Fundamentals of Risk Management

supply chain management
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Risk and contracts
Risk management is clearly an important component when setting up supply chain 
contracts or deciding to outsource certain activities. The need for a detailed contract 
between the organization and the suppliers of the outsourced service is clear from 
the factors considered in Table 32.2. The nature and complexity of the contract will 
depend on at least the following factors:
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level of the risk associated with the contracted service;
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value of the contract for supply of goods or services;
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duration and scope of the contract;
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level of skill required in the delivery of the contracted services;
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critical nature of the goods or services that are being contracted.
The desire to achieve greater value for money and reduce costs has resulted in
complex supply chains that are far more fragmented than was previously the case. 
Many organizations will contract out key parts of their activities, so that money can 
be saved and a greater level of specialist expertise is available from the outsourced 
company. Outsourcing also enables organizations to focus on their own core opera-
tions and competencies.
However, this has resulted in complex global supply chains that are more vulner-
able to potential disruption through external sources such as terrorism, pandemics 
and natural disasters. Organizations need to undertake a thorough risk assessment 
of their supply chain and outsourcing arrangements to ensure that the risks associated 
with these contracted services are adequately managed. Remember that contracting 
out the supply of goods or services does not transfer all of the risks. The scope of 
factors that need to be considered are discussed in the text box on the next page.
Outsourcing arrangements should be introduced only when they offer a cost-effective 
and efficient way of running the business. Outsourcing decisions based on a belief 
that risks are being completely transferred to a third party may prove to be incorrect. 
Damage to reputation may still be suffered if the outsourced manufacturing activity 
produces sub-standard goods or is exposed as operating unethical business practices.
For example, an organization that decides to have manufacturing undertaken in 
a lower-cost territory may discover that the goods produced do not comply fully 
with safety requirements. There have been examples of toys manufactured in one