An empirical analysis

of supplier risk
Zhong Sheng, Feng Dan, Zeng Meng-qi

Cleofas, Maria Arielle P.

MS EM
IE213P-D01
 Over the years, outsourcing has become one of the main options for companies to help
them grow their companies with the help of another. However, outsourcing has also became one
of the problems in the company’s supply chain that has become a risk. Suppliers are the main core
of the supply chain; it takes charge of the company’s most important resources that can affect the
whole business. Current literatures have studied supply chain risk but have only classified it instead
of identifying its factors In this article, the author have identified 7 main categories of supply chain
risk factors caused by the supplier: Technology, quality, price, information, transaction, reputation
and finance, in order to create a Supply chain risk model to identify latent variables and indicators
of supply chain risk which was later identified that has one Exogenous variable and seven
Endogenous variables wherein, quality, price, information, transaction, credit, finance, technology
factors are identified as "cause" and stability of supply chain was identified as a "result". The initial
model was used as a source to collect data for a structural equation model. To get the needed data,
purchasers of Chengdu local enterprise was asked to mark 2 to 3 of the most important supplier
factors, so that the supplier’s risks can be perceived, 384 pieces of questionnaires was used for the
data collection and then was processed by the LISREL 8.54 Software to have an output of that
shows factor load, factor covariance, factor effect and error variance are all significant and have
produced four different models that will indicate the modification indices, the models are M21,
M22, M23, and M24 which is the best model. Based from the results of M24 seven kinds of factors
were identified. a) factors including supplier’s information, transaction, reputation and finance
have direct influence on the stability of the supply chain; b) factors of technology, quality and
price have indirect effect on the stability of the supply chain; c) Technology affects quality, price
and transaction; d) quality influences price and transaction; e) price has influence on transaction,
reputation and finance; f) information affects transaction and quality; g) reputation influences
transaction; h) finance has effect on reputation. Based from the results, it can be proved that the
direct factors affecting the stability of supply chain include supplier’s information, transaction,
credit and finance, while the indirect factors are constituted of technology, quality and price. In
fact, according to the specific factor structure of every factor, four factors including supplier’s
information, transaction and reputation and finance usually belong to the category of the
transaction cost, while the other three factors, technology, quality and price, are often put into the
category of the resource. That’s the main reason why the later factors are much easier to be ignored
than the former factors when the identification and control of supply chain risks are undertaking
in the real practice. Stability of the supply chain was caused by two factors: Resource and
transaction cost. Based from this factor, the 30 indicators were classified into 3 types: Type 1:
Resource based indicator, belongs to resource variable; Type 2: Cost based indicator, belongs to
transaction cost variable and lastly Type 3: Multiple indicators, belongs to both resource and
transaction cost variable. These factors connected with resource have the same level of influence
on the stability of the supply chain as the factors related to transaction cost do. It can be identified
that resource have the same level of influence on the stability of the supply chain as the factors
related to transaction cost do. These indicators were used as parameters setting estimation and test
that resulted in identifying which level of influence does the indicator is related to the factors. As
a result, the final parameters of transaction cost factors and resource factors are 0.36 and 0.38
respectively, which suggests that there are no big differences between the importance of the two
main factors.
1. Based on the journal article, what does the author claim that s/he/they is/are contributing to the
field of Risk Analysis & Management? How does it differ from what has already been known and
published? (Elaborate)

- Over the years, the problem of supply chain risk is getting worse with the increasing trend of
globalization and outsourcing. One of the reasons for this is there is still no definite definition on
what supply chain risk is, being unable to define what the main problem is makes it harder to solve
such cases. In order to determine this, the author classified supply chain risk factors and made an
empirical analysis to determine relationships between factors. According to Zsidision, the source
of supply risk is project risk, market risk and supplier risk, on the other hand, Kleindorfer et al.
assort supply risk into two categories from the aspects of the discrepancy of the coordination level:
risk of coordinating supply and demand, disruption risk. While for Das and Teng supply chain risk
resource is from four groups: financial resource, technical resource, material resource and
management resource.

2. What does the author(s) wanted to investigate? Describe the kind of failures or risks that the
author was trying to investigate. What is the rationale for the investigation? Was the author
successful in achieving his/her objectives? What evidences have been presented as proof?

- the author wanted to investigate the definite definition of supply chain risk. To do this, the author
assessed the indicator of suppliers that may lead to identify and control supply chain risk. 7 main
categories of supply chain risk factors caused by the supplier were decided: Technology, quality,
price, information, transaction, reputation and finance. After identifying these factors an initial
model for one Exogenous variable and seven Endogenous variables was made. In my opinion the
author was not able to fulfill its objectives of the study, the research focused on identifying how
to avoid risk by controlling the supplier, however the bigger picture or the whole supply chain was
not discussed thoroughly, only one phase of the problem was identified and discussed. In terms of
the risk in the supplier, author used of empirical analysis by use of structural equation model
(SEM) and have identified seven kinds of factors these are: a) factors including supplier’s
information, transaction, reputation and finance have direct influence on the stability of the supply
chain; b) factors of technology, quality and price have indirect effect on the stability of the supply
chain; c) Technology affects quality, price and transaction; d) quality influences price and
transaction; e) price has influence on transaction, reputation and finance; f) information affects
transaction and quality; g) reputation influences transaction; h) finance has effect on reputation.

3. Describe the author's methodology.

With the use of different literatures, the author identified 7 main categories of supply chain risk
factors caused by the supplier were decided: Technology, quality, price, information, transaction,
reputation and finance, then established an initial model as an indicator for supply chain risk
wherein the model has one Exogenous variable and seven Endogenous variables. Quality, price,
information, transaction, credit, finance, technology factors are identified as "cause" and stability
of supply chain was identified as a "result". The participants of the research are the purchasers of
Chengdu local enterprise asked to mark 2 to 3 of the most important suppliers, so that the supplier’s
risks can be perceived. 384 pieces of questionnaires was used for the data collection and then was
processed by the LISREL 8.54 Software to have an output of that shows factor load, factor
covariance, factor effect and error variance are all significant and have produced four different
models that will indicate the modification indices, the models are M21, M22, M23, and M24 which
is the best model. Based from the results of M24 seven kinds of factors were identified.

4. Describe the risk analysis models and tools that the author employed.

The author used Path diagram in order to determine the correlation of the 7 main factors and 30
indicators. Aside from the claims of previous literatures and the use of path diagram, a new supply
chain alliance was identified, one is based from transaction cost and the other is resource, which
was later identified as resource indicators and transaction cost indicators that was analyzed by
using the structural equation model (SEM). The 30 indicators were classified into 3 types: Type 1:
Resource based indicator, belongs to resource variable; Type 2: Cost based indicator, belongs to
transaction cost variable and lastly Type 3: Multiple indicators, belongs to both resource and
transaction cost variable. These indicators were used as parameters setting estimation and test that
resulted in identifying which level of influence does the indicator is related to the factors.

5. What did you learn from this article? Where else can this knowledge be applied?

As an Inventory, planning and allocation analyst that often communicates with suppliers (or what
we usually call as vendors) I understood what the author is trying to solve, and I understood where
the problem is coming from. As an analyst, it is our job to allocate the right quantity of stocks at
the right time. However, it does not stop there, we also monitor deliveries from vendors and these
deliveries is where we “grade” our vendors. The article gave me a better understanding on what to
consider in how to grade suppliers correctly and in choosing the right supplier, it is to not only
base it from the supplier’s delivery performance but also use several factors as a basis to avoid
risky situations or having problems with the supplier that may affect the performance of the whole
supply chain. Being able to choose the right supplier does not only make our job easier it also
benefits the whole company for the products that the supplier serves the company are not only
being evaluated by us but it is also being evaluated by the customer through the quality of the
product or customer satisfaction.