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Assessment of
Assessment of supply chain risk: supply chain risk
scale development and validation
Murugesan Punniyamoorthy, Natarajan Thamaraiselvan and
Lakshminarayanan Manikandan 79
Department of Management Studies, National Institute of Technology,
Tiruchirappalli, India Received 22 June 2011
Accepted 21 July 2011
Abstract
Purpose – The purpose of this paper is to provide a reliable and accurate instrument to assess the
supply chain risk of similar comparable industries. This enables the firms which fall in this category of
industry to identify and incorporate suitable risk sources under various risk constructs. This paper
also provides a framework to the top management to prioritize the various risk constructs.
Design/methodology/approach – A systematic approach is used to develop and validate an
instrument for assessing overall risk of supply chain. This includes specifying the domain and
dimensionality of a construct, generation of initial pool of items, refinement of the initial items by the
expert group, assessment of content validity, evaluation of reliability and construct validity of the
scale items. Also a higher order measurement model of structural equation modeling is used to
prioritize the various risk constructs.
Findings – The process yielded a robust instrument to assess overall risk of the supply chain.
Through empirical verification, this instrument is shown to exhibit high levels of reliability and
validity. The framework for prioritization of risk constructs revealed the importance of various supply
chain risk constructs.
Practical implications – The framework is intended to be useful in practice for assessment of
overall risk of heavy engineering industries supply chain. The procedure will be extended for
development of risk assessment instrument for other industries which shares a common risk profile.
Prioritization of various risk constructs with respect to the overall risk enables the top management to
focus their attention to plan and manage the supply chain risks based on their relative importance.
Originality/value – This paper fulfils an identified need for the development of an empirically
validated instrument by identifying the significant supply chain risk sources under major supply
chain risk constructs for assessing the supply chain risk of industries which are similar in their risk
profiles. Also provides a higher order model to identify the most influential risk constructs.
Keywords Supply chain, Risk constructs, Risk sources, Risk assessment, Instrument validity,
Risk prioritization, Risk management, Supply chain management
Paper type Research paper

1. Introduction
Supply chain management (SCM) is the key to success in today’s competitive global
environment for any business organization. SCM has been a major component of
competitive strategy to enhance organizational productivity and profitability
(Gunasekaran et al., 2004). Supply chain, as a source of competitive advantage, has
driven organizations to pursue the dual goals of achieving both value advantage and
operational excellence (Wilding, 2003). Thus, an efficient supply chain is imperative to Benchmarking: An International
respond to customer needs on a real-time basis and improve business performance. Journal
Vol. 20 No. 1, 2013
The adaptation of SCM principles by many organizations has resulted in more pp. 79-105
networked, highly dependent organizations (Oke and Gopalakrishnan, 2009). Cost pressure q Emerald Group Publishing Limited
1463-5771
and competitive advantages have forced companies to adopt globalization and outsourcing DOI 10.1108/14635771311299506
BIJ strategies requiring an extended supply chain network. This had lead to an increase in the
20,1 number of nodes in the system (Tang and Nurmaya Musa, 2010). Complexity of supply
chains have a direct bearing on the risks associated with managing them. The present
supply chains are more vulnerable to disruption due to increased network complexity, more
interaction among the different organizations constituting the supply chain, higher
dependency on external vendors, shorter product life cycles and a dynamic environment.
80 These disruptions could adversely influence the performance of the supply chain by
obstructing the free flow of materials and information among the participants of the supply
chain. These disruptions could lead to financial losses, a negative corporate image or a bad
reputation eventually accompanied by a loss in demand as well as damages in security and
health (Jüttner et al., 2003). Any material, financial or information risk could create problems
in a supply chain (Tang and Nurmaya Musa, 2010). Managing supply chain risk is difficult
because individual risks are often interconnected and, actions that mitigate one risk can end
up exacerbating another (Chopra and Sodhi, 2004). Thus, any supply chain risk
management strategy needs a comprehensive risk management approach due to the
interconnection among various risks in the supply chain.
The supply chain risk management begins with identification of potential risk
sources that affect performance. Understanding of the supply chain risk sources which
disrupt the performance and the severity of their impact on the supply chain can help
an organization design efficient supply chain networks. It can also helps to decide the
right supply chain risk mitigating strategies that mitigate the adverse effects due to
these risk sources. There are many sources which cause risk in the supply chain. These
sources are associated with the constituting members in the supply chain and the
environmental factors within which the supply chain do function. This paper stands on
the pillar that the industries which are grouped under similar categories based on their
risk, needs a common risk assessment instrument. So, it is essential for a holistic frame
work to identify all the supply chain risk sources comprehensively for similar
industries. A suitable scale which incorporates all such risk sources is needed to assess
the overall risk in the supply chain of similar industries.
Risk prioritization is the key to the success of supply chain risk management
approach. The effective way to manage the supply chain risk begins with identification
of various risks followed by prioritization of these risks. Once there is an understanding
of the various risk factors, there is a need to determine where action needs to be taken.
Understanding the priorities would help the organizations to focus attention and
develop suitable risk mitigation strategies to manage the supply chain risks according to
their relative importance. This helps the top management to plan and utilize their
important scarce resources effectively to mitigate the supply chain risk.
This paper reports the results and findings of a study carried out to develop and
validate a supply chain risk assessment instrument. We propose a 45-item instrument
with six major risk constructs. Also a higher order measurement model of structural
equation modeling is developed to prioritize various risk constructs. The following
section details various risk sources of supply chain that are addressed in literature.
Subsequently, we describe the procedure for development and validation of an
instrument for assessing the supply chain risk. Further we explain the method for
development of a higher order measurement model to prioritize the risk constructs.
Finally, we conclude with a discussion of implications of this supply chain risk
assessment approach on heavy engineering industry.
2. Review of literature Assessment of
Risk is equated with the damage or loss resulting from a supply disruption (Wagner supply chain risk
and Bode, 2008). Supply chain risk comprises any risks for the information, material
and product flows from original supplier to the delivery of the final product for the
end-user ( Jüttner et al., 2003). A majority of business researchers appear to use the term
risk to refer to some form of negative change with respect to performance (Shashank
and Goldsby, 2009). Reducing supply chain uncertainty leads to enhanced supply chain 81
performance (Childerhouse and Towill, 2004). The performance of the organization in a
supply chain environment needs to be assessed along with all the dimensions of risk in
the supply chain. The first step in the supply chain risk assessment is classification of
the risks constructs and identification of potential risk sources under these risk
constructs. Identification of uncertainties and especially their sources led to the
recognition of effective chain redesign strategies (Van der Vorst and Beulens, 2002).
Jüttner et al. (2003), emphasized that classification of supply chain risk sources clarifies
the relevant dimensions of the potential disruptions faced by the organization in
supply chains and provides basis for the risk assessment. The research associated with
identifying risks is still in an early stage (Shashank and Goldsby, 2009).
Chin-Fu et al. (2005), emphasis that a structural framework for supply-chain
uncertainty can help in dealing with the intricate interactions among supply-chain
members. This resulted in the construction of an instrument that helps improve the
understanding of the supply chain participats reaction to uncertainty in the
supply-chain. To develop a measurement instrument, it is important to first identify
a common unifying framework for identifying and relating the dimensions; second,
a rigorous methodology for instrument development is needed (Xun et al., 2009).
A prerequisite for the creation of a validated instrument is a consideration of the
dimensionality of the relevant construct (Churchill, 1979).
Risk, in the context of SCM, is a multi-dimensional construct (Zsidisin, 2003;
Zsidisin et al., 2004). Broadly, the risk sources of a supply chain may be categorized as
internal or external to the supply chain. Svensson (2000), classified the sources of
disturbance into two categories namely atomistic (direct) and holistic (indirect).
Christopher and Peck (2004) categorized the supply chain sources under three
categories namely internal to the firm, external to the firm but internal to the supply
chain and external to the supply chain network. This classification covers all the risks
of the supply chain completely. The supply chain is to be treated as a complete system,
wherein small changes made to optimize one echelon of the supply chain can result in
massive changes in other parts of the supply chain (Wilding, 1998). So, it is imperative
to consider all dimensions of the risk comprehensively when assessing the overall risk
of a supply chain. Risks of supply chain can be classified according to sources.
We summarize various risk sources pertaining to the risk constructs which covers all
the three categories of (internal to the firm, external to the firm but internal to the
supply chain and external to the supply chain network) under six major risk constructs
namely supply side, demand side, manufacturing side, logistics side, information and
environment. These risk constructs and risk sources are presented below.

Supply side risk

Supply risk is the distribution of outcomes related to adverse events in inbound
supply that affect the ability of the focal firm to meet customer demand (in terms
BIJ of both quantity and quality) within anticipated costs and time, or causes threats to
20,1 customer life and safety (Zsidisin et al., 2004). Supply management becomes more
critical because the increasing dependence on suppliers makes companies highly
exposed to supply risks (Micheli et al., 2008). The supply risk is mainly due to the
supplier related and product related variables. Several researchers identified many
sources associated with supply side risk such as “quality problems” (Cucchiella and
82 Gastaldi, 2006; Sheffi and Rice, 2005; Manuj and Mentzer, 2008; Tuncel and Alpan, 2010),
“complexity of the critical material” (Micheli et al., 2008). “short supplies” (Micheli et al.,
2008), “inflexibility of supplier” (Micheli et al., 2008; Chopra and Sodhi, 2004), “sudden
default of suppliers” (Kleindorfer and Saad, 2005; Manuj and Mentzer, 2008), “single
source supplier” (Hauser, 2003; Sodhi and Lee, 2007; Tang and Tomlin, 2008), “frequent
changes in supplier” (Chin-Fu et al., 2005), “delay in supplies” (Micheli et al., 2008),
“intellectual property risks” (Chopra and Sodhi, 2004; Sodhi and Lee, 2007; Tang and
Tomlin, 2008).

Manufacturing side risk

The manufacturing firms by themselves may cause inefficiency in the supply chain due
to their poor performance. Even though companies invest heavily in programs such as
total quality management (TQM), lean manufacturing and Six Sigma to improve
internal quality and capabilities, their internal operations are still susceptible to
issues that can cause fluctuations in effective capacity and quality (Tang and Tomlin,
2008). The factors associated with planning and production capabilities may become
sources of supply chain risk. The vital manufacturing side risk sources are: “production
uncertainty” (Shashank and Goldsby, 2009), “variability in production process”
(Van der Vorst and Beulens, 2002), “variability in production cycle time” (Pujawan
and Geraldin, 2009), “inadequate production capability” (Manuj and Mentzer, 2008;
Wu et al., 2006), “capacity inflexibility risk” (Blackhurst et al., 2008; Sheffi and Rice, 2005),
“frequent product recall process” (Hauser, 2003) and “organization issues” namely, non
cooperation among the actors and low ability to adopt the new technologies (Cucchiella
and Gastaldi, 2006).

Demand side risk

Demand side risk results from disruptions emerging from downstream supply chain
operations (Jüttner, 2005). Disruptions occur from a mismatch between a company’s
projections and actual demand (Wagner and Bode, 2008). The first step in devising an
effective supply chain strategy is to consider the nature of the demand for the company’s
supplies (Fisher, 1997). Sheffi and Rice (2005), stated that demand uncertainty is the
primary risk in a supply chain and the demand uncertainty can be attributed to several
interdependent trends such as increased customer expectations, more global
competition, longer and more complex supply chains and greater product variety
with shorter product life cycles. There are many factors addressed by researchers which
are associated with demand risk, such as “unanticipated or very volatile customer
demand” (Manuj and Mentzer, 2008; Sodhi and Lee, 2007), “forecast errors” (Fisher et al.,
1994; Chopra and Sodhi, 2004; Manuj and Mentzer, 2008; Oke and Gopalakrishnan,
2009), “delays in delivery” (Chopra and Sodhi, 2004), “receivables risks” (Chopra and
Sodhi, 2004) and “reputation risk” (Sodhi and Lee, 2007).
Logistics side risk Assessment of
Logistics risk can broadly be categorized as the potential disturbances to the flow of supply chain risk
goods, information, and money (Ellegaard, 2008). Traditionally, in the supply chain
uncertainty literature, little attention has been paid to the causes and consequences of
uncertainty in freight transport operations (Sanchez-Rodrigues et al., 2008). The other
factors responsible for logistic side risks, as stated by various researchers are “storage
issue” (Hauser, 2003), “carrier financial strength” (Hauser, 2003) “transport network 83
management” (Sanchez Rodrigues et al., 2008) and “delays in delivery” (Pujawan and
Geraldin, 2009; Manuj and Mentzer, 2008).

Information risk
An important mechanism for ensuring effective coordination of the various functions in
a supply chain is the information flow among the members of the supply chain (Lee et al.,
1997). Information is the facilitator in the smooth functioning of the supply chain.
Information asymmetry is a main source of systems inefficiency in many areas (Guo et al.,
2006). Childerhouse and Towill (2004), highlighted that improved information flow and
smoother material flow simplifies the task of synchronization and coordination among
values streams, leading to better decision making within the supply chain. Sharing of
information among the members in a supply greatly reduces the uncertainty associated
with lack of information (Christopher and Lee, 2004). While information sharing is
important, the significance of its impact on the performance of a supply chain depends
on what information is shared, when and how it is shared, and with whom. The sources
of information side risks addressed in literature include “unavailability of information”
(Guo et al., 2006), “information delay” (Cucchiella and Gastaldi, 2006), “break down of
information infrastructure” (Chopra and Sodhi, 2004; Blackhurst et al., 2008) and
“security of the information system” (Blackhurst et al., 2008).

Environment risk
Risk can arise due to the interactions between the supply chain network and its
environment. Recent evidence also point to the fact that that economic, political and social
developments and events over the past decade appear to be increasing the risk of supply
chain disruptions which is further complicated by the fact that supply chains are getting
longer and more complex (Khan and Burnes, 2007). Supply chain networks are exposed to a
full range of restrictions inherent to the business, institutional, and regulatory environments,
among others, that impact, directly or indirectly, on their activities (Seu Keow Cheng et al.,
2009). The environmental factors that impact the supply chain are: “policy risk” (Manuj and
Mentzer, 2008; Shashank and Goldsby, 2009), “macro economic” (Shashank and Goldsby,
2009), “regulatory environment” (Seu Keow Cheng, 2008; Van der Vorst and Beulens, 2002),
“safety regulations by government agencies” (Oke and Gopalakrishnan, 2009; Bovet and
Sheffi, 1998), “social risk” (Tang and Tomlin, 2008; Shashank and Goldsby, 2009), “labor
availability” (Blackhurst et al., 2008; Giunipero and Eltantawy, 2004), “natural calamities
and other forced majeure like strikes, riots, etc.” (Kleindorfer and Saad, 2005), and “natural,
man made disasters” (Sheffi and Rice 2005; Oke and Gopalakrishnan, 2009).

3. Problem definition
Any supply chain risk management strategy which aims at reducing the vulnerability
to disruption in the supply chain needs to consider all dimensions of risk. To assess
BIJ risk in a supply chain context, companies must not only concentrate on direct risks of
20,1 their own operations, but also the risks which are caused by other members in the
supply chain. Organization needs to look at all risk sources which cover entire
operations of the supply chain to ensure that they work seamlessly. The risk associated
with one type of industry could be unique and can be distinct from the risks to another
type of industries since they work in different environment. The magnitudes of risk for
84 firms which fall under the same category are usually similar in nature. All these
significant risk sources of a similar industry need to be identified and incorporated in
the instrument which will be used for assessment of risk in the supply chain. The
present supply chain risk related literature devoted little attention for addressing the
above problem. Even though a number of risk sources are addressed in diverse
literature under various risk constructs, few researchers have approached the supply
chain risk management issues for a specific type of industry in a more holistic manner.
The existing literature which address the risk of specific industry are as automotive
industry (Blackhurst et al., 2008), consumer electronics industry (Sodhi and Lee, 2007),
EPC supply chain (Micheli et al., 2008), transport operations (Sanchez-Rodrigues et al.,
2008), pharmaceutical (Enyinda et al., 2009).
To address the above mentioned problem, we develop an instrument by identifying
the significant supply chain risk sources under major supply chain risk constructs for
assessing the supply chain risk of industries which are similar in their risk profiles.
We focus on the supply chain risk issues of one such industry namely, heavy
engineering industry. The firms falling under the category of heavy engineering type
industry are found to have similarities in the risk sources. In this study, a sample of four
firms is considered to represent the heavy engineering industry for the development and
validation of risk assessment instrument. This paper also prioritizes the supply chain
risk constructs based on their severity of impact which enables the top management to
focus their attention based on the relative importance of various risk constructs.

4. Research methodology
4.1 Scale development and validation
The ultimate objective of this research is the development and validation of an instrument
to assess the overall risk and prioritize the risk constructs of similar industries which
share a common risk profile. As an example, we focus on heavy engineering industries
supply chain. To develop a risk assessment instrument a holistic framework is
considered and a systematic approach has been adopted to identify various potential risk
sources which have impact on the performance of the supply chain. The first step in the
suggested procedure for developing better measures for an instrument involves
specifying the domain of the constructs (Churchill, 1979). The steps such as
dimensionality of a construct, generation of initial pool of items, refinement of the
initial items by the expert group, assessment of face and content validity, finalization of
the items for instrument development and validation of the scale are followed as stated in
the existing literature (Williams et al., 2009; Ojha and Gokhale, 2009; Xun et al., 2009).
To specify the domain/dimensionality of supply chain risk and to establish content
validity of the generated scale items, an extensive literature review was carried out as
described in the earlier section. The literature review is the starting point for
determining various dimensions of the construct. We consider a very simple supply
chain with supplier(s), manufacturer, logistic providers and the customers who are the
supply chain constituting members. Supply side, manufacturing side, logistic side and Assessment of
demand side risk constructs are the risk associated with these four constituting supply chain risk
members of the supply chain. The key to improved supply chain visibility is shared
information among supply chain members. If the information between supply chain
members is shared, it reduces uncertainty (Christopher and Lee, 2004). So, it is
appropriate consider information risk one of the supply chain risk construct. Risk can
arise due to the interactions between the supply chain network and its environment. 85
Other than the members of the supply chain, the environment which is outside the
supply chain may impact the supply chain performance. So, it is also represent one of
the supply chain risk construct. Thus, the proposed six risk constructs cover the entire
risk of supply chain. The conceptual model of the same is shown in Figure 1.
From various potential risk sources which are earlier addressed in the supply chain
risk management literature, the sources which are relevant to the industry of our study
are deduced and presented to an expert group consisting of industry professionals and
academicians. The risk items are critically reviewed by the expert group and they
confirmed the suitability of these risk sources for the heavy engineering industries
supply chain under the respective risk constructs. Also, to supplement our research
interest for identifying risk sources of relevant to heavy engineering type industries, the
expert group recommended certain additional risk sources under certain risk constructs.
Since a new set of risk sources were identified, content validity for the same is
established. The content validity could be assessed by using various quantitative and
qualitative methods. Lawshe (1975) adopted a method to quantify the content validity
and determine the extent of overlap (or communality) between a job performance
domain and a specific test. We used this method to evaluate the content validity of the
items. An instrument was developed by using the items which had a score above the
threshold value. The ensuing instrument has a list of 45 supply chain risk sources
under major six supply chain risk constructs.
The instrument was pilot tested by exploratory study with the leading professionals
of the engineering industry and the questionnaire was refined and finalized.
The questionnaires were subsequently circulated among the executives in engineering
industries asking them to rate the importance of the risk sources with respect to its
impact on the supply chain performance. The instrument was tested for its reliability
using Cronbach’s a-value. Further, measurement models for each risk construct were

Supply side risk

Manufacturing side risk

Over all Demand side risk

supply
chain risk
Logistic side risk

Information risk
Figure 1.
Dimensions of supply
Environment risk chain risk
BIJ developed and confirmative factor analysis (CFA) was carried out using LISREL 8.8.
20,1 Subsequently, the instrument was tested for its convergent validity by estimating
the factor estimate and t-values. Discriminant validity of the instrument was also
carried out by calculating the x 2 differences of the restricted and free models of each
risk construct. The above explained steps are presented in the form of flow chart
in Figure 2.
86
4.2 Prioritizing the risk constructs
One important constituent of risk management process is the prioritization of risks.
Prioritization helps a company to focus the decision making and risk management
effort on the most important risks (Hallikas et al., 2002). In order to prioritize the
importance of supply chain risk constructs, we develop a higher order structural
model. The higher order measurement model is derived from lower order measurement
models. The individual measurement models which were developed as explained in
Section 4.1 have been considered as the lower order models. The higher order model
consists of all the risk constructs (latent variable of lower order models) as observed
variables and the total supply chain risk as the latent variable. These lower order
models are further used for computing the latent factor score using LISREL 8.8 for
each respondent. Suppose if there are “m” respondents and “n” constructs, we need to
compute m £ n latent variable scores. The statistical theory and methods for these
scores are provided by Jöreskog (2000). The latent factor scores arrived through the

Step 1: Generation of initial pool of risk items through literature

review.

Step 2: Review of the initial risk items by an expert group.

Identification additional items with respect to supply chain of a
specific industry of interest by the expert group and finalization of
the risk items

Step 3: Assessment of content validity for the finalized risk items

and the items which had scores above threshold limit value are
retained for the development of the instrument

Step 4: Preparation of draft questionnaire, conduct the pilot study

and finalise the questionnaire

Step 5: Carry out the survey and collection of data

Step 6: Check for unidimensionality of the constructs.

Figure 2. Step 7: Check for reliability of the constructs

A framework for
development of supply
chain risk assessment Step 8: Assessment of convergent and discriminant validity
lower order models is again inputted to the higher order model for arriving the factor Assessment of
score the observed variables (risk constructs) of higher order model. The factor scores supply chain risk
of higher order model will be used to determine the relative importance of various
supply chain risk constructs with respect to the total risk of the supply chain. The
macro view of this process is shown in Figure 3.

5. Development of scale items and assessment of content validity 87

An expert group was constituted for the purpose of reviewing the initial risk sources
and the appropriateness of their inclusion in the development of the instrument.
The expert group consisted of two academicians and three industry professionals. The
two academicians are holding the post of professor and having research experience in
SCM. The members in the industry experts group are having more than 20 years of

Risk source 1
Risk
Risk source 2 Construct 1

Risk source n1

Risk source 1
Risk
Risk source 2 Construct 2

Risk source n2

Risk source 1
Risk
Risk source 2 construct 6

Risk source n6

Lower order measurement models

Risk Construct 1

Risk Construct 2 Total Risk

Figure 3.
Risk Construct 6 Lower and higher order
measurement models for
Higher order measurement model risk prioritization
BIJ experience in heavy engineering industries and involved in various operations related
20,1 to supply chain of their organization. The expert group discussed the various potential
risk sources which are relevant to heavy engineering industries and recommended to
append the list with the following additional risk sources which are relevant to the
heavy engineering industries:
.
Supply side risk. Vague inspection and acceptance procedures, inability to furnish
88 drawings and data sheets, non availability of technical know-how with the
supplier.
.
Manufacturing side risk. Inflexibility in layout, vague inspection and acceptance
procedures, hesitation in sharing of design and other documents with suppliers,
improper handling/maintenance of strategic warehouses.
.
Logistics risk. Wrong choice of mode of transportation, damages due to
accidents/improper stocking, unavailability of special vehicles.
.
Information risk. Wrong choice of communication/information sharing medium
and wrong interpretation of communication.

Since new items were added, we established (“A means to measure accuracy of
the instrument-Enabling supply chain risk measurement” – unpublished paper) content
validity of each of the items for the new set of risk sources by a quantitative method.
The finalized items were circulated among a focus group. The focus group consisted
of three professors who have research experience in operations management, in
particular in SCM and seven industry experts who have over 15 years experience in
different areas of supply chain such as manufacturing, procurement, outsourcing,
materials management, marketing, finance, system in heavy engineering industries.
All these industry experts are involved in the strategic level decision making process in
their respective organization. They were asked to review each risk source and to rate
the appropriateness of each item by statement if each is “essential/essential but not
useful/not essential” with respect to the supply chain.
After receipt of the responses from the experts, content validity ratio (CVR) was
calculated for each item using the formula used by Lawshe (1975):
 
ne 2 N=2
CVR ¼
N=2

CVR ¼ content validity ratio.

ne ¼ number of experts indicating essential.
N ¼ total number of experts.

The risk sources which were scored values above the threshold limit were retained for
further development of the risk measuring instrument. Finally, 45 risk sources had
been retained and used to develop an instrument for assessing overall risk of heavy
engineering industries supply chain.

6. Data collection
A structured draft questionnaire was prepared with the 45 risk sources which were
validated for its content by the method proposed by C.H. Lawshe. The questionnaire is
enclosed as Appendix 2. The questionnaire was pilot tested by exploratory study with Assessment of
the leading professionals of the engineering industry and the questionnaire was refined supply chain risk
and finalized.
We identified four engineering industries situated in southern part of India and they
do similar operations that involve manufacturing of heavy engineering products. These
industries are having similarities in the risk factors such as outsourcing, customized
product line, inspection and acceptance procedures, availability of skilled manpower, 89
handling of over sized dimensions consignments, etc. The questionnaires were
circulated among the executives in these industries. They were selected randomly from a
group of executives with more than ten years of experience in various operations related
to their supply chain such as manufacturing, procurement, outsourcing, materials
management, marketing, system, finance. In total, 133 respondents against the
distribution of 200 questionnaires and the response rate is 66 per cent.
To rate the importance of the risk sources a five point Likert scale was adopted. The
respondents were asked to study the importance of each risk source under various risk
constructs to rate the risk source using the scale ranging from 1 to 5 based on the severity
of impact on the performance. The scale and description of the five point Likert scale is as
1 – negligible, 2 – marginal, 3 – significant, 4 – critical and 5 – crisis. In case a risk
variable has higher impact on supply chain means it adversely affect the performance
and it create higher risk in the supply chain. Hence the rating for such risk sources could
be maximum (i.e. 5), if it has negligible impact the rating could be least (i.e. 1), and if it is
in between these two ranges, the rating could be between 2 and 4 based on their severity
of impact. The responses of the instrument were used to test the validity of the
instrument and also used for prioritizing the risk constructs.

7. Analysis and discussion

7.1 Scale validation
Data which are collected on these 45 risk sources under six risk constructs were used to
develop six measurement models for each supply chain risk construct using LISREL
8.8. The measurement model for all the six constructs are shown in Appendix 1
(Figures A1-A8). From these measurement models, the evaluation of various validity of
the instrument was carried out as follows.
7.1.1 Unidimensionality. Unidimensionality is a necessary condition to establish
reliability and validity. Unidimensional items only capture one construct, and do not
exhibit significant cross loadings onto other constructs. Researchers use CFA to test
the unidimensionality. The items that load heavily on the hypothesized latent factors
prove the unideimensionality.
CFA analysis was carried out for all the supply chain risk latent constructs and the
factor loadings are found to be high. The range of values for the six risk latent
variables are; supply side risk 0.48 to 1.16, manufacturing side risk 0.53 to 0.80,
demand side risk 0.62 to 1.03, logistics side risk 0.62 to 1.04, information side risk 0.75
to 1.07 and environment side risk 0.86 to 1.02. The higher estimated factor load values
prove the unidimensionality of the scale items.
Another approach proposed by Jöreskog and Sörbom (1996) to check unidimensionality,
requires the construction of a measurement model for each individual construct.
A goodness of fit index (GFI) of 0.90 or higher for such a single constructs model
indicates appropriate confidence in the unidimensionality of the constructs. The GFI index
BIJ of all the risk constructs are shown in Table I. From the measurement model of each risk
20,1 construct, GFI index for the risk constructs demand, logistics, and information is above 0.90
and thus indicating evidence of unidimensionality.
7.1.2 Reliability. Unidimensionality alone is not sufficient to ensure the usefulness of
a scale, the reliability of the composite score should be assessed after
unidimensionality has been established (Gerbing and Anderson, 1988). Any research
90 based on measurements must be concerned with the accuracy or dependability or,
as more popularly known, reliability of measurement (Cronbach Lee, 1951). If the
measure is not reliable, it cannot be expected to show lawful relationships with other
variables under study (Mitchell, 1979). We first tested the measurement properties of
the sub-dimensions of the supply chain risk construct using reliability test followed by
confirmatory factor analysis (CFA). There are several techniques to check for
reliability. Internal consistency reliability and Cronbach’s coefficient a are the most
common measure. In our research, reliability of the instruments was assessed using the
internal consistency (Cronbach’s a) method. The reliability test analysis result is
provided in Table II. The coefficients were 0.906 for the supply side risk construct,
0.884 for the manufacturing side risk construct, 0.846 for demand side risk construct,
0.897 for logistic side risk construct, 0.877 for information side risk and 0.898 for
environment side risk construct. In general reliability coefficients of 0.70 or more are
considered adequate and Cronbach’s a-coefficients for the six constructs show the
presence of a high degree of internal consistency.
7.1.3 Convergent validity. While reliability refers to consistency, validity concerns
accuracy of measurement. The convergent validity of an instrument is the degree of
similarity between the scores of that instrument and those of another instrument that is
supposed to measure the same concept. Convergent validity can be assessed from the
measurement model by determining whether each indicator’s estimated pattern
coefficient on its posited underlying construct factor is significant (Anderson, 1987).
Statistically significant large factor loadings indicate convergent validity.

Sl. no. Risk construct GFI

1 Supply 0.70
2 Manufacturing 0.76
Table I. 3 Demand 0.94
Unidimensionality test 4 Logistics 0.91
supply chain risk 5 Information 0.95
constructs 6 Environment 0.81

Consistency of each item under the

Sl. no. Risk construct construct (Cronbach’s a-coefficient)

1 Supply side risk 0.906

2 Manufacturing side risk 0.884
3 Demand side risk 0.846
Table II. 4 Logistics side risk 0.897
Reliability checks: 5 Information risk 0.877
Cronbach’s a-values 6 Environment risk 0.898
CFA analysis using LISREL 8.8 was carried out. The estimated factor loading and Assessment of
corresponding t-value for all the scale items are listed in Table III. supply chain risk
7.1.4 Discriminant validity. Discriminant validity is the extent to which a measure
does not correlate with other constructs from which it is supposed to differ. Discriminant
validity is to be carried out mainly to test if there is any overlapping between the
constructs, i.e. it ensures each construct is separate and independent. A series of pairwise
CFAs were conducted to assess the discriminant validity of the sub-dimensions using x 2 91
difference tests (Gerbing and Anderson, 1988). This is to be ensured through a process as
explained below:
.
If there are n constructs, nC2 combination of measurement models have to be
developed. Thus, each model consists of two constructs.
.
Further, each measurement model is divided into two models namely restricted
and unrestricted models.
.
The unrestricted model allows the correlation between two constructs freely and
the restricted model is one wherein the correlation between the constructs is
assigned a value of 1.0.
.
Run the restricted as well as unrestricted model using any structural package
like LISREL 8.8.
.
Find the x 2 difference and degrees of freedom between restricted and
unrestricted model.
.
The above procedure is repeated for all the nC2 combinations of measurement
models.
.
The x 2 difference for the corresponding degrees of freedom is tested for the
significance by stating the null hypothesis namely, there is no difference between
the two constructs is tested.
.
If the null hypothesis is rejected, we can assume that the two constructs in a
measurement model are significant in nature and considered to be separate and
independent.
. If the null hypothesis is accepted we assume that the two constructs are
insignificant constructs and they are overlapping or redundant.

In our case, six supply chain risk constructs were combined in 6C2 ways, thus
15 combinations of measurement models were developed. The x 2 difference for both the
restricted and unrestricted for each combination constructs were calculated using
LISREL 8.8 and the results are shown in Table IV. The free and restricted model for
information and environment risk are shown in Appendix 1 (Figures A7 and A8). From
the results it was found that the x 2 difference exceeded the x 2 difference threshold value
of 3.84 (0.05 significance level) in all the combinations. This implied that all the six
constructs are independent and there is no correlation between the constructs, thereby
establishing discriminant validity of the instrument.

7.2 Measurement model for prioritizing the risk constructs

The higher order measurement model which was developed as explained in Section 4.2
shown in Figure 4.
BIJ
Factor t- Error
20,1 Risk sources estimate value variance R2

S1: supplier quality problems 1.10 12.25 0.42 0.74

S2: vague inspection/acceptance procedure of the supplier 1.08 12.49 0.37 0.76
S3: short supplies 0.59 6.43 0.89 0.28
92 S4: inflexibility of suppliers 0.75 9.82 0.45 0.55
S5: non availability of technical know-how-method of production,
requirement special testing facility, tooling 1.16 11.94 0.52 0.72
S6: inability of the supplier to furnish drawings, data sheets, etc. 0.96 11.92 0.37 0.72
S7: sudden default of suppliers 0.54 5.35 1.11 0.21
S8: dependency on single supplier for critical and long cycle time
items 0.62 6.56 0.93 0.29
S9: frequent changes of critical material suppliers 0.53 5.99 0.84 0.25
S10: frequent delays in material supply lead-time 0.61 7.00 0.77 0.33
S11: intellectual property risk 0.71 6.68 1.17 0.30
S12: complexity of critical material 0.48 6.77 0.51 0.31
M1: disruption in production 0.72 7.54 0.83 0.38
M2: variability in process 0.79 8.42 0.74 0.46
M3: variability in production cycle time 0.62 7.98 0.53 0.42
M4: inadequate production capability 0.78 9.31 0.54 0.53
M5: inflexibility in capacity 0.77 8.91 0.60 0.50
M6: inflexibility in layout for free flow of materials 0.62 7.26 0.67 0.36
M7: vague inspection and acceptance procedures 0.66 6.84 0.89 0.33
M8: frequent product recall process 0.80 9.33 0.56 0.53
M9: hesitation in sharing of design and other documents with
suppliers 0.67 7.32 0.78 0.37
M10: improper handling/maintenance of strategic warehouses 0.72 8.31 0.65 0.45
M11: organization issues 0.53 5.88 0.82 0.25
D1: unanticipated or very volatile customer 0.62 7.09 0.71 0.35
D2: large forecast error in demand 1.03 11.69 0.36 0.75
D3: delay in delivery to customers 0.76 10.11 0.37 0.61
D4: receivables risk 0.71 9.40 0.42 0.55
D5: reputation risk 0.72 8.01 0.69 0.43
L1: inadequate carrier operation/financial strength 0.62 8.36 0.48 0.44
L2: storage issues 0.64 7.65 0.66 0.39
L3: poor design of transportation network 0.82 10.14 0.47 0.59
L4: wrong choice of mode of transportation 1.04 11.88 0.41 0.73
L5: improper packaging and marking details for safe
transportation 0.96 11.54 0.40 0.70
L6: damages due to accident/improper stacking 0.95 9.79 0.70 0.56
L7: delay in delivery time 0.77 9.13 0.57 0.51
I1: delay or unavailability of the information and communication
infrastructure, either within or outside the company 0.75 9.60 0.45 0.56
I2: breakdown of external/internal IT infrastructure 1.05 12.06 0.34 0.76
I3: inadequate security of information system 1.07 10.94 0.56 0.67
I4: wrong choice of communication/information sharing medium 0.88 10.16 0.51 0.60
E1: policy uncertainty 1.02 10.70 0.60 0.64
E2: macroeconomic uncertainty 0.88 10.52 0.47 0.62
Table III. E3: uncertainty due to government laws/regulation 0.96 10.44 0.58 0.61
Convergent validity E4: social uncertainty 0.93 12.04 0.30 0.74
checks: factor estimate E5: non availability of skilled man power required for the job 0.91 9.82 0.63 0.56
and t-values E6: uncertainty due to act of God, war terrorism, natural calamities 0.86 8.52 0.88 0.46
 Assessment of
Restricted Unrestricted
model model supply chain risk
x2
x2 (correlation
(correlation estimated x2
S. no. Combination of two constructs model fixed at 1) df freely) df difference
93
1 Supply side risk vs manufacturing side risk 1,444.75 230 821.82 229 622.93
2 Supply side risk vs demand side risk 729.12 119 458.02 118 271.10
3 Supply side risk vs logistics side risk 1,297.44 152 469.58 151 827.86
4 Supply side risk vs information side risk 761.82 104 439.47 103 322.35
5 Supply side risk vs environment side risk 1,122.86 135 500.77 134 622.09
6 Manufacturing side risk vs demand side risk 545.01 104 347.59 103 197.42
side risk
7 Manufacturing side risk vs logistics side risk 1,434.17 135 382.26 134 1,051.91
side risk
8 Manufacturing side risk vs information risk 587.66 90 285.30 89 302.36
9 Manufacturing side risk vs environment risk 996.42 119 393.57 118 602.85
10 Demand side risk vs logistics side risk 452.54 54 111.76 53 340.78
11 Demand side risk vs information risk 362.90 27 59.85 26 303.05
12 Demand side risk vs environment risk 480.16 44 145.92 43 334.24
13 Logistics side risk vs information risk 380.07 44 97.64 43 282.43 Table IV.
14 Logistics side risk vs environment risk 826.14 65 186.26 64 693.88 Discriminant validity
2
15 Information risk vs environment risk 770.35 35 129.26 34 641.09 checks: x differences

Figure 4.
Higher order measurement
model
BIJ The factor scores of the risk constructs are considered as a risk score and the risk
20,1 construct which is having higher score needs more attention. The ranking is done
based on these risk scores and the values are shown in Table V.
Based on the above ranking, we may conclude that the industries which fall under
the same category which we have taken for this study almost have similar ranking in
terms of risk. This ranking of constructs enables the top management to prioritize the
94 focus of their attention to on the supply chain risk management.

8. Practical implication
We have conducted the reliability and accuracy tests on the instrument and the
results have proved that the developed instrument is having high reliability and accuracy.
It was a pleasant revelation that, the newly identified risk indicators on the various risk
constructs had higher factor loadings. These include supply side risk (vague inspection
and acceptance procedures, inability to furnish drawings and data sheets, non availability
of technical know-how with the supplier), logistics risk (wrong choice of mode of
transportation, damages due to accidents/improper stocking and improper packing and
marking) and information risk (wrong choice of communication/information sharing
medium and wrong interpretation of communication) to name a few. The higher factor
loadings of the newly identified risk variables establish the significance of these risk
sources to the instruments ability in accurately assessing the supply chain risk of the
heavy engineering industry. Thus, the addition to the instrument makes it more
comprehensive for risk assessment of heavy engineering industry supply chain.
Our study further revealed that, in terms of risk prioritization of the total risk
constructs listed, the demand risk had the most adverse impact on the supply chain,
followed by manufacturing side risk and supply side risk. Demand is estimated
through forecasting or order based or combination of both. In case of forecasting, more
attention is needed for its accuracy. Since, for a heavy engineering industry, the per
unit cost of a product is high, organizations do not prefer to keep large inventories
which in turn lead to locking up of the working capital. It is imperative to have
minimum forecast error. At the same time, organizations should also ensure that there
are no supply defaults so as to ensure a high level of customer satisfaction.
Among the various risk constructs, the manufacturing side risk is the most
controllable risk function. It is well known fact that the variance is one of the important
measures in risk assessment. In order to mitigate the manufacturing side risk, heavy
engineering industries needs to pay more attention on reducing the variability in
production process and cycle time. Significant efforts should also be expended for
ensuring the flexibility in terms of capacity and lay out. In addition, the firms should
also establish best possible quality system for the manufacturing process.

Risk construct Risk score Ranking

Demand side 0.74 1

Manufacturing side 0.73 2
Table V. Supply side 0.65 3
Importance of risk Logistics side 0.36 4
constructs based on risk Information 0.36 4
scores Environment 0.27 6
As the supply side risk occupies the third position in terms of its importance, Assessment of
organizations should collaborate with their suppliers on sharing their best practices supply chain risk
and insisting them to achieve the right quality through quality improvements.
The quality can also ensure through periodic assessment of supplier’s facilities,
process and testing methods. Efforts should also be taken to help them bring in greater
flexibility in terms of quantity, delivery time and price.
The other three risk constructs namely, logistics, information and environment are 95
rated lower compared to demand, manufacturing and supply side risks. The reason for
the low risk scores can be attributed to the recent infrastructure development and
information technology revolution witnessed in India. The appreciation on the impact of
environment risk to the overall supply chain is gathering momentum only recently. This
may be the reason that the environment risk construct is scored low and its priority may
change in course of time.

9. Conclusion
In a supply chain environment, identification of various risk sources pertaining to
factors internal and external to the organization is important to understand and
manage the risk. In this study we developed a common risk assessment instrument for
the industries which fall in the same category by considering all the supply chain risks
comprehensively. The present study focused mainly in the context of heavy
engineering type industries supply chain.
This study provides a primary contribution to the supply chain literature, a validated
instrument for assessing the overall risk in the supply chain of heavy engineering type
industry supply chain. The development process included examinations of supply chain
risk management literature, and the use of group judgment and survey. The result is a
parsimonious 45-item instrument with six subscales tapping into distinct dimensions of
supply chain risk assessment. The instrument was successfully tested for its reliability.
The instrument was further tested for its convergent validity and the discriminant
validity checks which again returned favorable results. A higher order measurement
model was developed from the individual lower order measurement models of risk
constructs. The model was used for prioritization of these risk constructs based on their
importance with respect to the overall risk of the supply chain. This would help the
practitioners to focus their attention and develop risk mitigating plans based on the
relative importance of various supply chain risks.
As a future study, the grouping based on risk similarities may be done objectively
cutting across different type of industries using clustering algorithm. Then for each
cluster the instrument which we developed may be used with modification and the
higher order model could be used for prioritizing the risk constructs. The instrument
developed may also be used to quantify the overall risk of the supply chain using an
integrated risk measurement model.

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Appendix 1. Supply chain risk lower order measurement models

Figure A1.
Supply side risk
 Assessment of
supply chain risk

99

Figure A2.
Manufacturing side risk

Figure A3.
Demand side risk
BIJ
20,1

100

Figure A4.
Logistics side risk

Figure A5.
Information risk
 Assessment of
supply chain risk

101

Figure A6.
Environment risk

Figure A7.
Free model (information
vs environment risk)
BIJ
20,1

102

Figure A8.
Restricted model
(information vs
environment risk)

Appendix 2. Questionnaire developed to collect the data on various risk sources of

supply chain (45 items)

INSTRUCTION

• Read each supply chain risk sources and their variables carefully.

• Rate the importance of each risk variable with reference to severity of impact on the
supply chain foryour Industry based on the below explained FIVE point scale rating.

• The importance scale rating and the description of the scale rating is as follows:

Scale Rating 1 2 3 4 5
Description Negligible Marginal Significant Critical Crisis

• If a risk variable has a very high impacton supply chain means the rating should be
maximum (i.e 5), if it has negligible impactthenthe rating should be least (i.e 1),
and if it is in between these two ranges, the rating should be between 2 to 4 based
on their severity.
(continued)
 Assessment of
(Please put in the relevant box based on your rating for each risk variable. Please assign only one
supply chain risk
rating for each risk variable)
Risk Sources Risk Variables Scale Rating
1 2 3 4 5
Supplier Side Risk 1.1. Poor quality of supplies
1.2. Vague inspection/acceptance
103
procedure of the Supplier
1.3. Short supplies
1.4. Inflexibility of suppliers
1.5. Non availability of technical
know-how such as method of
production, requirement special
testing facility, tooling packing etc
1.6. Inability of the supplier to furnish
drawings, data sheets etc
1.7. Sudden default of suppliers
1.8. Dependency on single supplier for
critical and long cycle time items
1.9. Frequent changes of critical
material Suppliers
1.10. Frequent delays in material
supply lead-time
1.11. Intellectual property risk
1.12. Complexity of critical material
Manufacturer Side 2.1. Disruption in production
Risk
2.2. High level of process variation
2.3. Variability in production cycle time
2.4. Inadequate production capability
2.5. Inflexibility in Capacity
2.6. Inflexibility in layout for free flow
of materials
2.7. Vague inspection and acceptance
procedures
2.8. Frequent product recall process
2.9. Sharing of design and other
documents with suppliers which
may lead to loss of core
competency
2.10. Improper Handling/maintenance
of strategic warehouses/inventory
2.11. Organization issues

(continued)
BIJ
20,1 Demand Side Risk 3.1 Unanticipated or very volatile
customer
3.2 Large forecast error in demand
3.3 Frequent delays in delivery to
104 customers
3.4 Receivables risk
3.5 Change in customer preference
3.6 Reputation risk
Logistic side Risk 4.1 Inadequate operation/financial
strength of the carrier
4.2 Storage issues
4.3 Poor design of transportation
network
4.4 Wrong Choice of mode of
transportation
4.5 Improper packaging and marking
details
4.6 Damages due to accident/improper
stacking
4.7 Delay in Delivery time
Information Risk 5.1 Delay or unavailability of the
information and communication
infrastructure, either within or
outside the company
5.2 Breakdown of external/internal
IT infrastructure
5.3 Inadequate security of
information system
5.4 Wrong choice of communication
/information sharing medium
Environment Risk 6.1 Policy Uncertainty
6.2 Macroeconomic uncertainty
6.3 Uncertainty due to Government
laws/regulation
6.4 Social uncertainty
6.5 Non availability of skilled man
power
6.6 Act of God, war terrorism
Natural calamities and other
forced majeure like strikes, riots
etc,

(continued)
About the authors Assessment of
Dr Murugesan Punniyamoorthy has been in academia for over 20 years, teaching in the area of
supply chain management, production and operations management, data analysis and marketing supply chain risk
research, logistics management, etc. He has earned his PhD from Bharathidasan University, India.
He acquired a BTech in Production Technology from Madras Institute of Technology, Chennai, India
and later obtained an MTech in Industrial Engineering and Operations Research from the Indian
Institute of Technology, Kharaghpur, India. He has published more than 30 papers in international
journals. One of his papers, “A strategic decision model for the justification of technology selection” 105
published in the International Journal of Advanced Manufacturing Technology, Vol. 21, pp. 72-78 was
selected by the American Society for Mechanical Engineers as one of the best ten papers in the area of
technology selection. He is presently working as Professor in the Department of Management
studies, National Institute of Technology, Tiruchirappalli, India. Murugesan Punniyamoorthy is the
corresponding author and can be contacted at: punniya@nitt.edu
Dr Natarajan Thamaraiselvan is an Associate Professor of Marketing and Head in the
Department of Management Studies, National Institute of Technology Tiruchirappalli. His areas
of interest are services marketing, strategic marketing, brand management, marketing metrics
and marketing analytics. He is interested in cross-functional activities focusing on developing
key performance indicators. He has published many papers in related areas.
Lakshminarayanan Manikandan is a Research Scholar in Department of Management
Studies National Institute of Technology Tiruchirappalli. He has BE (Production Engineering)
from College Of Engineering Guindy, Chennai and ME (Industrial Engineering) from National
Institute of Technology Tiruchirappalli. His area of interest is supply chain management and his
research focuses on risk management in supply chain.

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