The International Journal of Logistics Management

On uncertainty in supply chain risk management

Jyri Vilko Paavo Ritala Jan Edelmann

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On uncertainty in supply
chain risk management

On uncertainty
in supply chain
risk management

Jyri Vilko, Paavo Ritala and Jan Edelmann

School of Business, Lappeenranta University of Technology,
Lappeenranta, Finland

Received 31 October 2012

Revised 2 April 2013
2 September 2013
Purpose The concept of uncertainty is a relevant yet little understood area within supply chain risk Accepted 27 September 2013

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Abstract

management. Risk is often associated with uncertainty, but in reality uncertainty is a much more
elaborate concept and deserves more in-depth scrutiny. To bridge this gap, the purpose of this paper is
to propose a conceptual framework for assessing the levels and nature of uncertainty in this context.
Design/methodology/approach The aim of the study is to link established theories of uncertainty
to the management of risk in supply chains, to gain a holistic understanding of its levels and nature.
The proposed conceptual model concerns the role of certainty and uncertainty in this context.
Illustrative examples show the applicability of the model.
Findings The study describes in detail a way of analysing the levels and nature of uncertainty in
supply chains. Such analysis could provide crucial information enabling more efficient and effective
implementation of supply chain risk management.
Practical implications The study enhances understanding of the nature of the uncertainties
faced in supply chains. Thus it should be possible to improve existing measures and analyses of risk,
which could increase the efficiency and effectiveness of supply chain and logistics management.
Originality/value The proposed conceptual framework of uncertainty types in the supply chain
context is novel, and therefore could enhance understanding of uncertainty and risk in supply and
logistics management and make it easier to categorise, as well as initiate further research in the field.
Keywords Uncertainty, Risk, Supply chain risk management, Conceptual framework
Paper type Conceptual paper

1. Introduction
Complexity, specialisation, and disintegration are emerging as major challenges in
terms of risk management in supply chains, having made them vulnerable to disturbances
from both inside and outside the system. Indeed, many recent events have shown how
vulnerable long and complex supply chains are. Such events include the well-known
melamine crisis in Chinese dairy products, and other food crises; major natural disasters
including floods, tsunamis, and earthquakes; industrial and societal disputes across the
globe, as well as firm and supply chain-specific glitches and disturbances (Hendricks and
Singhal, 2003; Chopra and Sodhi, 2004; Sheffi, 2005; Narasimhan and Talluri, 2009).
This vulnerability has attracted the attention of many academics in the field of logistics
and supply management, in which risk-related issues are increasingly taken into account
(Minahan, 2005; Kleindorfer and Saad, 2005; Sanchez-Rodrigues et al., 2008, 2010; Wagner
and Neshat, 2010; Ghagde et al., 2012). In this context, the quality and competitiveness
of individual companies operations depend on their ability to identify and mitigate the
uncertainties and risks they encounter. However, although awareness of vulnerability and
of risk management is increasing among academics and practitioners, many related
concepts are still in their infancy. There are thus insufficient conceptual frameworks and
This paper is based on a paper presented at the 17th International Symposium on Logistics
(www.isl21.net) held in July 2012 in Cape Town, South Africa.

The International Journal of Logistics

Management
Vol. 25 No. 1, 2014
pp. 3-19
r Emerald Group Publishing Limited
0957-4093
DOI 10.1108/IJLM-10-2012-0126

IJLM
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empirical findings to provide a clear picture of the phenomenon of supply chain

risk management ( Juttner, 2005; Manuj and Mentzer, 2008). Accordingly, both
academic research and practitioner reports stress its importance as well as the need to
develop different approaches (Blos et al., 2009; Manuj and Mentzer, 2008; Shaer and
Goedhart, 2009).
In line with the above-mentioned developments, the role of supply chain risk
management has recently been increasingly emphasised. Indeed, Ju (2005) found that
44 per cent of organisations expected their vulnerabilities to increase within the
next five years. More recently, the need for risk management has become evident
following Snells (2010) study showing that 90 per cent of the respondent companies
feared supply risks, whereas only 60 per cent felt confident or knowledgeable enough
to cope with them. In addition, Hendricks and Singhal (2005) found out that firms that
experience supply chain disruptions experience on average 40 per cent stock returns.
Thus, it is not surprising that there is a growing interest in supply chain-related
decisions and the uncertainty and risk involved (Prater, 2005; Swink and Zsidisin,
2006; Craighead et al., 2007; Hendricks et al., 2009; Hult et al., 2010). In fact, it has
traditionally been assumed that supply side risk is similar to or equivalent to demand
side risk (Christopher and Peck, 2004). However, it has been suggested that supply-side
risks and uncertainty are much more complex issues than demand-side ones, and that,
therefore, managing them needs more careful attention (see Snyder and Shen, 2006).
Supply chain risk management concerns risk as a situation entailing exposure
to two essential components: an event and the uncertainty concerning the possible
outcomes (Holton, 2004; Sheffi, 2005). Thus, risk assessment is based on the likelihood
of the occurrence of the risk situation, and on the kind of damage it might entail if
realised (Mitchell, 1995). The different types of risk are extensively covered in the
relevant literature (Rao and Goldsby, 2009), but analysis of the concept of risk itself is
very limited. For instance, the management of risk is commonly discussed in terms of
vulnerability and uncertainty (Sorensen, 2005), meaning that the concept is understood
as an occurrence for which the probability distribution is known. However, we suggest
that in reality, it is much more common that the probability distributions cannot
be defined. Thus, in order to enhance understanding of how risks could be better
managed under such conditions, we put forward a conceptual framework focused on
the role of uncertainty in supply chain risk management.
Supporting our argument and illustrating the research gap, some authors have
criticised the fact that the literature on supply chain risk management does not always
clearly distinguish between risk and uncertainty, which makes the definitions quite
vague (Tang and Nurmaya Musa, 2010). Further, it has been suggested that merely
recognising uncertainty is not enough, but researchers and practitioners need more
rigorous frameworks breaking uncertainty down into more detailed elements (Prater,
2005). Indeed, earlier studies have reported that the concepts of risk and uncertainty
are less understood and developed in this context than in other disciplines (Khan and
Burnes, 2007). Given that the two concepts are among the most essential in supply
chain risk management, clarity is of the essence. The aim in this paper, therefore,
is to enhance understanding of these concepts by illustrating the levels of uncertainty
in supply chain risk management. In so doing, we hope to define the nature of
uncertainty so as to facilitate a more comprehensive and valuable consideration of how
the concept should be approached in future studies in the field.
In the next section, we introduce the theoretical background of supply chain risk
management and uncertainty. We then develop our conceptual model of different types

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of certainty/uncertainty and their implications for the analysis and management of

supply chain risk. In building the framework, we utilise an integrative literature review,
aiming to synthesise and integrate existing literature in the quest of generating
new frameworks and perspectives (Torraco, 2005). We mainly build on the existing
supply chain risk management literature and combine it with the insights from economic
theory on certainty vs uncertainty (Simon, 1957; Langlois, 1984; Dosi and Egidi, 1991).
Illustrative examples of each type of uncertainty follow, which cover events related
to the focal actor, the supply chain, and the external environment. The study ends with
discussion of the theoretical and practical implications and further research directions.
2. Theoretical background
2.1 Supply chain risk management
The supply chain comprises a series of activities and organisations through which
material and information move on their way to the final customer. Peck (2005) describes
supply chain vulnerability in this context as exposure to serious disturbance arising from
risks within and external to the chain. According to Waters (2007), vulnerability reflects
the susceptibility of a supply chain to disruption, and is a consequence of risks in it.
Ju (2005) further refers to supply chain vulnerability as the propensity of risk sources and
drivers to outweigh risk-mitigating strategies, thus causing adverse consequences in the
chain and jeopardising its ability to effectively serve the end customer market. Supply
chain risk management, in turn, is a function that aims to identify the potential sources of
risk, and to implement appropriate actions to avoid or contain supply chain vulnerability
(Narasimhan and Talluri, 2009; see also Ghagde et al., 2012).
Supply chain risk is commonly portrayed as a threat that something might
happen to disrupt normal activities and that would stop things happening as planned
(Waters, 2007). Most of the literature defines risk as purely negative and leading to
undesired results or consequences (Harland et al., 2003; Manuj and Mentzer, 2008).
A standard formula for the quantitative definition of supply chain risk is (Mitchell, 1995):
Risk PLoss  I Loss
where risk is defined as the probability ( P ) of loss and its significance (I).
Hetland (2003) and Diekmann et al. (1988) view risk as an implicitly uncertain
phenomenon. It should be noted that there are differences between the two concepts
of risk and uncertainty, however. Waters (2007) explains the difference, suggesting that
a risk occurs because there is a certain type of uncertainty about the future. In this
traditional risk management context, uncertainty means that unexpected events may
occur, but they can be quantified and therefore managed.
However, as a concept, uncertainty reaches far beyond the traditional conception
of risk, and thus it deserves more elaborate scrutiny. Van der Vorst and Beulens (2002,
p. 413) define supply chain uncertainty as decision making situations in the supply
chain in which the decision maker does not know definitely what to decide as he is
indistinct about the objectives; lacks information about its environment or the supply
chain; lacks information processing capacity; is unable to accurately predict the impact
of possible control actions on supply chain behaviour; or, lacks effective control
actions. The sources of uncertainty include quantity, quality, and time (Van der Vorst
and Beulens, 2002).
Davis (1993) was among the first scholars to explicitly consider uncertainty as a
strategic issue for supply chains. However, in his investigations, the sources were

On uncertainty
in supply chain
risk management
5

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limited to suppliers, manufacturing, and customers, and the effects to the

performance of the supply chain. Later, building on the work of Davis (1993),
Mason-Jones and Towill, 1998 developed an uncertainty circle model, adding control
systems as one more source and offering a wider perspective on the supply and
demand sides of the chain; this was then further complemented by Geary et al. (2002)
and Sanchez-Rodrigues et al. (2008).
It appears from these studies that uncertainty has been taken into account in supply
chain risk management in various ways and in different contexts, but the literature still
lacks frameworks and consensus in terms of the role of uncertainty.
2.2 Uncertainty and risk
Knights (1921) distinction between certainty, risk, and uncertainty could be
regarded as the best-known and most frequently used typology of uncertainty in
risk management. In his definition of risk, he coined the terms measurable uncertainty
(quantitative) and unmeasurable uncertainty (non-quantitative), when only partial
knowledge of outcomes such as beliefs and opinions is available. The measurable,
quantifiable perspective portrays a type of basic uncertainty that can be managed
using objective measures, whereas Knightian uncertainty refers to immeasurable
risks that cannot be calculated. We adopt this intuition as our starting point in
developing a framework for uncertainty in supply chain risk management.
In this context, Trkman and McCormack (2009) classify uncertainty in two categories,
endogenous and exogenous, depending on whether they derive from within or outside
the supply chain. Juttner et al. (2003) also suggest including external uncertainty in
other sources of uncertainty in the chain. The exogenous-endogenous distinction in
itself, however, is too vague to make sense of how uncertainty really affects decisions
related to supply chain risk management: it describes the source of uncertainty, which
is relevant as such, but it does not describe the type of uncertainty. Thus, we propose
that uncertainty, especially in the context of supply chain risk management, could
be examined through the lenses of substantive and procedural uncertainty, as
explained below.
In line with Simons (1957) concept of rationality, Dosi and Egidi (1991, pp. 145-146)
introduce the notions of substantive and procedural uncertainty. Substantive
uncertainty derives from the incompleteness of the information set and is related
to a lack of information about environmental events and all the information
which would be necessary to make decisions with certain outcomes. A similar notion
has been discussed in the project management context by De Meyer et al. (2002), who
discuss unforeseen uncertainty, which refers to the lack of ability to predict factors that
influence project-related risks.
Procedural uncertainty arises from the inability of the agents to recognise and
interpret the relevant information, even when available. It concerns the competence
gap in problem-solving and limitations on the computational and cognitive
capabilities of the agents to pursue unambiguously their objectives, given the available
information. Uncertainty in a supply chain could be classified as illustrated
in Figure 1.
The main components used to distinguish between types of uncertainty include the
following:
(1)

the knowledge level of the decision maker related to the problem under each
type of uncertainty;

On uncertainty
in supply chain
risk management

CERTAINTY

Knightian basic uncertainty

RISK

7
UNCERTAINTY

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SUBSTANTIVE

PROCEDURAL

Related to the outcomes

Environment-dependent

PARAMETRIC

Related to the decision process

Decision-maker dependent

STRUCTURAL

COMPLEXITY

(2)

the decision-makers knowledge of the possible actions in which to engage;

(3)

the decision-makers knowledge of possible states of the world;

(4)

the decision-makers knowledge of the consequences resulting from the interaction

between actions and states of the world; and

(5)

the decision-makers subjective or objective knowledge of the probabilities of

the occurrence of possible states of the world.

This classification distinguishes three types of uncertainty: parametric and structural

(i.e. environment dependent) and procedural (i.e. decision-maker dependent). We believe
this distinction gives a valuable perspective on uncertainty related to decision making
(Langlois, 1984; Dosi and Egidi, 1991; Kylaheiko, 1995; Kylaheiko et al., 2002).
Within each of these categories, the decision maker has a different amount of knowledge
about the state of the world and its events, and therefore also has different kinds of
resources with which to cope with uncertainty. At the extreme, uncertainty could also
be conceptualised as radical, when all pieces of knowledge are imperfect and there is no
knowledge about the structure or probability of future events (Loasby, 1976; Kylaheiko,
1995).
3. Conceptualising (un)certainty in the supply chain context
Supply chain risk management is assumed to handle risks either by proactively
mitigating them or by reactively responding to them (Chopra and Sodhi, 2004; Tomlin,
2006; Ghagde et al., 2012). The current literature on supply chain risk commonly views
all threats disrupting normal activities (i.e. risks) as products of the impact and the
probability of an event (March and Shapira, 1987; Manuj and Mentzer, 2008; Vilko and
Hallikas, 2012), which in reality may be impossible to measure. Thus, we suggest that
the nature of uncertainties plays a crucial role here, since it affects the visibility and the
possibilities of decision makers within a certain domain (see De Meyer et al., 2002;

Figure 1.
Certainty, risk,
and uncertainty

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Prater, 2005). Thus, if supply chain management is to accomplish its tasks in both
theory and practice, it has to understand the concept of uncertainty in its entirety.
Given that the environment cannot normally be fully controlled, there are always
unknown elements facing decision makers. In general, decision makers in firms need to
cope with decision-making variables that involve variation within a predictable range
as well as events that are close to chaos or crisis (Weick, 1993; Pearson and Clair, 1998;
De Meyer et al., 2002). Taking into account all the influential environmental factors is
therefore impossible, and the information on the basis of which probabilities are
formed is more or less imperfect. In light of the above discussion on various types of
uncertainty, Table I explains in more detail the range between (complete) certainty and
radical uncertainty and the implications for supply chain risk management.
Table I describes the amount of knowledge that decision makers hold about the
state of the world (here: the supply chain) and its events. The amount of knowledge
thus describes the decision makers ability to cope with uncertainty.
Complete certainty, as illustrated in the first column, is an example of a hypothetical
world in which all relevant information is known to the decision maker. In terms of
supply chain risks, it suggests a situation in which all related risks (inside and outside
of the chain) and their consequences are known. Thus, in such a situation, there are no
actual risks, because all of them can be mitigated. In reality, this situation is, of course,
impossible.
The second column describes a situation in which the structure of future events is
known in terms of objective probabilities concerning the likelihood and impact of their
occurrence. This probabilistic certainty is typically regarded as an implicit basis for
the analysis of supply chain risk and the subsequent management actions. However,
typically the level of knowledge required for objectively assessing the likelihood and
impact of risk events is rarely known, which is why various types of uncertainty need
to be addressed as well.
The third column illustrates a situation in which the structure of the future
(or future event) is completely known but the probability parameters are not.
The uncertainty here is environment dependent. This situation is referred to as
parametric uncertainty, and it includes only subjective beliefs about the probabilities of
future events and their outcomes (Langlois, 1984; Dosi and Egidi, 1991). In terms
of supply chain risk management, potential risk events are identified, but in terms of
likelihood and impact, they are difficult to assess objectively the risk analysis is based
on subjective assessment. Parametric uncertainty allows quantification of different
aspects of the events; however, the following categories of uncertainty do not, and they
can only be described (assessed) qualitatively.
The fourth column indicates environment-dependent structural uncertainty.
Knowledge related to the state of the world in the future is imperfect, and only
subjective beliefs can be projected (Langlois, 1984). In terms of supply chain risk
management, this means that no holistic picture of the supply chain and the related
risk events can be objectively formed. The probabilities of the identified events are also
difficult to quantify, and the interdependence related to the operations of the supply
chain is unclear. Therefore, the analysis cannot objectively assess the risk events
or their causality.
The fifth column in the table illustrates procedural uncertainty, meaning that the
decision maker is constrained by his or her computational and cognitive capabilities
(Dosi and Egidi, 1991) and therefore cannot form a clear picture of the processes or the
risk events, mainly on account of their complexity. Inadequate cognitive abilities and

The risk events

and their
causalities are
not fully known
or assessable
The risk events
and their
causalities
cannot be
objectively
assessed

The risk parameters

(likelihood and
impact) cannot be
objectively assessed

No risk analysis
is needed

The structure of
the supply chain
and the related
risks are difficult
to formulate

Risk probabilities
are difficult to
quantify

Probability and
impact of risks
assumed and planned
for with specific
certainty (most
common approach for
supply chain risk
management)
The risk parameters
(likelihood and
impact) can be
measured and
assessed with
certainty

Complete
certainty about
the supply chain
and related risks
(hypothetical
world)

Implications for
supply chain risk
analysis

Severely
restricted
visibility of the
supply chain and
related risks

Subjective
beliefs

Subjective degrees
of beliefs as to the
probabilities of
events and the
consequences of
ones actions

Objective knowledge
of probabilities

Complete
knowledge

Knowledge of the
occurrence
probabilities of
possible states of
the world, possible
actions and
consequences
Implications for
supply chain risk
management

The limitations
of the decisionmakers cognitive
abilities
unambiguously
to pursue their
objectives given
the available
information
Incomplete
knowledge
about events

Imperfect
knowledge about
how the future
will turn out

The structure of
the future is known.
The probability
parameters are
not certain

Future states and the

structure of the
decision situation are
known. The
probability of each
future event is
objectively known

Every piece of
relevant
knowledge is
known

Procedural
uncertainty

Structural
uncertainty

Parametric
uncertainty

Probabilistic certainty
(risk)

The knowledge the

decision maker
holds related to the
problem

Certainty

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(continued)

The risk events

and parameters
cannot be
assessed at all

Complete
uncertainty
about the supply
chain and related
risks
(hypothetical
world)

No knowledge
at all

All pieces of
knowledge are
imperfect,
sometimes even
coming close to
ignorance

Radical
uncertainty

On uncertainty
in supply chain
risk management
9

Table I.
On defining uncertainty
in supply chains

Table I.

Decision-maker
acts upon
complete
knowledge and
implements
perfectly effective
activities

Radical
uncertainty
Decision maker
cannot act or
perform
rationally

Procedural
uncertainty
Decision-maker
acts fully upon
subjective
intuition about
future events and
attributes

Structural
uncertainty
Decision-maker
acts upon
subjective
assessment of
both event
structure and
probability and
their impact

Parametric
uncertainty
Decision-maker acts
upon known event
structure and
subjectively
evaluates how
probable and
impactful different
events are

Probabilistic certainty
(risk)
Decision-maker acts
upon known event
structures and
attributes based on
accurate calculations
and predictions

10

Implications for
decision maker
(e.g. supply chain/
logistics manager)

Certainty

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imperfect knowledge related to future events severely limit the decision maker in
pursuing set objectives. In the context of supply chain risk management, this reflects a
situation in which the supply chain has severely limited visibility in terms of its
activities and the related risks. Only a fraction of the events and risk can be identified
and analysed and then merely subjectively. Further, structural and parametric
uncertainties may be associated with procedural uncertainty; the sources of uncertainty
that allow some actors to generate unforeseeable changes are endogenous sources of
uncertainty for others (Dosi and Egidi, 1991).
The last column, radical uncertainty, refers to a hypothetical world in which there is
total imperfection in terms of knowledge (see Prater, 2005, on chaotic uncertainty for
parallel discussion). Thus, supply chain risk management and analysis are impossible
in that all knowledge related to each decision-making element is incomplete, which
does not even allow the formation of subjective beliefs about future events. This type of
uncertainty is unlikely in any situation, given that subjective beliefs may be based on a
very limited understanding of events and their context.
4. The applicability of the framework
By way of a practical illustration of the application of the developed framework in
supply chain risk management, we follow typical examples of risk through the
different uncertainty categories (Table II). We distinguish between events related to
the focal actor, the supply chain, and the external environment (which is a widely
adopted distinction in the literature, e.g. Trkman and McCormack, 2009).
With regard to events related to the focal actor, we illustrate the risk of industrial
unrest (employee strike affecting the focal actors activities). This risk is quite easily
mitigated on the left-hand side of the framework, with complete certainty and probabilistic
certainty, because management can prepare for known situations in which employee
strikes threaten supply chain and logistics operations. In contrast, moving towards
more radical forms of uncertainty, the related factors and causalities start to become more
unclear, and their assessment more subjective. Managing risks is likely to be a much
thornier task in these situations.
Turning to events related to the supply chain, we give the example of the crash
(operational failure/malfunction) of supply chain information systems, which is an
increasing concern in supply chain and logistics operations. When there is a
probabilistic certainty (a typical definition of risk assessment), it is possible to prepare
for the crashes and failures, and the risks can be sufficiently mitigated. However, on the
right-hand side of the framework, events leading to information system crashes may
not be understood or recognised, which makes preparing for them very difficult,
if not impossible.
In terms of the external environment, our example relates to a sudden and impactful
economic crisis. In conditions of certainty, there are no risks, because there is perfect
information regarding the economy and related factors. Although this is definitely not
realistic, probabilistic certainty (i.e. the traditional risk-assessment category) is not a
very likely scenario either, in the long run. In fact, economic situations may very likely
involve parametric uncertainty issues such as unanticipated fluctuations in supply and
demand, which may have an impact that can only be subjectively assessed. These
situations may also involve even more uncertainty that is not fully understood and is
hard to define (e.g. in emerging economies).
These examples show the importance of analysing the nature of uncertainty in
supply chain and logistics operations. In order to effectively manage the risks involved,

On uncertainty
in supply chain
risk management
11

There is no
knowledge about
the structure of the
economic system
nor the causalities
leading to
potential crisis
situations from
supply chain point
of view
The factors
affecting economic
environment and its
effect on supply
chain/network are
known, but their
likelihood and
impact are unclear
and are based on
subjective intuition

The known relative

probability of factors
affecting the balance
of the economic
environment, based
on historical data or
historically
accumulated
experience

Completely accurate
knowledge about
factors affecting
economic
environment of the
supply chain/
network and its
potential fluctuation
and vulnerability

Events related to
the external
environment
(economic crisis)

(continued)

The economic
environment is
deemed as
completely
external and
cannot be
assessed or
analysed at all

Changes in
system status are
not noticed or
recognised
The system
operability and
malfunctions are
recognised, but
neither the factors
leading to them
nor their
causalities are
fully understood,
and they are hard
to define
The mechanisms
and factors of the
economy and
economic crisis are
not fully
understood and
are hard to define,
and their linkage
to the supply chain
is not fully
understood

The factors
affecting system
operability and
malfunctions are
known, but their
likelihood and
impact are unclear
and are based on
subjective intuition

The known relative

probability of system
malfunctions and
operability

Completely accurate
knowledge about
current systems
status and future
changes in it

Events related to
the supply chain/
network
Supply chain
information
systems crash
(operation
failure/
malfunction)

The industrial
unrest is not
understood or
recognised as a
phenomenon

The factors and

causalities related
to industrial unrest
are not fully
understood and
are hard to define

The factors related

to industrial unrest
are known, but
their effects are
unclear and are
based on
subjective
intuition at best
The factors related
to changes in
system operability
and malfunctions
can only be
assessed
subjectively

The factors leading

to industrial unrest
are known, but
their likelihood and
impact are unclear
and are based on
subjective intuition

The relative
probability of
industrial unrest is
known, and related
factors can be
calculated accurately

Radical
uncertainty

Procedural
uncertainty

Structural
uncertainty

Parametric
uncertainty

Completely accurate
knowledge about
workers and unions
motivations, plans
and activities

Table II.
Illustrative examples of
using the developed
framework
Probabilistic
certainty (risk)

12

Events related to
the focal actor
Industrial unrest
(employee strike)

Certainty

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Key managerial
activities

No activities needed
related to supply
chain risk
management
design of supply
management is
based on full
certainty

Certainty

Procedural
uncertainty
Simplify,
categorise, and
evaluate risk
events and
situation based on
available
information and
experience, and
implement
effective risk
management
activities based on
those

Structural
uncertainty
Evaluate
probabilities and
risk situation
based on available
information and
best
understanding for
each recognised
risk event and
context and
implement
effective risk
management
activities based on
those

Parametric
uncertainty
Evaluate
probabilities based
on available
information and
best understanding
for each recognised
risk event and
implement effective
risk management
activities based on
those

Probabilistic
certainty (risk)
Calculate
(objectively)
probabilities for each
recognised risk event
and implement
effective risk
management
activities based on
those

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No activities
based on risk
management
knowledge can
be executed due
to complete
uncertainty

Radical
uncertainty

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Table II.

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management needs to pay close attention to the certainty and uncertainty levels in
the parameters, structures, and processes related to supply chains (as described in the
bottom row of Table II). If the certainty level is low (e.g. procedural uncertainty) with
regard to a major event, there is a need for activities that enhance it, or the organisation
needs otherwise to accept the consequences of being exposed to a level of uncertainty.
When the uncertainty increases, the risk management activities should be directed
more and more towards making sense of the situation and of risk events themselves,
as the level of subjectivity and intuition rises. Therefore, it is relevant to understand
both the level of objective information and the understanding used in subjective
decision making in the supply chain risk management context.
5. Discussion and implications
Supply chains have become very long and complex, with many parallel physical and
information flows to ensure that products are delivered in the right quantities, to the
right place, in a cost-effective manner (Juttner, 2005). At the same time, they are becoming
more and more vulnerable to serious disturbances. In line with these developments,
supply chain risk management and the uncertainty related to it are assuming
increasingly important roles. However, the concept of uncertainty is fuzzier in the area of
supply chain risk management than in many other disciplines, a research gap that has
been identified in some existing studies (Tang and Nurmaya Musa, 2010; Sorensen,
2005). In fact, in a recent systematic literature review (Ghagde et al., 2012), it was
suggested that further research is needed to better understand the visibility and
traceability of risks, which is still an underdeveloped area in the field of supply chain risk
management. Therefore, in order to enhance understanding on these issues, we propose
a conceptual framework and offer implications illustrating the various levels of
uncertainty in the supply chain context. We categorise the level of uncertainty in more
detail than in previous studies, which enables the construction of a more effective and
realistic risk management strategy with a better understanding of the level of known
information and the nature of uncertainty related to it.
5.1 Implications for the literature on supply risk management
Currently, supply chain risk management tends to assess risks as if they were based on
objective measures (e.g. Bogataj and Bogataj, 2007; Yang, 2011), which in this paper we
refer to as probabilistic certainty. However, in reality this objective basis is rarely
the case. Therefore, the measures derived from such assessments may well be based on
subjective beliefs, and thus should be treated as such. This carries major implications
in terms of risk management and risk analysis in supply and logistics chains
and networks.
The current contributions on uncertainty in supply chain risk management are
still quite scarce, and only a few scholars have studied the phenomenon. Typically, the
presented frameworks (e.g. Mason-Jones and Towill, 1998; Wilding, 1998; Prater et al.,
2001; Sanchez-Rodrigues et al., 2008; Van der Vorst and Beulens, 2002) concentrate on
studying the identification of and controlling the uncertainty from different parts of the
supply chain process, as well as studying the effectiveness implications. However,
these studies do not address in detail the nature of uncertainty itself. Thus, a gap can
be identified in the current body of knowledge, and this is the gap at which the core
argument of this study aims. There is, however, some work that comes close to our
aims here. For example, in the project management context, De Meyer et al. (2002)
underline the need for a better understanding of uncertainty, and analyse the degree of

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what is known and what can be planned and done based on that. Similarly, we analyse
the uncertainty in the supply chain risk management domain from the perspective
of the decision maker, and we concentrate on the level of knowledge that can be used
for the basis of identification, analysis, and management of the uncertain events.
In building our argument, we have combined various theories of uncertainty
(Knight, 1921; Dosi and Egidi, 1991) in the context of supply chain risk management.
The levels of uncertainty presented in the developed framework range between complete
certainty and complete (radical) uncertainty. In particular, risk is inherent in uncertainty
(i.e. probabilistic certainty), whereas, in the literature, uncertainty is commonly seen
as inherent in risk. The view presented here thus differs from that expressed in the
mainstream literature in that regard, and it facilitates deeper exploration of the concept
of uncertainty and its implications.
Our uncertainty framework for supply chain risk management contributes to
the existing literature in two distinct ways. First, it illustrates the different levels of
uncertainty and therefore enhances understanding of its nature when risks are
assessed and managed. This could help researchers in the field to better assess the
available information on risks, and on this basis to make stronger recommendations
with regard to how such risks should be managed. There is existing literature
addressing the different levels of uncertainty in the project management context
(e.g. De Meyer et al., 2002; Ward and Chapman, 2003). In addition, there is research
focusing on uncertainty in terms of its sources such as demand and forecasting
uncertainty (Prater et al., 2001), as well as on the generic influence factors on the level of
uncertainty (Prater, 2005). Complementing these approaches, our work takes one step
further in explicating the nature of certainty and uncertainty in the supply management
context through the lenses of parametric, structural, and procedural dimensions.
This allows for even more in-depth inquiry into the nature of the phenomenon, helping to
grasp its dimensions as well as their interrelations. Thus, as the existing frameworks
treat uncertainty mostly as a one-dimensional phenomenon and identify its sources and
implications (Mason-Jones and Towill, 1998; Prater et al., 2001; Sanchez-Rodrigues et al.,
2008), our study can be used to complement these frameworks by illustrating the nature
of different uncertainty types and levels. Second, the framework carries implications for
decision making under various levels of uncertainty, which should help decision makers
to design better information and other support systems in and beyond the context
in question (see e.g. Mansouri et al., 2012). In particular, in focusing on the type of
knowledge the decision maker has or lacks, it highlights the potential strong points as
well as the shortcomings in the decision-making process.
5.2 Practical implications
In practical terms, analyses of the nature of uncertainty could provide crucial information
for supply chain risk management and therefore could enable more efficient and effective
implementation. The framework opens up new insights and could be useful in the risk
mitigation process to organisations attempting to assess their vulnerability to different
exogenous and endogenous events.
In particular, the better that management understands the nature of uncertainty,
the easier it is to allocate resources related to supply chain risk more effectively.
When uncertainties concerning an important event are more procedural in nature,
more resources should be allocated to providing more clarification. Despite the
inevitable restrictions on the possibility of reducing uncertainty, resource allocation
and information gathering will ease at least some of it. An organisation making such

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decisions should examine the cost/benefit implications of accepting certain levels of

uncertainty or investing in lowering the level when necessary. In fact, a multidimensional
management approach for supply risk management has been suggested in order to
effectively and efficiently handle various types of risks in the firms supply chain (Chopra
and Sodhi, 2004; Kleindorfer and Saad, 2005). Utilising the uncertainty types introduced
in this study may help decision makers in further assessing the best possible risk
mitigation activities and processes.
Finally, the existing practice-oriented models for supply chain risk management
frameworks, whether they deal with uncertainty, risk, or vulnerability (see e.g. Waters,
2007; Kleindorfer and Saad, 2005; Sheffi, 2005; Ritchie and Brindley, 2007; Manuj and
Mentzer, 2008) aim to determine the optimal cost/benefit approach in the managing
of the unwanted events. Our framework has the possibility of extending these by
illustrating to managers what is in fact known (or not known) about the particular
events, thus allowing more purposeful and precise use of the frameworks according to
the information available.
5.3 Further research directions
The illustrated framework linking theories of uncertainty to the supply chain context
is novel, and therefore one goal of this study was to act as a catalyst triggering further
research. Future studies could both improve and test the argument provided here.
Given that the framework is conceptual, it needs to be empirically tested and validated
by the academic community in further research endeavours. Such studies could use it
to analyse a certain type of event with a large dataset, for instance, in which the level of
uncertainty is assessed against the performance effectiveness of supply chain risk
management. It would also be useful to conduct qualitative studies exploring various
types of processes related to decision making under different levels of uncertainty.
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About the authors
Dr Jyri Vilko (DSc Econ and Bus Adm, MSc, Tech) is a Post-Doctoral Researcher in the School of
Business at the Lappeenranta University of Technology, Finland. His recent research interests
are in the areas of supply chain risk management, inter-firm relations, operations research and
outsourcing. He has published on these topics in high-quality academic journals such as
International Journal of Production Economics and International Journal of Shipping and
Transport Logistics. He has also been involved in business practice with regard to these topics
through his research, and in speaker and advisory roles. Previously he worked as a Project
Manager in the project STOCA studying risk in the cargo flows of Gulf of Finland in emergency
situations. Dr Jyri Vilko is the corresponding author and can be contacted at: vilko@lut.fi
Dr Paavo Ritala (DSc Econ and Bus Adm) is a Post-Doctoral Researcher in the School of Business
and a Research Manager in the Technology Business Research Center at the Lappeenranta University
of Technology. His recent research interests are in the areas of inter-organisational networks, business
models, innovation and coopetition (collaboration between competing firms). He has published on
these topics in high-quality academic journals such as Journal of Product Innovation Management,
British Journal of Management & Technovation. He has also been involved in business practice with
regard to these topics through his research, and in speaker and advisory roles.
Dr Jan Edelmann (DSc, Econ and Bus Adm) is currently working in the private sector.
His research interests include innovation management, investment decision-making and strategy.
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