The adaptation of extended net present value theory and solvency II in risk management

The focus of this paper is the risk management of total supply chains through identifying risk drivers that could appear simultaneously and mitigating supply chain risk. Any risk driver that is likely to disrupt the procurement, production, transportation, warehousing, delivery or financing of a good or service constitutes a realisation of supply chain risk. Risk drivers often appear simultaneously. As many cases from around the world show, disruptions to supply chains can be of low severity or catastrophic to corporations, global supply chains and even national and international economies. It is imperative, therefore, that an a priori assessment of risk drivers that pose risk to the global supply chain is undertaken and that contingency plans are developed at every level to monitor and mitigate these risks, even when they appear simultaneously. The main duty of a supply chain manager is to prevent the ruin of a supply chain exposed to risks. To avoid the ruin of a supply chain, we must ensure the availability of adequate funds. Therefore, the risk-mitigation approach advanced in our paper follows from our conviction that money is a stock of purchasing power of any activity cell in a global supply chain that could influence a perturbation of material flows-on many stages simultaneously-and not only financial flows in a supply chain. In the paper, we provide a method that is closely related to the Solvency II methods but appropriate for studying the long-term solvency of a supply chains. As the balance sheet assets under consideration are different from those of banks and insurance companies, the solvency method could not be adopted directly. This new approach is based on Material Requirements Planning (MRP) Theory, as developed by Grubbström and later extended by Bogataj and Grubbström, in which simultaneous perturbations in the timing of financial flows, information flows and flows of items can be better evaluated through Laplace transforms and the net present value (NPV) expression.