Which form of supply chain risk can be reduced by the use of effective contracts with penalties?

• A. Currency fluctuations
• B. Moral hazard
• C. Natural disasters
• D. Technological obsolescence

Answer: (B)

Verified step by step guidance

1. Understand the concept of supply chain risks, which are potential events or conditions that can disrupt the smooth flow of goods and services in a supply chain.
2. Identify the nature of each risk option: Currency fluctuations relate to changes in exchange rates; natural disasters are external physical events; technological obsolescence involves products or processes becoming outdated.
3. Recognize that moral hazard occurs when one party in a contract has an incentive to take undue risks or shirk responsibilities because the negative consequences are borne by another party.
4. Understand that effective contracts with penalties are designed to align incentives and reduce moral hazard by imposing costs on parties who do not fulfill their obligations properly.
5. Conclude that among the given options, moral hazard is the form of supply chain risk that can be mitigated by using contracts with penalties, as these contracts discourage opportunistic behavior.