Managing Supply Chain Risks In Large Retailers Management Essay
In todays era companies are becoming competitive and are focused on ways to cut down their costs. This motive has been induced in firms to such an extent that they are in constant search of alternatives which can reduce their costs and can provide them a competitive edge over their competitors. Large retailers have been using different strategies to sustain their market share. However large retailers encounter different risks which are unique in nature compared to small or local retailers. Building value amongst consumers depends upon the effective management of different processes involved in carrying out day to day operations. Supply chain as an effective way of adding competitive advantage has been recognized by many firms. Effective supply chain leads to, flexibility in manufacturing, timely delivery of products, effective stock management, etc., which facilitates the firms to be cost effective as well as to retain their competitive advantage. Mentzer et al., (2008) has defined supply chain management as "the planning and management of all activities involved in sourcing and procurement, conversion, demand creation and fulfillment, and all Logistics Management activities. Thus, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, Supply Chain Management integrates supply and demand management within and across companies."
The World has become a global market and companies are not restricted to specific markets, if they are efficient and competitive they can reach out globally and can expand their customer base. An effective Supply Chain management is immensely important for companies to sustain in the globally changing environment. (Cooper & Ellram, 1993) Define Supply Chain management as "an integrated philosophy to manage the total flow of distribution channel from the supplier to the ultimate user." The word Supply Chain Management originated from Logistic literature as an inventory management approach. Managing inventory and stocks which are held involves different functions, however better information systems developed through effective supply chain management provides the firms with an opportunity to maintain small amounts of safety stocks, finished goods and production inputs.
In addition to this, (Ellinger, et al., 2011) discusses supply chain management as an "integration function with primary responsibility for linking major business functions and business processes within and across companies into a cohesive and high performing business model." Supply chain management further enhances the process of knowledge sharing in manufacturing operations to meet the supply and demand according to the market requirements. Supply chain management curtails the unnecessary duplication of non value creating activities leading towards efficient resource utilization, also incorporating information technology speeds up the supply chain and innovative process can be introduced which further reduce system wide inventory (Hult, et al., 2002).
However, as the circumstances and conditions worldwide are changing companies and businesses had to face various types of risks which have evolved through time. Companies are aware of the need for risk management and contingency planning, as precautionary measures to minimize their effects as ignoring these emerging risks will have adverse effects. Regardless of growing awareness regarding the concepts of supply chain susceptibility and managerial risk management are still in its inception Juttner et al., (2003). Companies which rely heavily on their supply chain are in constant search of innovative and reliable methods to incorporate into processes to manage and mitigate risks in their supply chain.
Motivation of study
Large multinational retailers are entering the Pakistani market and are seeking ways to establish themselves profitability by being able to compete with local retailers and thus the lack of research on supply chain management risks for large retailers in Pakistan motivated me to research on this topic.
The objective of this study is to determine various supply chain in Hyperstar and Metro Cash and Carry. To rank and prioritize most important supply chain risks and to suggest an action plan to mitigate those risks.
History of Hyperstar:
Hyper star being the Pakistans most vigorous and accelerating hypermarket chain, has global expertise and know- how. This global knowledge helps Hyperstar to offer its customers quality, variety and value of money, matching the international standards. The organizations own retail brands has helped it for differentiation and customer loyalty resulting extensively in its sales growth. Hyper star's massive buying power guarantees lower costs and prices - no wonder more than 2,000,000,000 people worldwide shop with us every year! As well as unbeatable value, we've also got an unbeatable choice - you'll find over 100,000 items always in stock (Hyperstar, 2012).
History of metro cash and carry:
The first cash & carry wholesale centre inÂ Pakistan was opened b METRO, in 2007. It then expanded to 5 wholesale centre in aÂ short span of 18 months. After the merger with Habib Group, the local business partners in 2012, today the company is operatingÂ 9 wholesale centres inÂ Lahore, Karachi, Islamabad & Faisalabad cities. Total head count of employees in Pakistan is up to 2252 employees.
Unlike Hyperstar which targets its market towards general household consumers, business concept of Metro cash and carry is a bit different. It does not only cater to private customers but also comes as a tailored and contemporary form of wholesale for businesses and companies. It targets business customers such as caterers, hotels, small and medium retailers, offering them a complete range of both food and non food and competent business solutions. This inclusive range, helps business customers to boost the customers' competitiveness in their respective markets. (Metro, 2012).
Risks are "The level of exposure to uncertainties that the enterprise must understand and effectively manage as it executes its strategies to achieve its business objectives and create value" (Deloach, 2000). Thus, it is essential for the companies to recognize its risks and formulate effective policies to avoid the uncertainties which can be harmful. Furthermore, Risk may be defined as "the chance or probability of incurring a loss" (Brindley, 2004). Risk increases uncertainty and chance of danger, damage, loss, injury, or any other undesired consequences (Harland, et al., 2003). And Stikin and Pablo, 1992).
Just add this citation stiking in the same brackets, as he has also talked about uncertainty. Too much quotes already.
Types of Supply chain risks:
Supply chain risk management focuses on the identification of risks, and provides action plans to mitigate those risks, hence preparing a retailer to deal efficiently with uncertain situations. Decision making today takes into account the different risks and uncertainties, as prominent risks linked to supply chain will affect the competitiveness and viability of the organization.
Cavinato, (2004) has categorized risks into various categories such as physical, financial, informational, relational, innovational. Physical - the actual movements and flows within and between firms, transportation, service mobilization, delivery movement, storage, and inventories. Financial - the flows of cash between organizations, incurrence of expenses, and use of investments for the entire chain/network, settlements, A/R and A/P processes and systems. Informational - the processes and electronic systems, data movement triggers, access to key information, capture and use of data, enabling processes, market intelligence. Relational - the appropriate linkage between a supplier, the organization and its customers for maximum benefit; includes internal supply matter relationships throughout the organization. Innovational - the processes and linkages across the firm, its customers, suppliers, and resource parties for the purpose of discovering and bringing to market product, services, and process opportunities. As the global market is developing severity and effects of supply chain risks are increasing, as with broader risks it is highly required to prepare and protect an organization as compared to risks in the past. Uncertainties, and vulnerabilities associated with supply chain management have been highlighted by academics in the last few years. Organizations adopting supply chain management principles are more networked and highly dependent organizations. Even though in literature an organization being networked and highly dependent, is able to grasp operational benefits, but the fact that vulnerabilities also increase cannot be denied. Large company's exposure to risk increases by inter-organizational networking, and exposure to risk increases as organizations become more dependent (Finch, 2004). His research elaborates on the importance of undertaking risk assessment and considering the need for business continuity planning when a company is exposed to inter-organizational networking.
"Supply chains are vulnerable to risks that arise from problems in co-coordinating supply and demand." (Kleindorfer & Saad, 2005). They, further categorize risks as high impact, low-likelihood risks which can affect an organization adversely. Unpredictable events such as 9/11, increase vulnerabilities for the organization, are regarded as high impact, low-likelihood risks for supply chains.
As claimed by Lee, (2002) organisations need to match their supply chain strategies with the right level of demand and supply risks encountered. This match-up provides organisations with an uncertainty framework based on supplier and demand risk in the context of products that are functional or innovative, stable or evolving.
Supply chain risks if not tackled in the appropriate manner can result in serious losses for companies. Supply chain risks and problems can arise as a result of various factors such as natural disasters, supplier bankruptcy, labour disputes, war or events of terrorism etc. supply chain risks can further cause delays, disruptions, inventory problems, procurement failures, systems breakdowns, intellectual property breaches, forecast inaccuracies, and capacity issues which can affect sales, increase costs, adversely affect good will etc. It has become essential for companies to focus intensely on identifying their supply chain risks and develop effective mitigation strategies to reduce the negative effects. (Chopra & Sodhi, 2004) Contribute to this research by defining supply chain risk categories and their drivers.
Figure 1. Source : Chopra & Sodhi, 2004
Supply chain risks can turn into serious problems not only for the retailer or organization itself but can also have a serious impact on the participating companies. As mentioned in the Figure above by (Chopra & Sodhi, 2004) a particular category of risks has various drivers which can cause short term, long term problems and the degree of impact each driver can cause varies. Natural disasters, terrorism, labour disputes each scenario according to the severity of it can have high or low impact. A simple delay in the process or along the chain will pose a temporary risk, as compared to a sole supplier demanding an increase in the prices of its products and holding down the manufacturer will be posing a greater and long term risk. Similarly a breakdown in the machinery of a manufacturer with redundant capacity will have lower impact, compared to the impact on a shipping company if the shipping lanes are destroyed due to war.
Even though companies have to focus on the identification of risks they may face in their supply chain it is often possible that taking measures to mitigate a particular risk can become drivers of increasing another risk, as individual risks are sometimes interrelated. Companies tend to create plans to reduce or mitigate high-likelihood risks which have low impact and often ignore the low-likelihood risks which have high impact and at times can be more devastating for the company. As stressed by G., (2000), companies along with focusing on their own risks should also focus on risks which their other links such as their supply chain might face.
Findings of (Economist, 2009), in their global survey, consisting of 500 executives responsible for risk management in their organizations, reveals that companies are still not able to estimate the severity of risks of supply chain failure. Recession and economic downturn have brought a change in the management's concerns about which risks to focus and emphasize. Utility failure, labour disputes, intellectual property protection are less prioritized today, then in the past and factors such as customer confidence, supplier insolvency, protectionism, energy price fluctuations is more prioritized. In order to cope with these ever developing threats and risks companies are constantly trying to build strategies to make their supply chains more adaptable. Strategies such as information sharing with peers and supplier audits will put companies in a stronger position as the recession ends.
Management decisions about which risks to stress upon more, will also be changing through the course of time as newer risks will make the company more vulnerable if not properly tackled. (Juttner, et al., 2003) Categorizes relevant supply chain risks into three categories such as external risks, internal risks, and network related risks. External risks are regarded as "natural risks", "political risks", "industry/market risks", "social risks" (e.g. Volatility of customer demand). These are risks on which a retailer cannot control and in order to make sure that their effects are minimized efficient mitigation strategies should be developed. Internal risks are such as labour disputes or strikes, production related issues e.g. machine breakdown, or IT system errors causing uncertainties. Network related risks are considered to be affiliated with problems caused due to lack of cooperation and insufficient interactions between organizations.
(Oke & Gopalakrishnan, 2009) Explains that considering the case of retailers there are mainly two basic types of risks. Supply related risks which can cause disruptions in the supply of products of the large retailers which are offered to their customers and demand related risks which could affect the ability of a retail supply chain, disrupting their operations and creating difficulties for the retailer to make its products available to customers.
Supply risks in large retailers include:
Imports: Chinese new year effects the Chinese imports and this type of risk is predictable and has fairly low impact.
Climate: Annual migration and breeding patterns of birds and animals may affect livestock and the supply needs to be maintained in order to mitigate the effect.
Man-made disasters: events such as September 9/11 will hinder the movement of goods and services. After the event movement of goods into the United States was restricted to much extent. These low frequency events will have catastrophic effects so proper contingency planning is required.
Natural disasters: Floods in Pakistan and earthquakes reduced the availability of livestock. Supplies to store are also affected by flood to reach on time. Similar incident of the Katrina hurricane and similar disasters have created disruptions in the retail supply chain worldwide. These types of risks are not so often but when they occur supply chain is severely affected so mitigation strategies should be properly developed by understanding the vulnerability points, and contingency planning should be properly tested.
Socio economic: appreciation in the value of land caused migration of fish farmers from coastal regions of Florida. The likelihood of these types of risks is fairly low but will have long lasting effects on supply.
Loss of key suppliers: Supplier going out of business or being unable to meet the demand, standards, and quality of products will have a very high impact on supply. Even though chances for such an event are low but strategies need to be developed to minimize the effects.
Demand risks in large retailers include:
Economic factors: increase in gas prices has led to a decline in the traditional shopping method and customers are reluctant to go to large stores for shopping. Online shopping is increasing and it is becoming difficult for large retailers to attract potential consumers.
Banning of ingredients: Ban on ingredients imposed by countries affects the global demand of products, such as in Pakistan pork meat and alcohol is not allowed to be sold.
Forecasting errors: these types of errors can severely affect demand and will have adverse effects. Errors such as short life cycle products, long lead times, and ignorance of evaluating the impact of promotions on future sales are errors which occur frequently. These errors create variability in demand and retailers may lose potential buyers if they are unable to accurately forecast the changes in demand patterns of products, which are being sold.
Figure 2. Source : (eyefortransport, 2011)
(eyefortransport, 2011) Conducted survey related to the concerns of retail supply chains worldwide. "Respondents identified their biggest supply chain concerns for the next 12 months, with a general weakening of demand (65%), fuel costs (56%), multichannel impact on supply chain (54%), and increased transportation rates (44%) being most prevalent."
Supply chain risks are increasing and changing and retailers have to keep in mind all the different factors that can increase threats for their operations. Pakistan is a country with potential buyers but unstable environment, threats of terrorism, inflation and political instability creates difficulties for the retailers to carry out their operations. Consistent increase in inflation is putting pressure on budget of potential Pakistani consumers as purchasing power is decreasing. The challenge today faced by Hyperstar and Metro is to keep their customers satisfied as well as realize their risks which can create disruptions. These disruptions in supply can decrease the company's revenue and market share, increase costs, and hover the company production or distribution. Supply disruptions can also negatively effect its credibility with investors and other various stakeholders, resulting an increase in the cost of capital. (Milr, et al., 2009).
Supply Chain risk management process:
Supply chain risk management has become a necessity for companies today as there are different complexities arising from global outsourcing of logistics, manufacturing and suppliers. It is used by the organization as a tool to progress organizations performance and a valuable way of attaining competitive advantage (Zailani, et al., 2009). (Norrman & Lindrorth, 2002) defines "Supply chain risk management is to collaborate with partners in a supply chain risk management process tools to deal with risks and uncertainties caused by, or impacting on, logistics related activities or resources". Supply chain management has been developing through the course of time and has inspired researchers to research this area in order to discover new methods to handle different types of risks and vulnerabilities (Brindley, 2004). Supply chain risk management is regarded as a collective and planned approach to risk management that assists in handling risks, which can have severe effects on achievement of supply chain goals and is (He & Song, 2009). Identification and management of internal and external risks faced by supply chains is necessary and supply chain risk management helps in reducing supply chain vulnerabilities.
The risk management process is concerned with realizing different types of risks, and minimizing their impact. Norman and janson (2004) defines as the making of decisions regarding risks and their subsequent implementation, and flows from risk estimation and risk evaluation". Risk management process has different stages such as identification of risks, assessment of risks, evaluation of risks, planning and control. All these processes are to be coordinated in order to determine the impact of risks and to develop proposed action plans to minimize the impact.
Figure 3 : Source: (Zhang & Lin, 2008)
According to (Zhang & Lin, 2008) Risk identification is an approach that combines theoretical knowledge, information, emperical experience, and other tools to dicover possible risks and potential risk events that pose a threat. Risk assessment is the in depth study of each risk, its probability of occurance, emerging time, and consequences. Risk evaluation indulges in evaluating the overall risk of the supply chain as a whole, thorugh which mitigation plans will be adopted. Risk planning sets up goals for risk control and assists in developing effective mitigation plans. Risk control is the implementation of the mitigation plans which were developed. Priority is to take immediate actions to minimize the effects and impact of risk accidents inorder to make sure that supply chain operations are being carried out without disruptions. Risk monitoring concentrates on real-time risk control, keeping a through check on the operations of supply chain by capturing contingencies that weighs down performance, dicovers any divergence from the goals which were set, so efficent measures are taken to deal with problems. It also reviews the effectiveness and efficency of risk mitigation plans which were developed.
''Risk identification is a process that reveals and determines the possible organizational risks as well as conditions, arising risks. By risk identification the organization is able to study activities and places where the resources are exposed to risks'' (Williams et al., 1998).
Risk is an inherent part of business and public life. Nowadays more and more companies and organizations in keeping with the current trend of competitiveness start initiatives that may have several different outcomes. In order to meet the desired outcomes these organizations and companies identify risks and mitigate them so as to efficiently remain on top as well as control the factors that affect the performance of the organization in a continually changing environment (Tchankova, 2002).
Accurate risk identification is prerequisite for risk management process to be effective (Greene & Trieshmann, 1984) explains that in case if managers are unable to identify or neutralize any or all possible risks and sources of risks in time, then it becomes extremely difficult to manage these risks later on which can then harm the organization (Dickson & Hastings, 1989). As the risks are not taken into account, the organization does not take any action against these risks and the results can be unexpected. The inability to identify risk possible risks is as inappropriate as non-identified risks related to the loss (Tchankova, 2002). It is also deemed a failure if the organization is unable to find a good positive solution (Dickson & Hastings, 1989).
As per (Tchankova, 2002) risk identification can be described by the following basic elements:
Sources of risks
Exposure to risks
Elements of an organizational environment bringing either positive or negative outcomes are known as sources of risks (Tchankova, 2002).while conditions that may cause an increase in chance of losses or gains are known as hazards (Tchankova, 2002).
(Hance, et al., 1991) describes peril as something that can happen anytime from an unknown cause, resulting nonprofitable loses. Hance et al., (1991) also describes peril as something close to the risk, having negative, non-profitable results. The objects that face probable gains or losses are known as 'resources exposed to risk'. These resources are affected if the risk event actually takes place.
(Salvador & Huang, 2006) explains 'risk assessment' as it quantifies the results of identified risks. For the assessment of the identified and analyzed risks, estimation and the impact of these risks on the performance of the organization and likelihood of occurrence of these risks is required.
There are various methods for risk assessment. (Atrebrant, et al., 2003) Discusses the following risk assessment methods:
The One-Day Analysis
This analysis is restricted to just one day as in this method the managing director and other coworkers for instance heads of production, staff, finance, and the risk manager have to participate. Other concerned stakeholders like the insurance company as well as local rescue service representatives are also involved. After analyzing the risks environment, they are prioritized economically. The resulting Prioritized risks provide the foundation to risk manager to continue the work.
The What-If Method
What-if method analyzes the result of possible deviation from a standard situation. The
experience of employees come into handy as they play a vital part in reaching a solution for various risks which can be easily overlooked if not approached with a unorthodox or out of the box thinking and should only be employed as a sub analysis for risk environment .
The Jonsson Analysis
Risks quantify relative terms rather than money. Distribution, probability, and consequences of the risks can be comprehensively reviewed by the Jonsson Analysis method. After analysing the possibility and consequences of risks, a scale is graded to inspect the level of risk. The amount of probability and consequences determines the level of risk. For instance if there is a low probability and big consequences (1+3=4) the risk level will be unacceptable and shall be dealt with appropriately.
Figure 4 : Grading Table - Jonsson Analysis
Source: (Atrebrant, et al., 2003)
An experienced and competent group of people from a consultancy firm are hired to brainstorm and examine risks within the organization. Risk conditions are then selected by the group, which are to be examined. The tool used in this method is the human evaluations of important exposures, which may possibly affect the decisions of the organization, but the Delphi-Technique usually gives credible results regarding probability of the risks involved.
In check list risk analysis method, a control tool is developed by asking questions regarding risks, vulnerabilities and damage exposure which measure the established security level. The results of the analysis are then compared. However, this method does not provide expected damage costs as well as may lead to several important issues being overlooked in the questionnaires.
Expected Damage Cost Analysis
This method provides a quantitative estimation of different risks. Vulnerability factors and damage costs are also calculated. Security measures are the direct choice of analysis results which optimizes the costs of these risks.
Evaluation of risks prevailing in the whole supply chain, with regard to ranking on the basis of possible risks and "probability before and after risk mitigation factor" is stated as risk evaluation by Zhang and Lin (2008).
cox, 2008 considered following factors to be considered important in order to compare the identified risk's efficiently and effectively, and to provide with a proactive solution:
The probability of the risk taking place,
The magnitude of the risk, and
The cost and resources required to mitigate the risk.
In the following matrix table, if the severity is critical and the probability is infrequent, then the risk exposure factor is 3 x 3 = 9, and we can evaluate the risk as being critical and must be dealt with immediately.
Figure 5 : Source: (Tummala & Schoenherr, 2011)
Mapping risks along these matrices help determine in which category certain risks fall into and then can be dealt with or accepted. Contracts developed between customers, suppliers, logistics providers and manufacturers may help in the determination of these acceptability levels (Tummala & Schoenherr, 2011). These matrices have been used in Highway construction project risk management, applied risk management consulting and practice, including business risk management, and in the assessment of potential risks to building ranging from terrorist attacks to hurricanes (Cox, 2008).
Risk mitigation strategies:
In the modern retail environment, retailers have to face different types of supply chain risks and relationship with their suppliers is a crucial aspect of effective supply chain management. "Collaborative relationships adopt a long-term approach with joint efforts by each partner to create unique value that neither partner can create independently" (Corsten & Kumar, 2005). Performance of firms engaged in collaborative relationships is efficient and builds on to a competitive advantage as increased flexibility, higher service levels, improved visibility, superior end-customer satisfaction and to achieve reduced cycle times. (Daughtery, et al., 2006).
(Nayaga, et al., 2010) Found in their research that suppliers are more committed to buyers who share information as it helps them to deliver products and services more effectively and efficiently. Joint relationship efforts from suppliers and buyers will effectively help in building trust between them. Suppliers will be more satisfied if buyers are involved in joint planning, performance measurement, goal setting, and problem solving. Directing joint activities provides suppliers an opportunity to express their needs, apprehensions and outlooks. This will further lead to suppliers assuming that such buyers are concerned about their welfare and will regard them highly. Even though generally suppliers commit to buyers with whom they have a trustworthy relationship, still they realize the fact that buyers will be searching for better alternative suppliers.
Global expansion in supply chains is increasing the risk of disruption, and supply chain risk analysis is extremely significant in order to form a mitigation action plan. Risk of supply chain disruption may be higher in extensive and complicated supply chains of large retailers. If supply chain has the ability to adjust and cope with changing environments then impact of disruption will be lesser as restoration of activities will be timely (Schmitt & Singh, 2009).
Figure 6 : Source: (Faisal, et al., 1997)
It is impossible to eliminate the risks encountered in supply chain, however if companies are aware of the variables that are affecting their supply chain then risks can be mitigated to a greater extent and their impact can be neutralized.
Information sharing helps in building collaborative relationships as mentioned above. It also aids in Aggregating the visibility of demand information across supply chain which helps in reducing the risks (Chopra & Sodhi, 2004)." Information sharing builds up trusts between partners and they are clearer about expectations from each other, and can work jointly. Also information sharing helps in reducing communication gaps that could result in misunderstandings between partners.
Building competitive advantage through strong collaboration between retailers and suppliers is gaining significance as new complexities and risks in supply chain are emerging. "Retailers must not only balance returns on assets, growth, and inventory turns but also develop strategic approaches in collaboration with their supply chain partners to drive demand (Ganesan, et al., 2009)." (Faisal, et al., 1997) Argues that this alliance results in a high degree of interdependence amongst supply chain partnerships, which allows an expansion of flexibility, low cost manufacturing skills, and responsiveness in order to reduce risk. Due to its ability to decrease uncertainity, trust and collaboration are increasingly becoming more dominant in suppy chain relationships (Hoyt & Haq, 2000).
Trust among supply chain partners:
Absence of trust between supply chain partners contributes towards increase in risk and uncertainties. Trustworthy relationship enhances the chance of partners not acting in an opportunistic manner for their personal gain but will be considerate towards the needs and expectations of their partners, which will eventually turn into an added competitive advantage in comparison with competitors. According to (Sahay, 2003) in order to develop trustworthiness it is essential for an organization to find ways to demonstrate their commitment to the other organization. Maintaining the level of trust will require a non opportunistic behaviour even though some decisions in the short run might seem might seem unfavourable. The organisation should consider the long term benefits which they will gain by building the level of trust rather than going for opportunities that will provide short term benefits.
"Data and information security risks are largely under the control of the organization (Finch, 2004)." However information that is shared amongst partners is extremely sensitive and any leak can not only increase risks but can also pose threat of competitors taking advantage. Information security provides a cover to the partners and reduces risk of losses that can arise from system misuse, intrusion, fraud, tampering (Faisal, et al., 1997). (Shaw, 2000) Concluded " Security and access privilege are two important issues in implementing internet and extranet technologies in supply chains."
Corporate Social Responsibility:
Companies today are not only liable to their customers, shareholders, investors, but accountable to all of its stakeholders. Socially responsible companies take into serious consideration all the impacts their decisions will have on the society. They tend to balance the concerns and needs of stakeholders with their ultimate motive of making profits (Doane, 2005). Corporate social responsibility aims to provide public chance of complaining by revealing information, and assures them that their interests are not neglected. Corporate social responsibility addresses to issues such as child labour, unhygienic working conditions, products made from endangered animals, etc. even if companies which have outsourced their manufacturing to suppliers worldwide, and their supplier are involved in employment of child labour, will have severe negative impacts on their image (Kolk & Tulder, 2002).
Aligning incentives and revenue sharing policies in a supply chain:
Companies often tend to neglect their supply chain partners and create conflict of interest by act in ways to satisfy their own motives. To build a positive image it is necessary that companies develop monetary incentives that favour themselves and their supply chain partners. Supply chains that take into account interests and incentives of their partners by distributing risks, costs and rewards fairly will work well with fewer disruptions (Narayanan & Raman, 2004). "Revenue sharing is kind of supply chain contract that makes possible to share the risks among supply chain partners (Tsay, 1999)." However (Cachon & Lariviere, 2005) concluded in their research "Even though revenue-sharing contracts are effective at coordinating the retailer's purchase quantity and pricing decisions, they work against the coordination of the retailer's effort decision. When demand is sufficiently influenced by retail effort, revenue-sharing contracts should be avoided."
Strategic risk planning:
Companies which realize their external and internal risks are in a better position to develop effective and efficient mitigation strategies. Formulation of effective and efficient organizational strategies reduces impacts of potential risks (Finch, 2004). Supply chain risk mitigation can be achieved through collaboration of efficient planning decisions and operational strategies. According to (Chopra & Sodhi, 2004) mangers should make sure that awareness and understanding of supply chain risks is communicated in their organisation, and they need to recognize, develop and determine various risk mitigation approaches which are relevant to their particular organisation in different circumstances.
Risk sharing in a supply chain:
Sharing of both risks and rewards between organisation and its supply chain partners builds a strong and trustworthy relationship. It is essential for organizations to realize risks not only related to them, but also those risks which can come across the different links in supply chain and can create complexities to such an extent that normal operations are disrupted.
Knowledge about risks in a supply chain:
Focus of companies is changing towards new emerging risks, and traditional known risks have been side lined, as global completion and outsourcing of various activities such as manufacturing, logistics etc increase. There are various types of supply chain risks which can be categorized, given to their affect on the organisation (Harland, et al., 2003). Effective decisions can be made for the organization and the whole network if management is fully aware and understands various supply chain risks. Response of management towards risk mitigation will be more appropriate if it understand variety of risks and how they are interconnected (Hallikas, et al., 2004).
Continual risk analysis and assessment:
"Risk analysis is a practice with methods and tools for identifying risks in a process. By identifying a risk, decision makers become aware of events that may cause disturbances (Sinha, et al., 2004)". Continual risk analysis and assessment helps determine and prioritize between variety of risks, such as which risks will have higher impact and should be dealt first and to what extent they can harm and create disruptions. To prioritize risks is immensely important in this era, as supply chains work in dynamic business environment where different variables such as political or economic conditions, terrorism, natural disasters, formation of new alliances, mergers, etc can influence the decisions and steps taken by organization in different circumstances.
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