Review of importance of Supply Chain Risk Management

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Supply chains of today must deliver varying degree of six out comes- the traditional cost related benefit plus responsiveness security, sustainability, resilience and innovation depending on the key of customer's need (Stevena. Melnyk,Edwardw.Davis,Robert E.Spekman,2010).

The objective of this literature review is to study the importance of risk management in Supply Chain. Risk and uncertainty seems to be prevalent in our environment and involve in all of our efforts (Desheng Dash Wu, 2010).Risk is a threat to disrupt or halt normal activities and occurs due to the uncertainty about the future. Risk can be defined as follows

Risk = Probability (given event) * Severity (negative business impact)

There are many types of risk involve in supply chain and can be divided in three broad categories.

External Risks are beyond the control of managers like earthquake, storms, terrorist attack and etc.

Internal Risks are the risk from the operations of organizations.

Supply chain risk are external to organizations but within supply chain.

Managers hate risk they presumably assumed that every activity will go as normal but in reality it's not true. By simply avoiding risk, it does not eliminate risk but increases its probability of occurring. Secondly, managers rely on reactive approach to the problem instead of preventive and often due to this approach organization has to face dread full consequences. Risk Management does not eliminate risk but devise different ways for handling unusual situations having negative impact on the organization.

Risk Management involve identifying potential risk, thorough analysis of that risk that involves calculating potential losses and then establishing ways for mitigating that risk and problem. Risk Management aim is not provide a risk free business but helps the business to manage risk effectively. In practical scenario Risk management balances risk.

Today globalisation and worldwide view of business has tremendously increase number of risk. SCM targets to reduce cost by using different methodologies including Just in time (JIT). Traditionally companies tend to hold buffer stock as soon as they predict forth coming risk but as we all know stock are expensive and according to the studies it cost around 25% of what item cost (Larry C. Giunipero,March 2003). Risk Management plays its role here because increasing stock means waste of useful resources and unsold stock but with low stock it can be difficult to manage uncertain demand. The role of risk management is to balance out the risk and find the solution that is more viable and less risky. Dell is often considered as an example for implementing close working relations with its suppliers and sources for adding value to the dell's product is as follows.

Sources of Risk

Traditional Approach

Problems

Supply Chain Risk Management

Problems

Material availability

Long distances

Insufficient capacity

Demand fluctuations

Technological changes

Financial instability

Labor instability

Management turnover

Extra inventory

Multiple suppliers

Expediting

Manual purchase orders

Frequent supplier changes

High transaction costs

Long purchasing ordering

cycle times

Low purchasing

productivity

Rush orders

Industry consolidations/

partnerships/alliances

Just in time deliveries

Small flexible supply base

Increased coordination

Early supplier involvement

Frequent commitment

Highly-trained supply

management professionals

Measuring total costs

Lower control over

supply-related risk

Magnification of problems

throughout the supply chain

Paying higher prices

Higher switching costs

Skill gaps in current

employees

Security of transactions

(Antonette et al., 2002; McWilliams and White, 1999)

Supply chain can comprise of number of upstream and downstream suppliers. Reliability of supply chain depends on its weakest link. Companies should not only focus on their own risk; they must also focus on the other links in the supply chain (Souter, 2000).In case the member of supply chain have their own minor risk involve in their operations but adding the risk associated with all the members of supply chain can be significant. This can only be achieved by efficient use of Information technology that allows integration in supply chain members and information sharing. Following current trends increases the vulnerability of supply chain (Andreas Norrman & Ulf Jansson, 2004).

More integrated processes between companies

Outsourcing of manufacturing and R&D to suppliers.

Globalization of supply chain

Reduction of supplier base

Reduced buffer

Increased demand for on time deliveries

Shorter Product life cycle

Some of the important and contemporary trends are discussed below.

Integration in Supply Chain between companies

Information sharing among the members of supply is of utmost importance because in supply chain performance of one supplier can have direct implication on outcome or on the value of product resulting in supply chain ripple effect (Andreas Norrman, 2004). Although integrations have several problems associated with it. Since each member of supply chain wants to make profits and it can be achieved by paying less for the material bought and sells that material at higher cost. However the risk of supply chain can only be reduced by establishing transparency among each member of supply chain have direct access to other member and knows what is happening on the other side. When the members of supply chain work in isolation for reducing their own risk, results of that are not satisfactory. Since reducing risk or implementing risk management strategy in one company does not decreases the overall risk because vulnerability of supply chain depends on the weakest link. It will just transfer the risk to other member of supply chain. Supply chain member should work together for reducing the supply chain vulnerability as a whole (Christopher, 2002). In the study carried out by Togar M Simatupang dilemma of collaboration in supply chain is represented as follows.

The above diagram reflects the problems that decision taken in the interest of supply chain is in conflict with the decision taken for the individual members like the conventional approach is reducing the cost each part of the supply chain will enhance the overall performance of supply chain.

Outsourcing

Outsourcing relate to relying on one's own competencies and relying on others for less competent areas. This allows company to have competitive advantage over one or two features of the products but outsourcing does not always work as expected. Since each company business strategy is different from other. Some tend to focus on high quality whereas others tend to focus on good customer service so there is increased risk of poor performance. Broader supply chains are less risky than narrow ones. Companies relying on a single supplier are on the knife edge because any incident on supplier side can bring whole system to halt. Secondly outsourcing can be detrimental for the goodwill of the company. As companies are relying on the others product so the quality of the end product depends on the raw materials.

Globalization

As global operations are increasing world is turning into a global village. A problem in a one part of world can seriously disrupt businesses in other areas. In addition to that risk of extended journey can result in crossing international borders, more stock in transit and so on.

The risk management process is executed in four stages which are as follows (Hallikas et al., 2004).

Decisions and Implementation of Risk Management actions and optimizations

Risk Assessment or Risk Analysing

Risk Identification

Risk Identification

This process is based on monitoring various KPIs (key performance indicators) related to supply chain. KPIs include level of in stock inventory, throughput, turnover of stock and delivery lead time are some of the commonly used KPIs(Mihalis Giannakis &Michalis Louis, 2010) . There are several tools available for identifying risk using different methods. Some of them tend to analyse the past events and others by collecting opinions through interviews, group meeting, Pareto analyses, checklist, process charts and cause and effect diagrams. There are also many unknown risk involve in supply chain that appear from out of the blue. Operations of different supply chains can also identify the potential risks pertinent to that supply chain. Risk identification requires the breakup of complete supply chain in terms of operation or activities and then considering the details of each operation for identifying potential risk involve in supply chain.

Risk Assessment

Risk assessment involves estimating the probability of occurrence and its overall impact on the business. Risk assessment has its own limitations due to lack of reliable data of past and experiences of similar events (Stemmler, 2006).

The key role of risk assessment in supply chain is to identify the critical path in the supply chain. Critical path are the ones that may have long lead time, a single source of supply with no alternative readily available or where visibility is poor (Martin&Helen, 2004).

There are several methods available for analysing risk. The most elementary and common method involve categorizing risk on the basis of its financial impact on the business or relative probability of its occurrence. Other models include failure modes and effect analysis (FMEA), Scenario analysis and simulation.

Responding to Risk

Risk response targets to find the best possible way of dealing with risk to supply chain and implementing those responses for reducing the probability and consequences of risk. There are different types of responses to risk that are as follows.

Ignore or accept the risk

Reduce the probability of occurring

Scale down the limit of consequences

Contingency plans

Transfer, share or deflect the risk

Adapt to it

Move to another environment

(Pauchant & Mitroff, 1992)

There are several ways that can be used for mitigating risk in supply chain. It can be achieved by adjusting the design of supply chain so that it involves less risk in terms of consequences and probability of occurrence.

Simplicity in supply chain can lead to enhance overall performance, leading to more consistent quality, lower operation cost and inherently greater responsiveness. Five ways for adding simplicity in supply chain are as follows.

Reducing the number of shippable items and consolidating the packaging and product.

Making more products to customer order and employing postponement technique, delaying the completion of product.

Build partnership and bind partners to organization.

Align performance objectives

Get information in time from system

(Rick Hoole, 2005)

Variability in the supply chain is considered as one of the main source of risk. It is recommended to reduce the variability as much as possible by introducing different systematic procedure. Traditionally companies tend to hold more stock for reducing risk but CISCO was one of victim of this approach and suffered with serious loss due to unsold inventory (Donald Waters, 2007).

Agility in supply chain is one of the recent approaches used by managers for making supply chain more flexible for dealing with the fast changing environment. This involves the manufacturing and delivery of product with very small lead times. It can be achieved by creating resilient supply chains that will be discussed later. There are number of other approaches as well for implementing agility in supply chain through standardisation (using same parts for different products), postponement (delays the finishing of product until last moment) and etc (Donald Waters, 2007).

Visibility in supply chain is important for accurate and fast delivery of information. Misleading or lack of information can have severe consequences in the form of bullwhip effect in supply chains. Supply chain vulnerability is the measure of transparency and obscurity (Paul A. Bartlett et al, 2007). According to Donald Waters visibility encourages replacing inventory with knowledge and it has two key benefits. Firstly, it allows managers to make more informed decisions and efficient joint plans for dealing with risk, Secondly, reduces risk from poor communication such as demand amplification.

Companies need to overcome the following barriers in order to share the information.

Companies must need to realize that cooperation is better than conflict.

Basic Information sharing with the partners does not results in compromising the existence of the company

Overcome the technological barriers for effectively sharing the information

Visibility of information leads to process convergence as well. If a company selects a process take JIT or lean manufacturing its specific demand will encourage other member to move to that process.

Risk Compensation is another area of concern for managers of supply chains. It indicates that using Supply chain risk management reduces the overall risk of the company but individual members behave more recklessly in their own organizations until the risk returns to its original level (Donald Waters, 2007).

The above literature concerns about the risk that can be analysed and planned for mitigating their effect. However there are risks and events that come out of the blue and for handling those we need to look out for some approach that could handle those effectively.

Supply chain resilience encompasses the understanding of networks that connects the business to supplier and their suppliers (Martin, 2004). Supply chain design can have significant effect on risk for example a long, narrow chain has more risk associated with that than a short and wide one (Donald Waters,2007).Resilience of supply chain guarantees that supply chain can recover from disruption quickly and cost effectively (Stevena. Melnyk et al, 2010).According to Martin, Resilient Supply chain must have risk management culture as integral part of supply chain.

(Martin&Helen, 2004)

Risk Monitoring

Risk monitoring is feedback loop for responding to the risk that occurred in response to resolving or minimizing the probability or effect of some particular risk. It can also be due to change in the environment or etcetera (Andreas Norrman, 2004).

Business Continuity Management

Business continuity management can be defined as 'process of developing advance arrangements and procedures that enable an organisation to respond to an event in such a manner that critical business functions continue with planned levels of interruption or essential change'(Scott P. Foster and Karen Dye, 2005).

BCM is the preparation of disaster recovery like earth quakes, hurricane, fire or severe weather. These events are very rare with low probability of occurring but having severe consequences as in the case of Enron, British Petroleum and Ericson in 2004.According to Donald water cited study conducted by deloitte in 2005 found that greatest losses in market capitalization were attributable to events that are unlikely to happen and companies apparently failed to plan.

Some benefits of BCM as follows.

Survival, even when hit by a major crises

Competitive advantage over organization not well prepared

Helps in improving and retaining customer and service.

Commitment to recovery helps in getting better rates for insurance.

Meeting statutory requirement for BCM

Following are the steps involve in implementing Business Continuity management.

Getting the support and commitment of senior management.

Devising strategies and options for balancing risk reduction and recovery.

Identifying the part of Supply chain that must continue working for sustainable operations.

Analysing the impact on business in the absence of key supplier.

Preparing Business contingency Plan for responding to a disaster like identifying alternate suppliers or modes of transportation.

Implementing business contingency plan

BCM should be monitored continually and modified according to the environment.

(Donald Water, 2007)

Conclusion

Supply chain Risk management is to be given priority and prudent steps need to be taken in order to safeguard the company's existence. Current crises of Lehman brother, Enron, British Petroleum and Ericson in 2004 are all subjected to lack of risk management. Ericson faces an approximate loss of $400 million due to a small scale fire in one of its supplier. They have now modified their SCRM by adding risk monitoring.

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