4.2 Two Types of Risks

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As we know that modern supply chains are very complex and upcoming lean practices have resulted in making these networks more vulnerable. Ever since 9/11, managers of different organizations have become highly aware regarding the vulnerability in their supply chain, with many of them still confused on the effective way in managing risk disruptions. The two major types of risks and effective methods in managing them are as follows:

4.2.1 Managing Uncertainty

Advance in business environment in the past couple of years have made it more and more unpredictable and complex. Companies often struggle to get ahead of uncertainty. The managers in such uncertain economy cannot rely on "tried and true" approaches, as most of them become outdated with the increasing risk environment. Managers need to adopt new strategies and mindsets. Many different fields are employed to tackle this problem namely organization theories, decision science, cognitive psychology and entrepreneurial research.

Adopting new mindset to exploit uncertainty: Managers need to face and capitalize on uncertainty rather than avoiding it. They need to exploit and benefit from uncertainty rather than seeing it as an enemy. For e.g. MacMillan and McGrath argues on the fact that managers should act like entrepreneurs, constantly looking for new opportunities.

Determining strategic issues and defining level of uncertainty: Level of uncertainty need to be considered for each strategic issue associated with question at stake. The four levels of uncertainty as defined by Courtney are:

Level 1: It is the lowest level of uncertainty. Here uncertainty is so low that forecasts could be made correctly by using traditional methods.

Level 4: In the highest level of uncertainty even analysis are not succinct in bounding the range of possibilities.

Level 2 and 3: This is the level of uncertainty faced by most managers. Managers are able to bind the range of outcomes.

Framing possible solutions: After determining the level of uncertainty, managers can start with defining of possible solutions. Knowledge of the level of uncertainty helps in framing the most adapted strategies. Strategies like "Re-differentiate products and services", Redesign products or services", Re-segmenting the market" and "Completely reconfiguring the market" are framed at this level.

Analyzing possible solutions and making strategic choices: After framing possible solutions and having a list of them, managers now need to choose best solutions among the list so that it can be include in the portfolio of strategies. Managers need to adapt tools and frameworks to decide. Traditional instruments like Porter's five forces, SWOT analysis and Discounted Cash Flow cannot be relied upon. Decision making tools like scenario planning, decision trees, real options, game theory and management flight stimulators need to be used.

Adaptive Execution: After selecting an appropriate strategy, the next task is to effectively implement it. Under the environment of uncertainty it is highly necessary to adapt and monitor the strategy selected overtime. (McGrath and MacMillan, 2000) define the "discovery-driven planning", which allows to "adapt the course of action as the real opportunities becomes clear".

4.2.2 Managing Disruptions

Risks of disruptions exist and managers should not ignore them. A culture of risk awareness needs to be introduced within the organization to face this problem. The main strategic issue is determining the actions needed to be taken in managing disruption risks. Disruptions can damage entire supply chain process strongly and may make firms loose business. Protecting supply chains becomes a strategic advantage against the competitors. Several organizations in the industry suffer from same disruptions, but the companies prepared for it are the ones that recover faster from this hardship and take most of the market share.

Managers need to undertake general review of possible solutions in managing disruptions. Organizations need to adapt these solutions in their own environment. Once managers are done with identifying possible solutions, they need to analyze each solution to choose and define a global strategy in managing risk disruptions. The managers need to rely on different models and tools that can be adapted to the disruption they are facing.

In implementation, (Forrester Research, 2002) suggests the reliance on adaptive planning rather than long-term plans. The major idea is generating solutions more adaptable to actual supply chain conditions, using real-time data to make decisions and allowing executives to spend time in experimenting assumptions.

Chapter 5: Globalization has an increasingly larger Impact on Supply Chain Management

Global operations increase logistics cost and complexity. In terms of complexity, global operations increase uncertainty and decrease capability to control. Uncertainty results from greater distance, longer lead times, and decreased market knowledge. Control problems results from the extensive use of intermediaries coupled with government intervention in such areas as customs requirements and trade restrictions.

There are many forces driving firms to enter the international area. These forces serve as both motivators and facilitators. Enterprises are motivated to expand global operations to grow and survive. Global operations are also facilitated through developing technologies and capabilities. The five forces driving global operations are economic growth, supply chain perspective, regionalization, technology, and deregulation. The following diagram represents forces and their interactions:

5.1 Improving Supply Chain Management

Supply Chain Management is the process of the management of the network of the business that is interconnected to each other. The SCM is involved in the provision for product and services that are required by the customers. (Harland, 1996). The supply chain management includes the various tasks such as raw materials, work in process, inventory management and also the finished goods moment from the origin point to the point where they will be consumed.

The SCM is defined as the designing, execution, planning and the monitoring of the activities related to supply chain management. The main objective of the supply chain management is to build the competitive infrastructure, leverage the worldwide logistics, and synchronize the supply with the demands and also to measure the performance globally.

Global economies are increasingly interlinked by material suppliers, logistical systems, markets and manufacturing capacity. It is natural that this interconnectedness takes the form of regional alliances that leverage geographic proximity and scale economies. The major trade regions developing are North America, Europe, and the Pacific Rim. It is likely that Eastern Europe will join with the Western European countries and that South America will ultimately link up with North America.

According to Christopher and Von Hoek (1998), a fast emerging concept which can be implemented in supply chain is agile supply chain especially in retail market. This can be done by being responsive to the market. Market sensitivity and responsiveness to the market conditions and the requirements of the consumers is a key driver of developing an agile supply chain. The agile supply chain is more of network based which is virtual in nature. This will also require great deal of integration between all elements of supply chain. The Sainsbury if want to gain competitive advantage if become first mover in this type of movement where both market sensitivity and responsiveness is important in retail market can help them to become value based retail chain. The complete integration is requisite for such supply chain. The framework will be more or less as in figure below

Virtual

Market sensitive

Process integration

Agile

Supply chain

Network based

5.1.1 Integration and Coordination

(Monczka and Morgan, 1997) state that "integrated supply chain management is about going from the external customer and then managing all the processes that are needed to provide the customer with value in horizontal way" SCM ensures a efficient flow from raw material to finished goods into to the customers.

An integral part of supply chain management is logistics management. The main objective of logistics management is to reduce inventory holding costs and improve profits. It is that part of supply chain process that plans, implements, and controls the efficient, effective forward and reverses flow and storage of goods, services and related information between the points of origin and point of consumption in order to meet customers' requirements

In today's scenario there are increasing number of evidences involving consumers and suppliers in the new product development. This integration had been of importance, though not all such efforts have been successful in the past. Integration of suppliers is dependent on numerous variables. Supplier integration consideration includes degree of responsibility for design, tier structure, specific responsibilities in setting requirement process, supplier involvement timings in the process, intellectual property agreements, inter-company communication, membership of supplier on project team and aliening of organization's objectives in conjunction with outcomes.

There are four stages of economic integration in Supply Chain Management namely free trade agreement, customs union, common market and economic union.

In the first stage, a free trade agreement eliminates trade traffics between countries in a region. A free trade is defined when: each participant in the free-trade area expects to gain by specializing in the production of goods and services in which it possesses comparative advantages and by importing from other countries in the group products and services in which it faces comparative disadvantages.

The second stage, a customs union, eliminates traffics between the member countries and establishes a common external tariff structure toward other regions and non member countries. Under this and remaining two stages, member countries are required to give some control over economic policies to the group. The advantage of a custom union is that none of the member nations in the union can position themselves to gain a tariff advantage at the expense of other countries.

The third integration stage, a common market, is characterized by the same tariff policy as the customs union. In addition, a common marketplace allows factors of production such as lzbor and capital, as well as goods and people, to move freely between countries as dictated by market conditions.

The economic union is the fourth and most advanced stage of development because it implies harmonization of economic policies beyond a common market. Economic union standardizes monetary and fiscal policy among member countries. While not absolutely required, an economic union likely includes common currency and harmonized tax structures.

5.1.2 General and Multi-Plant Coordination

A lot of research effort has been put into optimization of the performance of the supply chains. Early works and its major parts focused on very limited segment like manufacturing, distribution, materials procurement and treating theses as separate systems. Though these works might lead to future improvement in performance, the complexity of interactions among segments of supply chain is ignored. As a result, potential gains incurred from coordination are lost.

The above figure explains the concept of general and multi-plant coordination. The multi-plant coordination is a coordination on which decisions of productions are coordinated into the plants of internal-supply chain. The primary objective of multi plant coordination is to coordinate in vertically integrated manufacturing organization, several plants' production plans. The aim is to improve the overall performance of the company.

The multi-plant coordination problem is used to link together the production plans of manufacturing plants in a vertically integrated firm, i.e. output from one plant becomes an input into another plant.

5.1.3 Information Technology: An Unrealized Potential

Information Technology began with the advent of computers in 1980's when IBM and Apple came out with computers which could be used to both people and organizations. It was adopted at a fast pace with the organizations which used it for various purposes like automation of mundane processes, storage of information, fast processing of information, communication link with other locations, digitization of data so that it could be easily shared etc. As a result by mid 1980-1990 decade every big company like General Electric (GE), Wall Mart, and General Motors (GM) had huge Information Technology infrastructure like Computers, Printers, Networking equipments, Servers etc. At the same time they also had few applications which were running on the top of operating systems like Disk Operating System (DOS)/Linux/UNIX. Sometimes these applications were custom made to suit the special needs of the organization.

By end of 1980-1990 decade every big company had a big Information Technology Department to manage machines and software. This department was responsible for making sure computers; printers and software are working all the time. By this time application development to suit the special needs to the company was becoming a major activity for every Information Technology department and hence size and budget of the department was increasing. Soon the budget of several Information Technology departments ran into millions of dollars and hundreds of employees.

The opportunities within integration and coordination have been unprecedented with the rapid development of software engineering and information technology. The networks presents infrastructure for operational and planning processes coordination, among the organizations.

Radio Frequency Identification (RFID) is another technology adding to the effectiveness of SCM. It is a technology by which the stored data can be remotely retrieved. The use of RFID technology to track the movement of goods started in 1980s and quickly became popular. RFID technology used a small device called a tag which contains a microchip and an antenna. The microchip is an integrated circuit that stores and processes the data using a given unique product code. The antenna detects and responds to the radio signals. The tag contains data relating to the product such as the price, colour or data relating to the movements of goods, as they move from supplier to the distribution centres.

5.1.4 Flexibility, Inventories and Customer Service

"Satisfied customers are the desired end result of any supply chain management strategy" as illustrated by Billington and Lee. The three components of supply chain strategy are:

Customer Service: Customers view the offerings of any company in terms of price, quality and service and respond accordingly with the patronage of lack of it. Service, or customer service, is a broad term that may include many elements ranging from product availability to after-scale maintenance. From a supply chain perspective, customer service is the outcome of all logistics activities and supply chain processes. Logistics customer service is necessarily a part of a firm's overall service offering. From a corporate wide-perspective, customer service has been viewed as an essential integrant in supply chain strategy. A comprehensive study of customer service, sponsored by the National Council of Physical Distribution Management, identified the elements of customer service according to when the transaction between the supplier and customer rook place.

Corporate customer service is the sum of all these elements because customers react to the total mix. Of course, some of elements are important than others.

Inventories: Inventories are stock piles of raw materials, supplies, components, work in process and finished goods that appear at numerous points throughout the firm's production and logistics channel, as shown in the figure below

Transport Strategy

Inventory Strategy

Forecasting

Inventory decisions

Location Strategy

Inventories are frequently found in such places as warehouses, shop floors, yards, transportation equipment and on retail store shelves. There are numerous reasons why inventories are present in supply chain, yet in recent years inventory holding has been roundly criticized as unnecessary and wasteful.

Flexibility: Flexibility is the ability to respond to various changes in the environment. Taking the case of the manufacturer, Flexibility could be defined as the change in output with respect to the change in demand. In a Supply Chain Management, flexibility of the upstream entity is highly important for the flexibility of lower entities. The overall flexibility of any supply chain in any organization depends upon the flexibility of summation of all entities in a supply chain and their corresponding interaction.

5.1.5 Customer Satisfaction

Customers view the offerings of any company in terms of price, quality and service and respond accordingly with the patronage of lack of it. Service, or customer service, is a broad term that may include many elements ranging from product availability to after-scale maintenance. From a supply chain perspective, customer service is the outcome of all logistics activities and supply chain processes. Logistics customer service is necessarily a part of a firm's overall service offering. From a corporate wide-perspective, customer service has been viewed as an essential integrant in supply chain strategy. A comprehensive study of customer service, sponsored by the National Council of Physical Distribution Management, identified the elements of customer service according to when the transaction between the supplier and customer took place.

The basic structure of customer service depends upon customer expectations, industry standards, and the service standard the form would like to maintain. Firm marketing capital goods may evolve a service structure to extend lifetime product commitments for the supply of spares, irrespective of continuous product and technology up gradation at its end. The supplier may extend free, periodic product check up service to gain competitive advantage. In this case he may absorb all service related costs as a value added free service to the client. In the maturity age of a product's life cycle, when the competition is cut throat, the firm needs to customize its services to the strategic clients or to a section of clients in niche segment.

The most important aspect of service structure is its delivery. This may vary with the product and the client's need. Delivery has two dimensions, i.e. time and place. The firm may have to allocate and coordinate resources to deliver services at the time and place desired by the customer. The Exide industry ltd, a leading manufacturer of batteries, introduces Bat-Mobile Service to gain competitive advantage. It offers free service for battery related problems for vehicles stranded anywhere within metro city limits.

5.1.6 Inventories

Inventories are stock piles of raw materials, supplies, components, work in process and finished goods that appear at numerous points throughout the firm's production and logistics channel, as shown in the figure below

Inventories are frequently found in such places as warehouses, shop floors, yards, transportation equipment and on retail store shelves. There are numerous reasons why inventories are present in supply chain, yet in recent years inventory holding has been roundly criticized as unnecessary and wasteful.

Inventory management is a strategic area in logistics operations and has an impact on the efficiency and effectiveness of the overall supply chain systems. As the cycle of production and consumption never matches, goods have to be kept in stock to get over the uncertainties in demand and supply. However, higher inventory levels will affect the bottom line of the company. This is a high risk and high impact area, which has to strike balance between two polemic goals of lower cost and higher level of customer service.

The major portion of the working capital of a firm is blocked in inventory. If the inventory is in excess of the optimum level, more funds will be blocked and it cannot be used for other productive purposes, resulting in opportunity loss. Hence, funds are ties up un-necessarily. There are other costs related to inventory. The incidence of these costs will also be more if inventories are in excess of the optimum level.

The phenomenon of variability is customer demand, if not conveyed properly or if conveyed with distortion, as it travels upstream in the supply chain, is called the 'bullwhip effect'. It causes either stock-outs or inventory pile ups in the distribution logistics chain. The ripple effect of the demand volatility results in inventory problems affecting the profitability and customer service of a firm. This happens due to lack of smooth and speedy information flow, resulting in improper coordination and synchronization between actions of supply chain partners. The after effects of the Bullwhip phenomenon can be minimized by using latest inventory control techniques supported by an efficient and effective information flow system for supply chains. The ultimate objective of the inventory control system program is to provide maximum customer service at minimum cost. The objectives of inventory management are similar to objectives of cash management.

5.1.7 Inventory as Flexibility Buffer

Inventory management is a strategic area in logistics operations and has an impact on the efficiency and effectiveness of the overall supply chain systems. As the cycle of production and consumption never matches, goods have to be kept in stock to get over the uncertainties in demand and supply. However, higher inventory levels will affect the bottom line of the company. This is a high risk and high impact area, which has to strike balance between two polemic goals of lower cost and higher level of customer service.

Flexibility is the ability to respond to various changes in the environment. Taking the case of the manufacturer, Flexibility could be defined as the change in output with respect to the change in demand. In a Supply Chain Management, flexibility of the upstream entity is highly important for the flexibility of lower entities. The overall flexibility of any supply chain in any organization depends upon the flexibility of summation of all entities in a supply chain and their corresponding interaction.

5.3 Inventory Vs Customer Service: A Trade off

Customers view the offerings of any company in terms of price, quality and service and respond accordingly with the patronage of lack of it. Service, or customer service, is a broad term that may include many elements ranging from product availability to after-scale maintenance. From a supply chain perspective, customer service is the outcome of all logistics activities and supply chain processes. Logistics customer service is necessarily a part of a firm's overall service offering. From a corporate wide-perspective, customer service has been viewed as an essential integrant in supply chain strategy.

Inventories are stock piles of raw materials, supplies, components, work in process and finished goods that appear at numerous points throughout the firm's production and logistics channel, as shown in the figure below

Transport Strategy

Inventory Strategy

Forecasting

Inventory decisions

Location Strategy

Inventory management is a strategic area in logistics operations and has an impact on the efficiency and effectiveness of the overall supply chain systems. As the cycle of production and consumption never matches, goods have to be kept in stock to get over the uncertainties in demand and supply. However, higher inventory levels will affect the bottom line of the company. This is a high risk and high impact area, which has to strike balance between two polemic goals of lower cost and higher level of customer service.

The phenomenon of variability is customer demand, if not conveyed properly or if conveyed with distortion, as it travels upstream in the supply chain, is called the 'bullwhip effect'. It causes either stock-outs or inventory pile ups in the distribution logistics chain. The ripple effect of the demand volatility results in inventory problems affecting the profitability and customer service of a firm. This happens due to lack of smooth and speedy information flow, resulting in improper coordination and synchronization between actions of supply chain partners. The after effects of the Bullwhip phenomenon can be minimized by using latest inventory control techniques supported by an efficient and effective information flow system for supply chains. The ultimate objective of the inventory control system program is to provide maximum customer service at minimum cost. The objectives of inventory management are similar to objectives of cash management.

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