Supply Chain Risk Of New Product Development Management Essay

2.0 Introduction

Despite increasing awareness among industrialist, the perception of supply chain vulnerability and its managerial counterpart supply chain risk management are still in their infancy, therefore the existing literature on supply chain vulnerability and risk management is evaluated and compared with results from exploratory interviews undertaken to discover practitioners’ Perceptions of supply chain risk and current supply chain risk management strategies. (U. Jüttner, H. Peck, M. Christopher 2003) Today’s marketplace is characterised by turbulence and uncertainty, market turbulence has tended to increase for a number of reasons, demand in almost every industrial sector seems to be more volatile than was the case in the past, product and technology life-cycles have shortened significantly and competitive product introductions make life-cycle demand difficult to predict. At the same time the vulnerability of supply chains to disturbance or disruption has increased, it is not only the effect of external events such as wars, strikes or terrorist attacks, but also the impact of changes in business strategy. Many companies have experienced a change in their supply chain risk profile as a result of changes in their business models, for example the adoption of ‘lean’ practices, the move to outsourcing and a general tendency to reduce the size of the supplier base. (M. Christopher, H. Lee 2004). However in order for organisations to remain in business they must be competitive by introducing new products to the market in order to meet the ever changing needs of the society, World-class firms excel at a crucial triad of activities, new product development, the design of the required production process, and the design of the optimal supply chain, it explains further the main reason for new product development as the rapid changes in technology, the emergence of global industrial and consumer markets, increasing market fragmentation and product differentiation, and the increasing options for developing products have increased the pressure on all firms to more effectively and efficiently develop new products. B. Burt et. Al. The structure of the literature review section has a comprehensive overview and analyses that has been done by various scholars on supply chain management, types of SC risk, SC risks when new products are introduced, SC management and cooperation, the challenges when a new product is introduced, effects and possible solutions.

2.1 Supply Chain risk of new product development

Supply chain is a set of three or more entities (organizations or individuals) directly involved in the upstream and downstream flows of products, services, finances, and/or information from a source to a customer’ (Mentzer et al., 2001, p.4f.). Chopra and Meindl, (2001) explains that SC is more than the definition above that SC involves more, that not only the manufacturer and suppliers, but also transporters, warehouses, retailers, and customers are involved in the supply chain, Within each organisation, such as a manufacturer, the supply chain includes all the functions involved in filling a customer request, however the definitions failed to acknowledge the existence of supply chain risk and the effects of product development on SC, organizations must show competences in innovative ideas by creating products in order meet the ever changing human needs, Vincent A. Mabert and M.A. Venkataramanan (1998) describes SC from the area of product development, defined Supply chain as the network of facilities and activities that performs the functions of product development, procurement of material from vendors, the movement of materials between facilities, the manufacturing of products, the distribution of finished goods to customers, and after-market support for sustainment, He went further that Such a holistic approach is consistent with the integrated way today’s global business managers are planning and controlling the flow of goods and services to the market place. Today, firms are not only sourcing and selling their products internationally, they are also taking advantage of global product development support such as Boeing’s 777 Japanese design group or IBM’s use of Indian software programmers for computer systems for computer users. (Vincent A. Mabert and M.A. Venkataramanan , 1998, Kelley School of Business, Indiana University, Bloomington, Volume 29 Number 3 Summer I998), The definition given above describes SC as a smooth error free activity and failed to acknowledge the existence SC risks, this research seeks to identify the various risks involved in all the processes of SCM and how these risks can be reduced to the minimum level, M. Christopher (2003) wrote that Supply chain risk is about any threat of interruption to the workings of the supply chain. Risk may be generated as a result of risk ‘drivers’ that are either Internal or external to the company, this idea is illustrated in the figure below.

Figure 1

According to him the external drivers are the risk areas that are most commonly thought of by managers, this is exactly the reason that they are external and therefore may be perceived as ‘unmanageable’ such as unpredictable demand, unreliable supply and the effects of external shocks in the business, social and climatic environment, while the internal drivers The internal drivers are the process, control and mitigation/contingency are more tightly under the direction of the company itself and are therefore less obvious as being sources of vulnerability.( M. Christopher2003) Wu Donald Waters (2007) analysed supply chain risk from the operational areas, according to him the main risk to a supply chain is disruption to the flow of materials but acknowledged that other risks can be associated with this, the UK’s security service (2006) commonly referred to as MI5 list the possible consequences from a major terrorists incident as: Loss of staff through death or injury, damage to buildings, Loss of IT, systems, records, communications and other facilities, Unavailability of staff because of disrupted transport, Adverse psychological effects on staff including stress and demoralization, Disruption to related organisations and business that are necessary for operations, damage to reputation, New business demands put on the organisation. D. Olson and D. Wu (2010) saw supply chain risk more from the external environment rather than concentration on the internal environment, according to them, risk drivers can arise from the external environment, from within an industry, from within a specific supply chain, from specific partner relationships or from activities within the organization, Risk drivers arising from the external environment will affect all organisations, can include elements such as the potential collapse of the global financial system, Supply chain configuration can be source of risk, Specific organisations can reduce industry risk by the way they make decisions with respect to vendor selection, Partners risk includes consideration of financial solvency, product quality compatibility and capabilities of vendor information system while the internal risk drivers relate to internal organisational processes in risk assessment and response. The different perspectives of supply chain outline previously indicates the range of activities and decisions that represent the roles and responsibilities of supply chain management , for example strategic level ( e.g. single source supplier) and the operational level( e.g. progress chasing particular order) are an essential element of supply chain management, however risk has formed part of management, environmental, insurance, and psychological studies, each focusing on a particular decision making unit in terms of composition, then it is important to understand the differences and the impact that these can make in terms of perception and preparedness to take risk, the writer analysed SC risk using a model of risk determination in the SC, the model of risk determination within the business context constructed by Ritchie and Marshal ( 1993) suggested the following key elements,

The simplified model indicates that these variables indicates that these variables influence financial performance as well as the risk inherent in the business, each of the first four variables above will determine the risk inherent in the given situation due to a combination of the contextual parameters and the specific problems parameters. The behaviour of the decision maker may change the total risk exposure, as the quality of the decision may induce risk into the situation to a greater or lesser degree e.g. the decision to invest in a standby generator may reduce the probability of power failure and the dislocation of production but will reduce the scale of the consequences should such an event occur, the scholar concluded that this is what he referred to as proper risk management. (Clare Brindley. 2004) The previous scholars featured previously did not analyse the consequences of neglecting SC risk when new products are introduced, the effects of SC is dangerous to business as explained by O Khan, B Burnes, 2007. They explained the effects of the risk in supply chain in their study that there is considerable evidence that failure to manage supply chain risks effectively can have a significant negative impact on organisations (Mitchell, 1995). As Hendricks and Singhal (2005) showed, not only can the failure to manage supply chain risks effectively lead to a sharp downturn in an organisation’s share price, which can be slow to recover, but it can also generate conflict amongst the organisation’s stakeholders. Cousins et al. (2004) identify the wider consequences of a failure to manage risks effectively. These include not just only financial losses but also reduction in product quality, damage to property and equipment, loss of reputation in the eyes of customers, suppliers and the wider public, and delivery delays. There is also evidence that economic, political and social developments over the past decade appear to be increasing the risk of supply chain disruptions as supply chains are getting longer and more complex and are involving more partners due to the increase in global sourcing, The International Journal of Logistics Management). The effects of the SC risk can be reduced to the minimum level when is it is being managed effectively, Supply Chain Management on the other hand means ‘the systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole’ (Mentzer et al., 2001, p.18) the definition did not emphasise the importance of coordination when SC is been managed, Achieving a supply chain that will run smoothly when introducing a new product in an organization requires coordination from the SCM. The importance of coordination cannot be overemphasized; Benita M. Benson 2006 explained SC coordination as Coordination within a supply chain is a strategic response to the problems that arise from inter-organizational dependencies within the chain. A coordination mechanism is a set of methods used to manage interdependence between organizations. Given the increasing importance of high-p the advantages to be gained through supply chain coordination; the challenge to an organization is how to select the appropriate coordination mechanism to manage organizational interdependencies. Coordination mechanisms may be differentiated on the bases of four attributes: resource sharing structure, decision style, level of control, and risk/reward sharing. Given that the selection of a coordination mechanism is often based on minimizing relative costs, transaction cost theory (TCT) can be used to classify the three types of costs associated with coordination: coordination cost, operational risk cost, and opportunist risk cost (Benita M. Benson 2006)

H. Peck (2006) emphasised on the SC vulnerability and risk, According to him, “risk” automatically acquires downside connotations Svensson (2000), the first and most widely cited author in this field, placed vulnerability and related concepts, such as risk, uncertainty and reliability, within the context of the wider concept of contingency planning. He defined vulnerability both as an “exposure to serious disturbance, arising from risks within the supply chain as well as risks external to the supply chain” and as “a condition that is caused by time and relationship dependencies in a company’s activities in a supply chain” the literature agreed that supply chain vulnerability is taken to be related to risk, in the sense that something is “at risk; vulnerable: likely to be lost or damaged”. Given that supply chains link organisations, industries and economies, the author suggested that supply chain vulnerability should be addressed at multiple levels of analysis. What is “at risk” could be the performance or survival of a process, vital assets or infrastructure, an organisation, an inter-organisational network, an economy, or society. Figure 3 below illustrates a supply chain as an integrative, interactive system that, in the spirit of Forrester (1958), extends to the macroeconomic level of a national economy, and beyond, The concept of “resilience” is related to risk and vulnerability in so far as it accepts that not all “risks” (hazards or threats) can be avoided, controlled, or eliminated. Instead, resilience focuses on the “ability of the system to return to its original or desired state after being disturbed”, i.e. its ability to absorb or mitigate the impact of the disturbance.

(H. Peck 2006)

2.2 INTEGRATING SUPPLY CHAIN WITH NEWPRODUCT DEVELOPMENT

Several important questions about supplier of raw materials involvement in the success of new product development remained unanswered, specifically the issue of how managerial practices affect new product development team effectiveness when suppliers are to be involved, the factors differ depending on when the supplier is to be involved and what level of responsibility is to be given to the supplier. All the definitions by previous scholars above have failed to explain how product development can be aligned with SC, This section of the thesis will seek to explain the integration and how the risks and challenges can be minimised when new products are developed.

In many industries, firms are seeking to cut concept to customer development time, improve quality, reduce the cost of new products and facilitate the smooth launch of new products, Prior research has indicated that the integration of material suppliers into the new product development (NPD) cycle can provide substantial benefits towards achieving these goals, This involvement may range from simple consultation with suppliers on design ideas to making suppliers fully responsible for the design of components or systems they will supply. Moreover, suppliers may be involved at different stages of the new product development process. Early supplier involvement is a key coordinating process in supply chain design, product design and process design. (K. Petersen 2005 et.al.) Christopher (2005) also mentioned that SCM is upon the management or relationships in order to achieve a more profitable outcome for all parties in the chain, however the literature explains the importance of involvement of supplier/customer collaboration in the development of new products as an important source of competitive advantage for firms, a generic NPD processes can be analysed in three steps, Planning, design, and production In the automotive industry, the planning phase is often referred to as the functional specification phase, whereas the design and production steps are often referred to as the detailed engineering phase (Clark and Fujimoto, 1991; Lamming, 1993; Womack et al., 1990). The platform/architecture and related outsourcing strategies are often decided during the functional specification stage. Most firms regard their ability to manage platform designs as their core competences hence generally not much supplier involvement is observed during this phase (at least with regard to core components). As explained by McCutcheon et al. (1997, p. 274), the diagram below shows involvement of suppliers, customers and manufactures in the supply chain of NPD.

(J. Mikkola,T. Skjøtt-Larsen, 2006)

However it is expedient to integrate supply chain with new product development before aligning it with the possible risks that may be involved, the design is the progression of an abstract notion or idea to something that has a function, The new product development is a series of interdependent and frequently overlapping activities which transform an idea into a prototype and on to a marketable product, as the original idea progresses through the development process, it is refined and constantly evaluated for technical and commercial feasibility, tradeoffs between various objects such as price, cost, performance, market availability, quality and reliability are made throughout the process. However when those responsible for the design ignore the manufacturing process and technological capabilities outside the suppliers, problems with quality, time to market, configuration, control, and cost are inevitable, he emphasised that if optimal design performance is to be achieved, suppliers must be active from the beginning when they can have a major impact on performance, time, cost and quality. (B. Burt et.al 2010) this scholar omitted the involvement of the operational activities while integrating supply chain with new product development. R. Hoek, P Chapman (2006), explains the importance of operations in the supply chain integration, meaning the consideration of supply chain operations in product development (Dowlatshahi, 1999; Gubi et al., 2003; Klevas, 2005; Singhal and Singhal, 2002), these calls are part of “design for X thinking” which Rungtusanatham and Forza (2005) describe as the outcome of the realization that product design and development needed to be coordinated with many considerations leading to calls for design for assembly, manufacturability, social responsibility etc. The diagram below explains when all the advice from existing research is followed and supply chain staff are pre-informed about upcoming product launches and new products are designed correctly, there are still several things that remain outstanding from a supply chain perspective; alignment is limited to the final stages of the new product development process. Essentially, new product launch means bringing product to market for which there are no or limited historical forecasts making it really hard to predict pick up in the market, failures, changes, returns and length of life cycles. What this means is that even when products are designed for handling and shipping and when supply chain has had a chance to prepare for the new product flow it will not be clear what volumes are needed and for how long, The analysis above did not emphasise the need to carefully integrate the product life cycle into the analysis which J. Sharpiro (2001) referred to as inter-temporal integration which is also called hierarchical planning, this requires consistency and coherence among overlapping supply chain decisions at various level of planning, however inter-temporal planning is the need to optimize a products supply chain over its life cycle through the stages of design, introduction, growth, maturity, and retirement, Like most areas of strategic planning, product life -cycle planning requires integration of supply chain and demand management such as analysis of capital investment decisions in manufacturing equipment during the growth phase of a new product should take into account marketing decisions affecting product sales and gross revenues that may provide future returns sufficient to justify the investment.

Aligning product development and supply chain

(J. Shapiro, 2001)

2.3 RISKS IN THE SUPPLY CHAIN OF NEW PRODUCTS

The previous scholars did not emphasize the possible risks that while integrating supply chain with new product development, there are a couple of risks that can lead to failure of the whole process if not properly handled. On the other hand, L. Giunipero, R. Eltantawy (2003) broadens the concept of SC risk of new product development, According to their journal on risk management approach “Supply managers must manage many risks in their increasingly competitive environments. Traditionally this meant buffering against uncertainties, which sub-optimized operational performance. Risk management can be a more effective approach to deal with these uncertainties by identifying potential losses” The journal made explained that traditionally companies used to adopt strategies, which buffer against risks present in their environment by using multiple sources for strategic items and holding safety stock. These buffers restrict operational performances and can negatively impact competitive advantage. New approaches involve risk management, which is a formal process that involves identifying potential losses, understanding the likelihood of potential losses, and assigning significance to these losses. Supply chain management seeks to reduce these risks and enhance competitive performance by closely integrating internal functions within a company and effectively linking them with the external operations of suppliers, channel members and final customers. Previous research has focused on: the risk assessment process (Zsidisin et al., 2000); proactive risk management practices (Smeltzer and Siferd, 1998); and factors that influence management’s perceptions of supply risk (Zsidisin, 2003). However, a research gap still exists in the supply management literature on providing guidelines for managers on the situational factors that may influence the level of investment in risk management systems. Therefore the purpose of this conceptual research is to provide a categorization of these situational factors. Most previous research in this area addressed the “sources of risk” in the supply chain rather than the influential forces on the “level of investment in risk management”. These two are not mutually exclusive. However, we argue that the situational factors affect the level of investment in risk management. We explore four of these factors. These include: degree of product technology; need for security; importance of the supplier; and the purchasers’ prior experience. Prior to discussing these four factors we first present the sources of supply management risks identified in literature. Second, we compare risk buffering activities to risk management strategies. Third, we discuss a situational approach to risk management. From this, we develop a set of research propositions for four situational factors and managerial implications of these factors. The figure XX below highlights the approach taken in this research.

The research propositions derived are explained by the scholars are follows:

Risk buffering practices in supply chain – Purchasing/supply management is expected to mitigate risk and, at the same time, control costs and assure continuity of supply. Previous research findings lead to the conclusion that relationships exist between risk, strong pursuit of objectives, early supplier involvement, and careful development, evaluation and management of suppliers (e.g. Zsidisin and Hendrick, 1998; Laios and Moschuris, 1999). However, traditional strategies that were used to buffer risk implied that the purchasers’ main role was to react to internal customer needs. Under this philosophy a purchase requisition is received from another department and an order is placed with a supplier. Purchasing is largely transaction-oriented and risk averse, historically, most purchasing professionals adopted policies that hedged against risks after the events had already unfolded. They buffered against supply risks by developing multiple sources of supply and carrying safety stock.

Risk management practices in the supply chain – As stated above, the buffering approach worked when purchasing was more tactical, as we move to more strategic approaches risk management becomes a desired option, these purchasing practices include industry consolidations, e-procurement, just in time deliveries, smaller supply bases, and a focus on total costs. Risk management is a continual process that involves long-term dedication of supply chain members, ongoing risk assessment involves gathering, communication, and evaluation of information that helps in developing appropriate risk management strategies (Zsidisin et al., 2000). It is important to realize that there are risks with these new supply chain strategies. For example, fewer suppliers and lower inventories mean that a problem at one supplier can be magnified throughout the supply chain, similarly, a disruption in transportation services could quickly cripple the entire supply chain since inventories are very low throughout the chain. Transportation risk management contingency plans would provide for alternative modes of transportation. Thus, if a trucking company failed alternative modes such as air or rail backups would be in place to guard against supply disruption. In order to manage risk effectively, purchasers are moving to adopt closer relationships with key suppliers. These suppliers are expected to provide solutions and compliment or enhance the buying firm’s core competencies. Dell Computer is often cited as an example of a firm that has implemented this close working arrangement with its suppliers (Antonette et al., 2002; McWilliams and White, 1999). Suppliers are treated as extensions of Dell’s operations and its purchasing personnel are extensively involved in understanding their suppliers operations, products, and commodities. Such long-term business relationships are expected deliver added value for buyers and suppliers. However the scholar identified problems with risk Management of SC, certain risk management purchasing practices can create new problems and risks. Single sourcing, just-in-time deliveries, and reduced supply bases all have the potential for disrupting supply chain processes. Reliance on e-procurement tools also involves additional risks, For example, security of transactions in an electronic environment is a potential risk management problem (Kendall, 2003; MacKinnon, 2002). Information in the hands of a “competitor” or a “hacker” could create major confusion for the supplier. Also, shipments of material that can be used to make illegal items, such as pipe bombs and biological, could wind up in the wrong hands. Recently, extensive publicity has been given to the lack of security over the contents in shipping containers unloaded daily from ships at major port cities in the USA. Finally, risk management skills, including awareness of risk signals and developing risk management plans, are essential requirements for supply management success today (Giunipero and Pearcy, 2000).

Situational risk management – Risk is present to some extent in every supply chain. Each commodity, product, or service purchased exhibits a different risk profile. With today’s uncertain conditions and heightened awareness of supply threats it is particularly important for supply managers to assess the degree of risk across their purchase categories. The distinguishing characteristics of each purchasing situation are expected to have a differential impact on the need for risk management, Further, the extent to which management invests in any risk handling strategy depends largely on the buying situation. The supply professional should be aware of the cues that each buying situation presents, so that they can invest in the appropriate level of risk management strategies for each buying situation and, thereby, optimize their performance and minimize their risk at the same time.

(L. Giunipero, R. Eltantawy, 2004)

2.4 CHALLENGES OF SUPPLY CHAIN RISK OF NEW PRODUCT DEVELOPMENT

Despite all the efforts by academic scholars to identify and solve the problem of supply chain risk of new product development, they are often faced with series of problems that posses challenges to the scholars from eliminating the problem of supply chain risk of new products. Barbara Flynn 2010 agreed with my statement above that it would be difficult to find a supply chain that does not cut across national boundaries at some point. The presence of global supply chains introduces a number of new management challenges. For example, how can risk be assessed in global supply chains, and what measures are effective in ensuring the security of a global supply chain? As organizations strive to reduce costs by outsourcing, how can they deal with the corresponding risks of outsourcing to low-cost countries? What sort of logistical complexities are introduced when organizations engage in cross-border trade? How should global supply chain strategies be designed so that they are sustainable economically, socially and environmentally? This calls for innovative empirical research approaches. Richard Wilding 1998 explained one key issue to the impact on the effectiveness of a supply chain is that of uncertainty [Davis, 1993]. Uncertainties in supply and demand are recognised to have a major impact on the performance of the manufacturing function. Research at Intel [Oliver & Houlihan, 1986] investigating the match between actual call off and the actual forecast, estimated that supply and demand were in equilibrium for 35 minutes in 10 years! The “Supply chain complexity triangle” provides an explanation for this far-from equilibrium behaviour and gives a useful insight into the generation of uncertainty within supply chains [Wilding, 1997b]. Three interacting yet independent effects would seem to cause the dynamic behaviour experienced within supply chains. These are deterministic chaos, parallel interactions and demand amplification. The combination of these effects can significantly increase the degree of uncertainty within a supply chain system. The diagram below depicts these three effects and their interactions. (Richard Wilding, 1998) The scholars’ literatures above have succeeded in identifying various challenges of SCM but have not explained how these issues can be reduced or eradicated, this work will research with the use of appropriate methodology how these challenges can be avoided, minimised or eradicated.

2.5 TYPES OF SUPPLY CHAIN RISKS

Companies have streamlined and optimised supply chains to bring about operational efficiency; they have achieved this by adopting best practices such as lean manufacturing, just in time inventory, outsourcing, and integrated supply networks and so on, these strategies can help minimise cost and free companies to focus on competencies, but they may also stretch a company’s supply chain to its breaking point, which could lead to huge global disruptions. Profit maximisation has led to extended and complex supply chains which could break at anytime and cause huge losses. The recent economic disruption of 2008 is a case in point. Without realising it, a company’s best intentions to become a fierce competitor can leave it vulnerable. (Shah, Janat, 2009) However for organizations to achieve this, conscious efforts must be made in order to bring supply chain risks to the minimal level to achieve the competiveness, the various types of supply chain are discussed below.

2.5.1 SUPPLIER AND DEMAND RISK

Supply chain relationship management in supply chains seeks the participation of good suppliers providing low cost and high quality. A recent trend in 21st Century business is outsourcing product manufacturing, with an increase in outsourcing, offshore-sourcing, and electronic business, supply management decisions are becoming ever more complex in a global market. Supply management strategies such as offshore-sourcing can emphasize manufacturers at low cost locations such as China, India, or Vietnam, assemblers at high-tech operations in Taiwan and Korea, and di