Economic Risk Management in Supply Chain

Scope and Study Background

Walkers Shortbread is a company located in Scotland. Established in the year 1898, the company has been successful in sourcing for wheat as its primary raw material from neighboring countries such as Greece. The company’s supply chain management has been stable in mapping, executing, and managing the surge of material; information and services from raw material, actual production, and delivering the product to the consumer. This analytical treatise attempts to explicitly review control systems and explore the impacts of proper benchmarking and improved control systems in the supply chain logistics management for the Walkers Shortbread. The paper proposed the ideal strategies to apply to minimize economic and other risks.

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Walkers Shortbread’s supply chain strategic cost management is based on the principle of the low-cost strategy as a competitive approach. This principle involves providing clear and consistent performance objectives, facilitating excellence, and the reduction of the complexity in the organization’s supply chain management, especially in managing the relationship with international suppliers of wheat. Through the first strategy, the company ensures clear and aligned expectations and targets, despite economic swings in the suppliers’ economy.

The approach involves the elimination of risks associated with outsourcing suppliers together with dealing with issues of over expanded service and product lines, at the raw material acquisition stage. For example, in the food processing industry where the low-cost strategy determines success or failure, Walkers Shortbread relies on technical knowledge and strategic procurement contractual management to build its success.

Through the facilitation of excellence, Walkers Shortbread now does not rely on performance improvement that is determined by the swings in the regions from which it outsources raw materials. Rather, it evaluates its performance based on the no-late delivery, and the year-in-year-out reduction of costs, including environmental costs. It seeks mechanisms for reducing the accumulation of costs that arise from economic risks as is the current situation within its main suppliers in Greece.

The rationale for the study

Despite the success in minimizing risks associated with supply chain management for outsourced raw materials, Walkers Shortbread is currently faced with the risks such as scarcity of raw materials, supply chain structure complexities, environmental concerns, and economic issues, which have hipped pressure on the company’s buyer-supplier relationships. This paper will present the ideal strategies that Walkers Shortbread should apply to manage the dangers of economic and other risks arising from its relationship to the Greece suppliers. The proposed solution will integrate the procurement function to manage the global network of vendors and suppliers.

Procurement Function Literature Review

Basically, “supply chain analysis is the examination of the management of the flow of information, inventory, processes, and cash flows from the earliest supplier to the ultimate consumer, including the final disposal process through value chain analysis” (Bodily & Allen 2009, p. 35). Value chain analysis is the essence of a corporate strategy determining how it chooses to compete in its markets (Bowman 2003).

To achieve the functional value chain balance, there is a need to use tools that support strategic cost management to minimize the economic risks of sourcing raw materials from foreign markets. Once processes have been mapped, keeping the value proposition in mind, the organization can determine which tools to use to better understand the cost through applying cost analysis, price analysis, the total cost of ownership, and targeting cost (Thompson & Martin 2010). Under cost analysis, an organization should analyze zero-based pricing, as well as analysis of service provider cost elements. Price analysis involves understanding the prices available in the marketplace (Wood 2002).

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The total cost of ownership involves analyzing the true cost of acquisition, use, maintenance, and disposal of a good, services, capital equipment, or process (Cox 2009). Finally, target costing involves determining what the market will bear and working backward to see how much you can afford to produce the product or service for, considering the cost of sourcing the materials.

Inadequate analytical dimensions of the supply chain such as business responsibility, customer service quality, and cost may compromise the functionality of a supply chain. From a theoretical perspective, the value creation model cannot align cost-effectiveness when the logistics of operation are inadequate. For instance, the lack of strong control systems and poor benchmarking approach (Button, Hensher & Brewer 2001) will compromise the organizational strategy of cost reduction, customer satisfaction, and reduction of risks. The most notable trend in the current business environment is the outsourcing of supply chain management.

This trend is becoming very common in many businesses since it has benefits such as strong distribution and retribution process, efficiency, and reduced inventory costs. Essentially, the success of the brand and product management in a new market depends on the proper alignment of a functional idea into the creation of flexible, involuntary, and quantifiable measurement of perception among the target audience in the supply chain (Thompson & Martin 2010).

Supply chain outsourcing relieves a company of fixed costs irrespective of seasonal trends and market demand. Through a competitive process, the outsourced unit will develop a balanced control system for a sustainable level of efficiency, costing, dependability, speed, quality, and flexibility through value delivery, value addition, and creativity (Button, Hensher & Brewer 2001).

The element of increased competition as part of the future development is well assured when the objective of outsourcing is aligned to cost reduction in doing business. However, what makes this strategy effective is the constant formulation and implementation of strategic policies based on its knowledge of the customer needs in the supply chain management (Thompson & Martin 2010). Sustainable development is vital in a business environment when outsourcing is incorporated into the business development goal. Generally, outsourcing and supply chain management strategies are interdependent to ensure that the business is sustainable. For the implementation of the strategy, the management is to balance both the short term and long term consideration towards decision making (Cox 2009).

To achieve desired margins in sales and total revenues generated, a proper supply chain plan should integrate entry strategy, comparative advantage, and market segmentation since in most cases, there is always a strong competitor or competitors that passing might prove challenging due to the existence of consumer perceptions and household names.

To increase credibility and maintain professionalism, the outsourced supply chain plan should encompass processes and features that flawlessly facilitate healthy and lifetime relationships between the business and its clients (Cohen & Roussel 2005). Among the new development elements that can be incorporated to build trust include the establishment of a strong distribution, fair retribution process, and passing accurate information to the target audience to restore confidence within the new networks (Thompson & Martin 2010).

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Theoretical perspective on project risk and procurement management

The supply management system coordinates functions purchasing. This mechanism identifies the need for commodities, appropriate suppliers, quantity, and quality of the commodities. It also evaluates the effectiveness of supply practices already in place (Gray & Larson 2011). The expansion of capacity and mechanization of production demands that the supply system matches production efficiency while assuring the quality of supplied goods. Information technology delivers on both efficiency and quality. With computer software to automate supply chain management, decisions can be made reliably and promptly (Liu & Nagurney 2013).

Input from the production section is processed to chart a supplier’s trend in adherence to quality, quantity, and timeliness of deliveries. Communication of the quality guidelines minimizes the risks of product rejection/return. In the absence of a guide, the variance is more probable. In such a case, the delay before replacement may slow or halt production; consequently, potential revenue from processed products are missed.

Outsourcing refers to a business arrangement in which an organization provides some services and/or makes products for another organization, rather than accomplishing the same task in-house. Outsourcing comprises an important cost reduction strategy (Thompson & Martin 2010). For example, outsourcing support logistics services in sourcing raw wheat from Greece to Walkers Shortbread reduce the cost of the operation compared to when such processes are conducted in-house (Solomon 2010). Outsourcing constitutes a tool for ensuring the competitive advantage of UK organizations sourcing raw materials abroad against their competitors.

Organizations also outsource to take advantage of the best skills and technology in the industry. Although Walkers Shortbread is the place where organizations outsource their supply chain and logistics services, the company also engages in the outsourcing of various functions (Liu & Nagurney 2013).

For example, the company outsources its software maintenance and updating to organizations such as BEAT to ensure that the agent carrying the tracking of wheat imported from Greece is empowered to predict any short term or long terms dynamics in the market. This strategy is aimed at protecting the company from sudden swings which escape the focus radar in the supply chain relationship management. Walkers Shortbread’s strategic partnership for the delivery of products with various liaison delivery centers, especially where the company does not have operational offices, also comprises a form of outsourcing.

Amid the significance of outsourcing on cost reduction, it may lead to the risk of losing direct control of some operations. This situation makes an organization experience shocks that emanate from problems such as labor turnover, decreased productivity, and trade conflicts in organizations where it outsources. Outsourcing may also introduce the risk of reduced in-house innovation and creativity levels (Hilletofth & Hilmola 2010). Since Walkers Shortbread operates in a dynamic market, uncontrolled outsourcing of some supply chain functions may lead to loss of significant knowledge on different core activities that enable the company to make future predictions on market swings.

Besides, outsourcing sometimes may lead to increased dependence on some suppliers who do not have the best interest of a company at heart. As a result, such a company may become weak in terms of determining the relative bargaining power of the customers (Supply Chain Council 2005). Also, uncontrolled outsourcing might lead to loss of chain margin, especially when the supplier is very strong and able to capture the company’s share of revenues by capitalizing on the exchange rate and economic swings to renegotiate costing for supplies (Thompson & Martin 2010).

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Importance of procurement for global organizations operating in a complex environment

The core competency of Walkers Shortbread lies in its capacity to reduce its customers’ operational costs while at the same time reducing delivery times. This process constitutes a core competency since “improvements in delivery time, price, and product line-ups can add significant value to a business’ offering and can help it to find a true niche in even the most crowded markets” (Cox 2009, p.43). The organizations reduce the delivery times, hence boosting efficiency in the distribution operations.

They facilitate the planning of inventory holding to such levels that customers gain optimal profitability, thanks to the reduced warehousing costs and the associated material handling expenses.

To determine its performance, Walkers Shortbread measures its operations, logistics processes, and customer contentment. The company measures its logistics performance in a bid to derive strategies for reducing its operating costs together with increasing revenue growth (Cohen & Roussel 2005). The measurement of operational costs indicates the healthiness of Walkers Shortbread logistics and supply chain performance. It also aids in the discovery of the necessary areas of improvement.

In the effort to attract and retain its customers, Walkers Shortbread emphasizes the increasing-price value of the services that it offers. Customers’ satisfaction is measured from their feedback on their experience with the Walkers Shortbread (Dolgui & Jean-Marie 2009). This kind of customer communication is achieved through IT tools such as aramex.com, ePOD, and PACK. Besides, Walkers Shortbread also conducts customer surveys that are aimed at collecting customer feedback to help in measuring client service satisfaction in areas such as professionalism, speed, flexibility, competitive pricing, friendliness, and the provision of a variety of services (Gray & Larson 2011).

Project risk and procurement management

Business environment often experiences dynamics and swings which create short and long term effect on profitability and chances of survival. When faced with a business dilemma that requires critical decisions, companies resort to analytical tools that ensure competitive advantage besides cutting a market niche (Hill, Stephanie, Darryl & Bertie 2009). Walkers Shortbread may be on the brink of uncertainty into its future survival following the effects of Greece’s economic downswing on the cost of getting raw wheat.

The main risks that Walkers Shortbread faces in relating to the suppliers in Greece are economic swings in the market as a result of the current biting economic depression. With the unstable economic climate across the Euro currency dominated part of Europe, the economy of Greece has experienced the most devastating financial meltdown that has culminated in a crisis (Hilletofth & Hilmola 2010). As an aspect of the overall risk contagion, the crisis is currently threatening both the survival of foreign companies that depend on raw materials from Greece, such as the Walkers Shortbread (Wood 2002). As a desperate measure, the government of Greece opted for heavy expenditure to try and salvage the situation.

As a result of this crisis, the sovereign debt of Greece has become ‘junk’, and investors are likely not only to lose their profitability but also more than 30% of their total investments (Johnson, Whittington & Scholes 2011). This means that Walkers Shortbread will also be affected by the increased cost of importing wheat from Greece. Also, the exogenous progress as a result of competitive advantage may seriously be compromised as investors farming wheat in Greece may opt to move to more friendly economic zones, thus reducing the supplies going to Walkers Shortbread (Janus 2008).

As a result of the Eurozone crisis in the Greece agricultural industry, it is apparent that an increase in the cost of production of wheat due to inflation will affect the supply side of the economy massively in the long run (Barney 2009). It causes a decline in quantity supplied since the economy will not be competitive due to reduced competitive advantage. This leads to an increase in the price of the main wheat as a product being exported to the UK (Liu & Nagurney 2013).

From the analysis, it is necessary to adopt the broad spectrum classification of risks in identification the various risks, reviewing their impacts on the project, and offering mitigation to the risks to make the project viable and successful. Specifically, the risks are rank in terms of their magnitude, that is, low risk, medium risk, and high risk to make the responsive strategies specific in addressing the risk concerns (Leclerc 2012; MacKay & McKiernan 2004). About the Walkers Shortbread Company, the appropriate actions are summarized in the table below.

Risks Appropriate actions
Economic Risk The ideal approach would be either risk transfer or mitigation. Specifically, in relating to the suppliers in a volatile market such as Greece, Walkers Shortbread may address the risk of through contingency budgeting to protect the project from inflation and financial market swings as a result of taxes.
Contractual Risk with Suppliers Since the frequency of possible occurrence is low, the procurement management strategy for the Walkers Shortbread should address this risk through simple risk acceptance and deal with through risk management approaches as they arise such as taking insurance.
Operational Risk This risk can be dealt with through outsourcing some demanding stages of the supply chain, such as market focusing to minimize damages as a result of poor preparation.
Delay Risk This risk should be address through a critical contingency plan since chances of occurrence are very high, especially in the transportation of wheat from Greece to the UK. The procurement team at the Walkers Shortbread should adopt a closed contract with the suppliers in Greece to protect itself from additional costs as a result of the delay.
Environment Risk The environmental risk may be avoided through a partnership with a local environmental organization to carry out an impact assessment before settling on the ideal suppliers.

Recommendations

Logistics outsourcing

Logistics outsourcing relieves a company of fixed costs, irrespective of seasonal trends, and market demand (Murphy 2010). Through a competitive process, the Walkers Shortbread should outsource the wheat collection and delivery function to an agent in Greece or another place to protect itself from constant pricing negotiations (Thompson & Martin 2010). This outsourced unit will develop a balanced control system for a sustainable level of efficiency, costing, dependability, speed, quality, and flexibility through value delivery, value addition, and creativity (Trompennars 2006).

The outsource logistics team will have the responsibility to rationalize the scientific aspects of the supply chain such as the use of statistical tools, their application, and evaluation criteria in monitoring and managing logistics (Swaminathan &Tayur 2003). When the outsourced logistics regulator is properly balanced, efficiency in the supply chain management is achievable (Mankiw 2007).

Through role shifting, Walkers Shortbread will concentrate on the core activities, which add the highest value to its productivity and efficiency in its operations (Solomon 2010). For example, by focusing more on increasing quality as a measure of efficiency and effectiveness in delivering customer cargo, rather than developing and maintaining the sourcing and transportation of raw materials in-house, Walkers Shortbread can attract more customers (Medina-López, Alfalla-Luque, & Arenas-Márquez 2011). This process has the effect of increasing the organization’s competitiveness (Baltzan 2014).

Benchmarking of the mapping, executing and managing processes

Benchmarking of the channels for planning and execution of production and distribution goals has the effect of reducing costs of supply chain management since Walkers Shortbread will be in a position to monitor all the control systems and their logistics, irrespective of the economic swings in the markets where it sources the wheat (Mikulski & Katowice 2010). Thus, the major part of the success puzzle for the supply chain control system should be operated on the periphery of soft skills involving the timeless vision of organizational principles, defining the value of the business, and determining requirements (Murray, Grantham & Damle 2011).

Besides, building teams and mitigating tasks in the production-distribution channels for the products will restore efficiency in the supply chain management (Neuhaus 2006). This can be achieved through Contract Manufacturing (CM), Third-Part Logistics (3PL), and Business Process Outsourcing (BPO). These tools will ensure that the supplier and the company balance their activities within mutually beneficial standards (Park, Kitae, Tai-Woo & Jinwoo 2010).

Supply chain optimization is a process of determining an appropriate number of suppliers to retain in a business. In its operations, Walkers Shortbread may be keen to ‘right-size’ its supplier base (Plunkett 2007). For example, the company may reinforce partnerships with traditional supplier trade partners, especially in the sourcing of the best wheat in Greece, economic surveillance systems, and transportation service (Quantum & Daley 2011).

The goal is to ensure that Walkers Shortbread continues to enjoy reliable and available services that make the organization celebrated for its long-term experience (Snyder 2009; Stadtler & Kilger 2008). This promise has the merit of increasing the quality of the wheat products that are offered by Walkers Shortbread to its customers as the basis for building long-term customer relationships (Sehgal 2011; Sercu 2011).

Conclusion

Walkers Shortbread has not optimized its supply chain because focusing on its trade relationships with traditional partners does not provide adequate opportunity to do business with the emerging organization, which may provide better value for money. Therefore, the company may protect itself from risks, such as economic and environmental among others, through implementing an integrated procurement and risk management structure to ensure that the current and future swings do not affect its supply chain management.

This can be achieved through logistics outsourcing and proactive benchmarking. When lean supply chain management is fully adopted, there will be a reduction in the cost of factors of cost reduction such as labor, raw material unitisation, and efficiency of the entire process. Thus, the reduced actual supply chain costs will result in accumulated gains as a result of controlled costs that are recurring.

Reflectively, Walkers Shortbread has to introduce the concept of lean supply chain management through a balanced buyer-supplier relationship into the modern efficiency theory. Lean and effective supply chain management allows for a complete reinvention of the company’s procurement and supplier relationship model. The reduced wastes translate into efficiency and sustainability of supply chain and buyer-supplier relationship management.

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