Abstract
Today, supply chain management has become critically important especially regarding the recent developments in the global economy. As a global business enters the era of supply chain competition, and the rules of this competition dramatically change within short periods of time, effective risk management in supply chains must become an essential objective of crisis managers. In addition, supplier networks face serious internal and external risks that affect the profitability of corporations and firms. Among such risks are market variables, political conflicts, terrorist attacks, environmental factors, natural and manmade disasters, customer demand issues, operational hazards, and human risks. In the following study, the general structure of the risk management process in supply chains and the methods of risk management in supply chains will be observed. The results of this study prove the importance of creating risk management strategies in supply chains using showing a number of its profits for different participants of supplier networks. Among these profits are quicker product delivery, cheaper pricing policy, reduced transaction costs, having greater efficiency, and acquiring higher levels of satisfaction both of suppliers and ultimate clients. The presented information assists in assessing, understanding, and managing different kinds of risks and uncertainties in supplier networks.
Supply Chain
Introduction
The growth of global business is accompanied by increasing complexity as well as an increase in the number and types of risks faced by supply chains. Companies, participating in supply chains come to face more and more uncertainties of different kinds including delivery uncertainties and customer demand uncertainties. Unforeseen events such as terrorist attacks, military actions, extreme weather conditions, and natural disasters continue to occur, further adding to the problems firms face. The global economic crisis of 2008 is an example of how extreme events have affected supply chains throughout the globe. The analysis of the global financial crisis by many researchers and financial analysts has brought to light the inadequacy of some risk management practices. In this study, risk management in supply chains will be observed with a purpose of making important findings regarding assessing, understanding, and managing different kinds of risk and uncertainties in supplier networks.
Methodology
This study aims to seek a greater understanding of risk management in supply chains using exploring business literature on this subject. Content will be utilized from research studies in the last decade. The principal method of information collection is a practitioner and discovery-oriented approach. To provide a broader picture of risk management peculiarities in supply chains, a range of experiences of different companies has been taken into consideration while information research and data collection. The main research questions, studied in this paper based on reviewing literature in this field, are:
- what kind of risks are faced by supplier networks, and what related issues arise in connection with these risks,
- how can the risk management process operate in supply chains to mitigate the negative consequences of facing risks,
- what kind of measures and options can be implemented for effective identifying risks, assessing, and controlling them.
Practices
Risk management practice entails not only formal rules and regulations but also risk management culture. Indeed, the rules and regulations are not enough to bring into line the incentives of the individuals with the members of the enterprise. To a certain degree, a strategic risk management culture should incorporate broad business goals into risk-aware decision making (“Supply chain risk management”, 2012). Risk management should not be left to an independent function, but rather, it should penetrate the culture of the organization in its entirety to ensure its effectiveness in minimizing risks. In other words, the culture of risk should begin from the top management level and trickle down to the most junior of employees. The persons involved in risk control in the institution are given as much prestige, status and compensation as those directly involved in profit-focused businesses. The risk control partners are also involved in the institution’s decision-making processes. Besides having a culture of risk management, risk reporting is equally important as a sound management practice (“Supply chain risk management”, 2012).
Managerial Implications
Numerous companies have enjoyed great advantages due to the use of effective risk management in supply chains. This has been achieved by means of integrating all activities associated with (1) material flows; (2) financial flows; and (3) information recourses between the ultimate customer and the suppliers of raw materials and the other recourses. Among the most significant profits of risk management in supply chains are faster product delivery, reduced pricing policy, reduced transaction costs, greater efficiency, and higher levels of satisfaction both of suppliers and of ultimate customers. Such advantages are achieved by means of improved relationships between the members of supply chains including manufactures, wholesale companies, distribution centers, and ultimate clients; and through tightening links between business partners in supply chains. All the above-mentioned factors prove the importance of developing the risk management strategies by risks managers in companies, participating in supplier networks even despite the fact that a number of modern researchers are not sure about the expediency of firms’ expenses on risk management in supply chains (“Supply chain risk management”, 2012).
Risk Sources in Supply Chains
There exists a multidimensional approach to understanding potential risks in the literature, investigating risk management in supply chains. The very notion of risk is commonly defined as a variety of potentially negative outcomes, their probability, and their subjective significance (“Supply chain risk management”, 2012). In the case of any particular corporation or firm, risks are always different, which is explained by the fact that cooperation of companies in a supplier network causes transfer of risks between them. Thus, for some companies risks can be decreased or increased depending on the state of affairs for any particular company. For that reason, no generic assessment plan of risks for a company can be provided. This means that in each particular situation, risk managers must make the assessment of company risks from the perspective of their own company.
Still, risks, related to different kinds of uncertainties, can be subdivided into the two main categories. These two main categories are (1) uncertainties that result from customer product delivery, and (2) uncertainties that come from customer demand. According to Juttner, Peck and Christopher (2003), customer delivery risk in supply chains is connected with unpredicted external or internal variables such as political and market variables; environmental factors; customer demand issues; operational hazards; and human risks. For instance, in 2000, Ericsson lost $450 million on the reason of fire in their supplier’s semiconductor plant; and in 1999, Apple lost many orders from their clients because of a supply shortage of chips that was caused by the earthquake in Taiwan (Hallikasa, Karvonenb, Pulkkinenb, Virolainenc & Tuominena, 2004). Risks, which are connected with uncertainties that come from customer demand, are also very significant as they often result in considerable financial losses.
There also exists the other source of risks, which is often underestimated by risk managers, and is connected with organizational mistakes on different levels of supplier networks. Unfortunately, such underestimation often leads to considerable problems and significant financial losses. The following comment by Hallikasa et al. provides an insight into the nature of this type of risk:
The network-related risks are connected for example to the networks’ resistance towards changes, new technologies, practices and members, as well as to problems and risks that may arise in network management or the setting up of appropriate development activities. Increasing requirements for communication and co-operation activities also add claims for more efficient information systems, openness, trust and production systems. There may also arise problems with information transfer (2004, p. 62).
From this comment, it becomes evident that risk managers must be aware of the human-related and organizational risks in the supplier networks including resistance to technological progress and management changes, increasing requirements to professionalism of employees, and delay in implementing current informational technologies. Finally, if a firm wants to remain achievement-oriented in the business, its risk managers should be aware of the fact that markets and products constantly undergo changes, and new competitors regularly appear. Thus, they need to recognize and follow the main trends, and develop new risk management strategies on a regular basis.
Risk Modelling and Extreme Risk Management
It is usually difficult to predict extreme and rare occurrences or their potential impact. Predictions are therefore normally based on historical data and supplemented with confidence intervals of possible results. As extreme crises occur occasionally, it is not easy to predict this correlation using historical data. Therefore, if the available data is inadequate and unreliable, risk managers in supply chains should find alternative ways of evaluating risk instead of relying on model estimates (Juttner et al., 2003). The alternative risk assessment techniques may include qualitative judgments, which can either complement or replace quantitative analysis. The global financial crisis also brought to light various serious problems in modeling risk exposures. Most of the financial institutions incurred subprime-related mortgage losses that had not been predicted by their risk models prior to the onset of the credit crisis. Although non-payment of finance borrowers happens to be individual during normal times, they have a tendency to be combined during economically complicated periods including crises. Therefore, firms that are engaged in supplier networks should mind that their risk management strategies should also take into consideration unforeseen extreme factors related to market conditions.
Risk Management Process
Each firm in the supply chain should assess, control, operate, and manage its risks. At times, it may be useful to consult and cooperate in developing collaborative strategies with business partners in supply chain, which share the same risks. According to Hallikasa et al. (2004, p. 64), “identification and implementation of mutual means for risk reduction help to find out risk management actions that may be too expensive to be implemented by a single partner, but cheap to be implemented by collaboration”. In any case, whether a company operates its risks itself or does so in mutual collaboration, its risk managers should be aware of time limits for managing each of the company risks; otherwise, the situation may turn undesirable for it and its partners. In addition, firms should mind that risk managing process has a continuous nature. Thus, it should be put into a regular practice even though it requires considerable material investments because the acquired benefits will exceed the expenses (“Supply chain risk management”, 2012).
Typically, a risk management process of a firm has the following stages:
- risk identification;
- risk assessment;
- developing and implementing risk management strategies;
- risk monitoring.
During the stage of risk identification, risk managers should monitor business situations with the goal of identifying the type of uncertainties that may cause potential risks. The more effective the monitoring process is organized, the more effective proactive measures can be developed to mitigate the risk. During the second stage, when the identified risks are assessed, the main objective of risk managers is to assess all the factors that stand behind the identified risks. For this, risk managers should consider the company’s past experience along with the experiences of the other companies, working in the same field. As a result, the risk managers will identify that some factors are of higher probability of disturbance and the other ones are of lower. During this stage, risk managers should consider not only financial factors, but also immaterial factors including customer trust and business reputation. Although these factors do not have a visible monetary value, their significance for the firm’s profitability is critical. The most important stage in risk management process is the third stage, when risk management strategies are developed and implemented. During this stage, risk managers should make risk transfer, risk elimination, and risk reduction. The following comment identifies the most common practice, utilized by companies during this stage,“ in a supplier network environment, risks can be managed generally by developing a common network strategy, best practice modes of action and contract policies” (Hallikasa et al., 2004, p. 65). During the final stage, when the further monitoring of risks is provided, risk managers continue assessing the identified earlier risks. The significance of this measure is explained by the non-static character of business situation in supplier networks. This character explains why risk managers should be ready to incorporate new risk factors into their risk reduction strategies. To identify the new risks, they have to regularly monitor such important variables as market demands, customer needs, changes in supplier network, technological progress, changes in partner supplier chains, and possible threats from competitors.
Incentives Practices
Incentives are the backbone of every corporation, more so when it comes to executives. Understanding incentives is thus a major step in addressing any organizational puzzle. Nevertheless, there have been doubts about the current practices in corporate governance, included those related to executive pay. The agency theory has long been used to explain compensation in a typical enterprise. The theory argues that principals (shareholders), whose primary goal is to maximize the firm’s bottom line, delegate duties to rational, risk-averse but self-centered agents (managers) (Hallikasa et al., 2004). Based on this assertion, several practices were developed such as the independence of the board, separation of chairman and CEO positions, and use of compensation tools that are based on outcomes.
Mitigating Supply Chain Risks
To mitigate supply chain risks, companies have numerous options. First, they may make an assessment of company supply sources to define the most important ones for the business. This will help identify those suppliers, who contribute to the firm’s best revenues. Logistics is one more significant variable that causes considerable levels of risks. Risk managers in companies should pay a lot of attention to investigating logistics mechanism that the company is using (Juttner et al., 2003). They have to consider possible changes in logistic patterns that may occur on the reason of some external or internal factors such as natural disasters, extreme weather conditions, terrorist attacks or military conflicts in particular zones of their distribution patterns. Any enterprise needs to have a few logistic distribution options, which can be utilized in case circumstances do not result in the outlined scenario. The other possible solutions that will mitigate supply chain risks are “sourcing from different suppliers, developing supply sources in other parts of the world, finding alternate modes of transportation or alternate routes, demand shaping, buffer inventory, and postponement strategies” (“Supply chain risk management”, 2012, p. 138). To mitigate uncertainties, which are connected with customer demand, the demand management strategies can be implemented. For instance, risk managers may choose to utilize dynamic pricing and revenue management strategy. These strategies have a special impact on reducing disruption risks, which is explained by the fact that an enterprise may urgently use them when disruption occurs unexpectedly (Juttner et al., 2003).
Use of a Range of Risk Managing Measures
The majority of enterprises use a wide range of risk measures to analyze market risk across different business lines. Some firms pay great attention to the interrelationship between market sensitivities of derivative exposures and historical and forward-looking scenario analysis. Such firms use developments and strategies that can be altered to reflect new circumstances, and they understand the weaknesses of individual risk measures (Hallikasa et al., 2004). The risk measures used by such companies include multiple tools, notional measures, value-at-risk and basis risk. As a result of uncertainty surrounding the accuracy of assumptions underlying their risk measures, the other firms revisit simple notational limits to emphasize potential risky concentrations. These strategies are not based on suppositions and give the management a simpler perspective on the potential scale of the risks (“Supply chain risk management”, 2012).
Conclusion
This paper discussed the questions related to risk management in supply chains including the kinds of risks faced by supplier networks, the possible strategies mitigating those risks, and the step-by-step description of the risk management process in supply chains. It addressed challenges that supplier networks cooperation sets in the face of risk managers. It provided an outline of the general structure of the risk management process and observed the methods for risk management in the conditions of the modern-day market. The main results of this research are in proving the importance of developing risk management strategies in supply chains, which is explained by the variety of its positive outcomes for corporations and firms including faster product delivery, cheaper pricing, reduced transaction costs, having greater efficiency, having ability to concentrate on core skills, and acquiring higher levels of satisfaction both of suppliers and of ultimate customers.
References
Hallikasa, J., Karvonenb, I., Pulkkinenb, U., Virolainenc, V., & Tuominena, M. (2004). Risk management processes in supplier networks. Finland: Lappeenranta University of Technology.
Juttner, U., Peck, H., & Christopher, M. (2003). Managing risks in supply chains. International Journal of Logistics: Research & Applications, 6(4), 197-210.
Supply chain risk management: knowing the risks – mitigating and responding for Success. (2012). Journal of Enterprise Information Management 20 (6), 132-145.