Managing supply chains in todays competitive world is increasingly challenging. The global retailers are linking millions of customers to potentially thousands of vendors thus making the supply chain more complex. In order to compete in such a fierce environment, retailers are trying their best to find ways to mitigate the risk.
The supply chain risks can be broadly classified into two categories:
Low likelihood High-Impact Risks
Natural disasters
Geopolitical risks
Epidemics
Terrorist attacks
Volatile fuel price
High likelihood Low- Impact Risks
Currency fluctuations
Port delays
Market changes
Supplier's performance
Forecasting accuracy
Execution problems
As you can see that the supply chain risk is wide, ranging from minor delays to major disruption or destruction of the entire supply chain. Such is the nature of supply chain that the problem with single member of the chain effects the entire chain and ''a chain is no stronger than its weakest link.'' The low impact risks can be controlled or minimized to a great extent. For example supplier's performance, forecast accuracy, operational problems are controllable as they can be quantified: the issues like lead-time performance, mean time and forecast error can be characterised using historical data of the firm. There are also some risks that fall between the two extremes, for example volatile fuel price, currency exchanges. On the other extreme is the high impact low occurrence risk which the firms often tend to overlook. Deloitte in its risk study, Disarming the Value Killers found out that the most unlikely events were the main reason for the greatest market loses.
Legal risk: There are many legal risks involved in international trade which would not apply in purely domestic situations. For example, export or import of goods carries with it legal documentation in order for the goods to be allowed into or out of a particular country.
Furthermore, corruption related issues are difficult to deal with even inside one's own country let alone in another one. Added to this can be problems arising from international relations for example, trade embargos.
Even where there are no problems in the above areas, there are contractual issues between supplier and purchaser that can lead to uncertainty about jurisdiction as well as a lack of confidence in another country's legal stability or its legal infrastructure, Handfield & McCormack, (2008).
With regards to the first two paragraphs mitigation of risk will be of greater concern the more politically unstable a country is (or indeed perceived to be). However, mitigation on contractual issues is easier to resolve. It is wise for all contracts to stipulate a jurisdiction clause. For example this involves stipulating a choice of law in a particular country as well as the court in which the case will be heard i.e. any issues arising in under this contract will be dealt with under English law and in English courts.
Cultural factors: when dealing with global sourcing, understanding of different cultures is very important. For example an American exporter went to Saudi Arab and sat on a chair with crossed legs and shoe facing the host as he was in a meeting with his Saudi counterpart. This gesture is considered insult in gulf countries. The price of this unintentional mistake was the loss of the contract. The various factors that play key role in international purchasing are:
Relationships and languages: In Asian countries or developing markets relationships are given priority over contracts. The countries like china, Japan and Korea give more importance to non-verbal communication while as converse applies in most developed markets or west countries. The business language may be English but English is not understood in the same way across borders.
Information sharing and time orientation: in Japan for instance at all levels in hierarchy information sharing is emphasised and on-time delivery may be considered less important in eastern countries.
Culture varies across borders: Paying additional fee to ensure quick or on-time supply is common in western countries. On the contrary this option is unavailable in eastern countries where things take time they are supposed to, thus becoming a challenge for time -sensitive stock movement, Kenneth & Brian, (2006).
Supply Risk
Transportation: Transport is a key to provide seamless delivery in a competitive global market with an effort to decrease lead times, providing reliable services and competitive pricing. Annual transport costs comprise about 3 to 5 % of total sales revenue for most wholesalers and retailers. Transportation has the power or potential to affect the supply chain big time. If something awkward happens it can bring a just in time supply chain to an abrupt halt.
Example: In 1997 a UPS company got badly affected when teamsters went on a 15 day strike which at the time controlled majority of the package deliveries in the U.S. The strike crippled the logistics of many other manufacturers as well. Similarly shut-down of all west coast ports due to dock workers strike in September 2002 caused problems to manufacturers as it incurred high costs.
Assessment: transport management to mitigate risk
Vehicle routing and scheduling-optimising and coordinating outbound and inbound shipments.
Transport planning-optimising resources of transportation within the restriction of the shipment plan
Delivery execution and shipment tracking-controlling shipment managing freight payments. This can be done through excellent delivery process and post execution activity.
Performance management-supply chain performance should be shared with the management.
David & Philip, (2008).
Supplier's reactions: It also plays an important part in determining the success of the supply chain. The flexibility of the supplier to meet the changing demands is a key factor in the effectiveness of certain decisions and strategies that help the firm in addressing the risk of operating exposure.
Government reactions: Governments can intervene to stabilise currencies, can provide tariffs or subsidies to endangered firms. Political instability can lead to changes in tax situation and policies.
Socio-economic: This type of risk is occasional but has a very long lasting effect on supply. For example, due to appreciation of land farmers from costal regions of Florida migrated to different parts. This can be mitigated by having multiple sourcing strategies as a retailer started sourcing from Asia to reduce this risk.
Environmental risk
Political and economic instabilities: These are critical in supply chain assessment in international trade. For example second war in Iraq. The strained relations between America and Iraq left many oil mines inoperable. The Pakistan is the best example when it comes to instable government which can in turn result in frequent changes of laws and export-import policies and relations with other countries. The retailer needs to balance the risks and rewards, Handfield & McCormack, (2008).
Terrorism: one of the major impacts of 9/11 has been on the movement of materials between countries. Post 9/11 the security system has gone through the ocean of changes. (GSK GlaxoSmithKline) joined hands with US customs program to heighten security of trade channels from terrorism. The US benefited from it so did GSK as it became an example for other companies to tighten security of supply chain. This process has ensured GSK few security checks, few inspections thus leading to fewer delays and less expenses, David & Philip, (2008).
Cross border issues: sometimes border closure, random inspections can cause delays and hence make the supply chain more vulnerable. Example: after 9/11 trucks queued up for miles at the US-Canada border. While it has been recognised that in the short run reducing inventory buffers is a nice way of cost savings but arguably such operations can also cause serious damage if the catastrophe hits, David & Philip (2008).
Demand risk
Demand unpredictability and variability: this type of risk arises when a retailer experiences an unexpected growth in demand and is not able to cope up with the abrupt increase in demand. This can be due inaccuracy or lack of precision in forecasting. Or it can happen the other way round as well. For example there are certain countries that impose ban on certain specific ingredients in a product, thus affecting the demand. The collaborative working with suppliers and manufacturers can reduce the possible impact of risk.
Other risks
Visibility supply chain: It can also increase problems. The toy maker Mattel was in news for recall of toys as it contained high dose of lead in the paint. In one case the culprit was the sub-contractor who decided to use paint from a non-authorised third party supplier.
Information technology and Technical risks: they make things happen fast, increase the speed of delivery and processing but can have a dire effect when unreliable. Example: In early 2000, Nike's hiccup in demand planning software caused supply shortage for famous Air Jordan footwear. As a result Nike announced loss. Technical risks can be divided into 2 types
Technology may not function as expected
Existing technology may become obsolete with the emergence of new technology.
Assessment: two ways in which this risk can be mitigated: pre-employed testing and pilot implementation.
Risk mitigation strategy and assessment
As we have already discussed the wide range of risks that lead to supply chain disruptions and the supply chain has become more vulnerable to these risks because of new practices like just-in-time inventory and lean management. "many of the key risks factors have developed from a pressure to enhance productivity, eliminate waste, remove supply chain duplication and drive for cost improvement" (Stauffer, 2003).
The demand for sourcing from developed markets like India and china is sky rocketing mainly because of cheap labour increased market access but these decisions often overlook the potential for disruption because increase in the number of nodes in the supply chain or complex supply chain networks also increase the probability of risk.
Sensing, responding and flexibility: It can play a vital role in avoiding a large scale disruption. The following example illustrates how speed in sensing and responding to the problem in supply chain can help a firm to gain a competitive advantage and ensure continuity of supply,
Philips was a major supplier to Ericsson and Nokia. On March 2007 the Philips semi-conductor factory in Mexico was hit by lightning thus destroying all the stock. Nokia detected delays in incoming goods from Philips. Two weeks after the accident, Philips confirmed that orders will be affected and delayed for months. Nokia was quick and decisive to response. They changed the product design immediately so that chips from other suppliers could be used.
Erricson responded differently, it took a long time for the news to reach the upper management but more importantly ericsson realised the severity of disruption, but it was already late as the alternative sources were taken by Nokia. Ericsson suffered badly and announced loss.
Source: Adapted with permission from F.Cela, Diaz, ''An Integrated Framework Architecting Supply Chains.'' MS thesis, Massachusetts Institute of technology, 2005.
Visibility: It reduces the time between risk discovery and the disruption, visibility system should be deployed to quickly identify disruptions. Alert or alarm system can prove handy when some crucial supply chain exceed the standard parameters as alerting (activating the trigger) will help figure out problems quickly and take necessary action to prevent disruption. For example a pharmaceutical company has deployed a transport alerting system tracking the departure and arrival of shipment times if the ship arrives late a trigger is sent to management.
To track the containers in channels at critical points Implementing pilot test RFID (Radio Frequency Identification) technology can be handy.
To keep a check of demand, capacity level and inventory at important locations in the supply chain like shipping.
The firm can also develop a predictive analysis system and dynamic risk indexes at major points to avoid disruptions in the supply chain.
Reconfiguration of supply chain to enable quick rescheduling of shipment in response to disruption.
Supply chain Redesign: As supply chain risk represent a threat to the financial performance of a firm, many retailers are engaged in redesigning of supply chain like port diversification, partnering with service providers to improve supply chain. Identifying pressure points and prioritising risks. One can also argue that the redesigning can take place at the product or component level that is quicker to source through conventional levels to lower the risk of global sourcing.
For example a major retailer predicted the west coast port strike and simulation predicted its effect on shanghai port. When the strike occurred, the company checked other routes through East coast ports to avoid strike. Another company started manufacturing complex components locally to minimise the need for global sourcing,
Recommendations- supply chain design should be influenced by risk consideration and the balance between cost of redesign and risk mitigation should be weighed properly.
Excess resources: This approach of risk mitigation is common when the degree of disruption is high or when the probability of risk is known. The method is very simple and easy as the firm uses excess resources to cushion the impact or save the firm from disruptions. This may include:
Increased inventory at warehouses, distribution channels and manufacturing locations.
Increase lead times over actual times to make room for greater cushion for response.
Increase suppliers for a critical input for a product.
Recommendations-
It is interesting to know that nowadays firms are reducing inventory in supply chain. There is a significant correlation between reduced inventory and premium freight shipments. Thus firms seem to be substituting one form of excess resource for another hence shifting financial resource to a different area. An understanding of excess resources and other costs is critical to avoid or overcome supply chain problems hence a major element of risk mitigation strategy. But firms need to maintain a balance as to see the cost involved to maintain excess resources and its impact on risk reduction.
Supply chain planning and collaboration: the above two mentioned strategies are both reactive strategies as they have the potential to mitigate the risk. This approach deals with the probability of the risk. Proper supply chain planning, coordination and risk reduction has the power to prevent disruptions from occurring in the first place. The firm must first identify and understand important players in one's global sourcing. The firm can then built relationships and discuss the powerful points that represent risk and work in a coordinated way to pre-plan to eliminate the risk.
Selection and number of suppliers is critical for supply chain risk management. Screening of suppliers, their evaluation as to find out suppliers with low reliability and high potential disruptors.
Check if the supplier is aware of risk and develop plans that can be employed within the supplier's base in case disruption occurs.
Suppliers capability to provide visibility of material flows, this information can be shared electronically within the network.
Total cost of sourcing from a particular supplier and factor in the expected cost of disruption needs to be evaluated to take a final decision.
Once the selection of supplier is over the firm needs to be in constant communication and dialogue with the transport and warehouse providers in supply chain.
Tele conferences with critical partners to search issues that may disrupt normal operations.
Promote security that complies with new initiatives.
Handfield & McCormack, (2008).
Recommendations-
Following a major disruption event the retailer should enable a disruption incident reporting to know about the main causes and failure mode analysis to learn and avoid reoccurrence of such events. The education and of managers and other associates in the chain to improve decision making process will help to manage risk.
Single supplier v/s multiple supplier: Many firms believe that the increase in supply base protects the firm against disruptions. Post 80's this approach has changed and some companies are little reluctant to increase their base as they adopted new strategies like just-in-time and lean manufacturing. Each solution has some pros and cons.
Since 9/11 retailers are more concerned about the risks due to single suppliers. The firms need to be more flexible to mitigate the risk. Increase in supplier base is an option but also comes with increase in cost. Therefore a careful integration of flexibility and cost efficiency is important to look at.
Retailers can use local or domestic suppliers in case of disruption or sudden increase in demand. For example HP desk jet's main supplier is in Singapore but it also has a domestic supplier in Canada to react to North American market.
Using a supplier with multiple manufacturing facilities or sites.
Recommendations-
Single sourcing helps firms in developing good relationships and reduce costs but the approach can also be risky there therefore possibility of multiple suppliers should be considered. The firm can rely on single supplier by strengthening disruption clauses.
Conclusion
In conclusion, we can say that for managing risks related to supply chain more efficiently it is essential to trace the risk, then find out the likelihood and impact, then identify and implement corrective responses and at the same time strengthen supply chain resilience. It being impossible to avoid the occurrence, supply chain needs to be flexible and potent, to prospect or to maintain operations during an interruption & quickly improve to its normal level position after being negatively influenced. The supply chain disturbances are increasing, in frequency as well as in number, thus making managers job more difficult while tracing potent ways for supply chain to negate the disturbance management.
