Supply chain is defined by the international centre for competitive excellence as "Supply chain is the integration of business processes from the end user through the original suppliers that provides services, product and information that add value for customers"(Matha C Cooper,1997). Add value to the customer differentiate SCM from Logistics Management. There is an added pressure on manager to reduce the cost of their product due to increase competition and globalization. Managers continually strive for higher quality and lower cost. Improving the supply chain is one way of adding efficiency to your system.
The objective of this literature review is study the importance of risk management in Supply Chain. Risk and uncertainty seems to be prevalent in our environment and involve in all of our efforts (Desheng Dash Wu, 2010).Risk is a threat to disrupt or halt normal activities and occurs due to the uncertainty about the future. Risk can be defined as follows
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Risk = Probability (given event) * Severity (negative business impact)
There are many types of risk involve in supply chain and can be divided in three broad categories.
External Risks are beyond the control of managers like earthquake, storms, terrorist attack and etc.
Internal Risks are the risk from the operations of organizations.
Supply chain risk are external to organizations but within supply chain.
Managers hate risk they presumably assumed that every activity will go as normal but in reality it's not true. By simply avoiding risk, it does not eliminate risk but increases its probability of occurring. Secondly, managers rely on reactive approach to the problem instead of preventive and often due to this approach organization has to face dread full consequences. Risk Management does not eliminate risk but devise different ways for handling unusual situations having negative impact on the organization.
Supply chain can comprise of number of upstream and downstream suppliers. Reliability of supply chain depends on its weakest link. Companies should not only focus on their own risk; they must also focus on the other links in the supply chain (Souter, 2000).In case the member of supply chain have their own minor risk involve in their operations but adding the risk associated with all the members of supply chain can be significant. This can only be achieved by efficient use of Information technology that allows integration in supply chain members and information sharing. Following current trends increases the vulnerability of supply chain (Andreas Norrman & Ulf Jansson, 2004).
More integrated processes between companies
Outsourcing of manufacturing and R&D to suppliers.
Globalization of supply chain
Reduction of supplier base
Increased demand for on time deliveries
Shorter Product life cycle
Integration in Supply Chain between companies
Information sharing among the members of supply is of utmost importance because in supply chain performance of one supplier can have direct implication on outcome or on the value of product resulting in supply chain ripple effect (Andreas Norrman, 2004). Although integrations have several problems associated with it. Since each member of supply chain wants to make profits and it can be achieved by paying less for the material bought and sells that material at higher cost. However the risk of supply chain can only be reduced by establishing transparency among each member of supply chain have direct access to other member and knows what is happening on the other side. When the members of supply chain work in isolation for reducing their own risk, results of that are not satisfactory. Since reducing risk or implementing risk management strategy in one company does not decreases the overall risk because vulnerability of supply chain depends on the weakest link. It will just transfer the risk to other member of supply chain. Supply chain member should work together for reducing the supply chain vulnerability as a whole (Christopher, 2002).
Outsourcing relate to relying on one's own competencies and relying on others for less competent areas. This allows company to have competitive advantage over one or two features of the products but outsourcing does not always work as expected. Since each company business strategy is different from other. Some tend to focus on high quality whereas others tend to focus on good customer service so there is increased risk of poor performance. Broader supply chains are less risky than narrow ones. Companies relying on a single supplier are on the knife edge because any incident on supplier side can bring whole system to halt. Secondly outsourcing can be detrimental for the goodwill of the company. As companies are relying on the others product so the quality of the end product depends on the raw materials.
Always on Time
Marked to Standard
As global operations are increasing world is turning into a global village. A problem in a one part of world can seriously disrupt businesses in other areas. In addition to that risk of extended journey can result in crossing international borders, more stock in transit and so on.
Risk Management involve identifying potential risk, thorough analysis of that risk that involves calculating potential losses and then establishing ways for mitigating that risk and problem. Risk Management aim is not provide a risk free business but helps the business to manage risk effectively. In practical scenario Risk management balances risk.
Today globalisation and worldwide view of business has tremendously increase number of risk. SCM targets to reduce cost by using different methodologies including Just in time (JIT). Traditionally companies tend to hold buffer stock as soon as they predict forth coming risk but as we all know stock are expensive and according to the studies it cost around 25% of what item cost (Larry C. Giunipero,March 2003). Risk Management plays its role here because increasing stock means waste of useful resources and unsold stock but with low stock it can be difficult to manage uncertain demand. The role of risk management is to balance out the risk and find the solution that is more viable and less risky.
Illustration given below will reflect the difference between the traditional approach of handling risk in supply chain and current practises of Supply chain Risk Management (Larry C. Giunipero and Reham Aly Eltantawy, 2003).
Sources of Risk
Supply Chain Risk Management
Manual purchase orders
Frequent supplier changes
High transaction costs
Long purchasing ordering
Just in time deliveries
Small flexible supply base
Early supplier involvement
Measuring total costs
Lower control over
Magnification of problems
throughout the supply chain
Paying higher prices
Higher switching costs
Skill gaps in current
Security of transactions
Dell is often considered as an example for implementing close working relations with its suppliers (Antonette et al., 2002; McWilliams and White, 1999) and they are the source of adding value to the dell's product.
The risk management process is executed in four stages which are as follows (Hallikas et al., 2004).
Decisions and Implementation of Risk Management actions and optimizations
Risk Assessment or Risk Analysing
This process is based on monitoring various KPIs (key performance indicators) related to supply chain. KPIs include level of in stock inventory, throughput, turnover of stock and delivery lead time are some of the commonly used KPIs(MihalisÂ GiannakisÂ &MichalisÂ Louis, 2010) . There are several tools available for identifying risk using different methods. Some of them tend to analyse the past events and others by collecting opinions through interviews, group meeting, Pareto analyses, checklist, process charts and cause and effect diagrams. There are also many unknown risk involve in supply chain that appear from out of the blue. Operations of different supply chains can also identify the potential risks pertinent to that supply chain. Risk identification requires the breakup of complete supply chain in terms of operation or activities and then considering the details of each operation for identifying potential risk involve in supply chain.
Risk assessment involves estimating the probability of occurrence and its overall impact on the business. Risk assessment has its own limitations due to lack of reliable data of past and experiences of similar events (Stemmler, 2006).There are several methods available for analysing risk. The most elementary and common method involve categorizing risk on the basis of its financial impact on the business or relative probability of its occurrence. Other models include failure modes and effect analysis (FMEA), Scenario analysis and simulation.
Responding to Risk
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Risk response targets to find the best possible way of dealing with risk to supply chain and implementing those responses for reducing the probability and consequences of risk. There are different types of responses to risk that are as follows.
Ignore or accept the risk
Reduce the probability of occurring
Scale down the limit of consequences
Transfer, share or deflect the risk
Adapt to it
Move to another environment
(Pauchant & Mitroff, 1992)
There are several ways that can be used for mitigating risk in supply chain. It can be achieved by adjusting the design of supply chain so that it involves less risk in terms of consequences and probability of occurrence.
Simplicity in supply chain can lead to enhance overall performance, leading to more consistent quality, lower operation cost and inherently greater responsiveness. Five ways for adding simplicity in supply chain are as follows.
Reducing the number of shippable items and consolidating the packaging and product.
Making more products to customer order and employing postponement technique, delaying the completion of product.
Build partnership and bind partners to organization.
Align performance objectives
Get information in time from system
(Rick Hoole, 2005)
Variability in the supply chain is considered as one of the main source of risk. It is recommended to reduce the variability as much as possible by introducing different systematic procedure. Traditionally companies tend to hold more stock for reducing risk but CISCO was one of victim of this approach and suffered with serious loss due to unsold inventory (Donald Waters, 2007).
Agility in supply chain is one of the recent approaches used by managers for making supply chain more flexible for dealing with the fast changing environment. This involves the manufacturing and delivery of product with very small lead times. It can be achieved by creating resilient supply chains that will be discussed later. There are number of other approaches as well for implementing agility in supply chain through standar disation (using same parts for different products), postponement (delays the finishing of product until last moment) and etc (Donald Waters, 2007).
Resilient Supply Chain
Supply chain resilience encompasses the understanding of networks that connects the business to supplier and their suppliers (Martin, 2004). Supply chain design can have significant effect on risk for example a long, narrow chain has more risk associated with that than a short and wide one.