Supply chain risks cause disruptions with far-reaching implications for end-to-end business continuity. A supply chain risk is defined as the “likelihood and consequence of an adverse event” occurring at any point in the supply chain (Tang 452). It could be an externally driven (environmental risk), process-related, or information-related event that stifles the efficiency of the supply chains. Supply chain risk management (SCRM) entails initiatives to mitigate anticipated and unanticipated risks to avoid a supply chain breakdown.
Effective SCRM includes strategies such as avoidance, postponement, speculation, and hedging to control or transfer the risk to a third party (Tang 453). This analysis will evaluate the importance of SCRM to organizations today, review the current thinking on SCRM, examine practice examples in this area, and provide recommendations for SCRM practitioners.
Relevance and Importance of SCRM to Organizations Today
Firms have realized that with effective SCRM, they can remain resilient in risky situations and acquire a competitive edge over rivals without a risk management plan. Most organizations utilize a cyclical strategy for risk management implemented to mitigate an impending supply chain risk. Iwan outlines four formal functions of SCRM in contemporary organizations, namely, creating efficient supply chains, improving partnerships, mitigating soft risks, and avoiding SC disruptions (17).
SCRM is useful for eliciting SC best practices in organizations to reduce the risk burden associated with high costs. A survey of supply chain glitches reported by listed firms in the US established that disruptions increased inventories and costs by 14% and 11%, respectively, and reduced the annual sales by 7% (Iwan 26). Therefore, risk management fosters efficiency in supply chains and profitability.
SCRM also fosters SC relationships through risk-sharing practices. Partners (firms and suppliers) often share risk information to better plan for intended or unintended risks that could cause a supply chain breakdown. SCRM is a useful tool for identifying and eliminating soft risks that are hard to assess. The function of a risk management plan in organizations is to provide continuous monitoring of “decisions, processes, practices, and goals” that inadvertently give rise to SC soft risks, such as overhead costs (Faisal, Banwet, and Shankar 601).
Chrysler launched a Supplier Cost Reduction Effort (SCORE) wherein suppliers gave R&D ideas to the carmaker in return for financial rewards shared equally (Faisal, Banwet, and Shankar 605). Through this collaboration, Chrysler saved up to $5bn in R&D costs (Faisal, Banwet, and Shankar 605). Therefore, with SCRM, organizations can decrease their strategic risks and optimize their resources, competencies, and skills. Disruptions in SC networks are common in organizations. With a risk management plan, firms can identify beforehand vulnerabilities in their SC networks before they can become large-scale to cause supply chain breakdown.
Technology, economic, or supplier risk can affect the upstream supply chains, reducing the organizational capacity to develop and supply products or services. Implementing a risk management strategy reinforces the organizational focus to mitigate potential risks. Besides, SCRM helps firms eliminate “potential and unexpected costs” associated with uncertainties and costly disruptions (Faisal, Banwet, and Shankar 607). Risks, if not addressed, permeate the entire supply chains affecting the efficiency of SC networks. Firms use risk mitigation methods to predict and avoid various risks to enhance supply chain performance. A breakdown in the supply chains can delay recovery time due to uncertain business risks. Therefore, contingency plans help improve plant efficiency and manage the production process effectively.
Current Thinking in SCRM
The Risk Management Framework
A common framework for risk management entails three elements, namely, risk management, risk evaluation, and risk treatment (Iwan 20). The process includes best practices that support the “crisis, continuity, and recovery” needs of organizations (Iwan 23). It starts with the evaluation of internal and external environments related to a firm’s supply chain. The internal risks may include weak policies or sabotage while internal contingencies could be meteorological or transportation risks that affect suppliers. Firms must prioritize and mitigate supply chain risks that hurt firm performance and revenue.
The analysis of the internal and external environments is followed by risk identification, analysis, and evaluation (Iwan 27). Risk identification involves an examination of external and internal threats to the efficiency of supply chains or operations (Iwan 25). It entails defining the risk categories that pose a threat to an organization’s operations. The next step is risk treatment, which entails implementing contingency and recovery plans after an interruption.
The final step in this cyclic process is the continuous monitoring of the risk treatment outcomes to define opportunities for improvement (Iwan 28). It entails the continual consultation with suppliers to detect and respond to supply chain constraints. The risk management framework described is outlined in Appendix 1.
SCRM in firms aims to address three kinds of risks; they include “environmental, technological, geopolitical, and economic” (Tang 455). The environmental risk comes from natural or artificial hazards that pose a threat to the continuity of supply chains. Environmental catastrophes cause disruptions of transportation infrastructure, leading to losses. In 2011, 15 listed firms in Japan reported a decline in profits of up to thirty-three percent due to SC disruptions occasioned by the tsunami (Tang 461). Therefore, an SCRM strategy can reduce vulnerability and promote an organization’s ability to recover after an environmental risk.
The second category includes geopolitical risks such as regional conflicts, lack of integrity, and wars, among others. Such risks have a disruptive effect on supply chains. Economic disruptions may arise from sudden changes in exchange rates, customs delays, and regional financial crises (Tang 459). In the 2008 economic crisis, the number of automotive suppliers filing for bankruptcy increased two-fold from the 2007 figure (Tang 562).
The globalized nature of supply chains makes firms vulnerable to global financial downturns. One survey revealed three forms of risks with the highest effect on supply chains, namely, volatility in oil prices, exchange rates, and economic crises (Tarabori par. 6). Technological risks can also hamper the ability of organizations to deliver their services. They arise from informational system failures, cybercrime, and loss of data, among others.
Addressing Supply Chain Risks
Once risks have been noted in the supply chains, a risk management strategy must be implemented to mitigate their effects. A model for dealing with supply chain risks involves four steps, namely, risk analysis, prevention, reduction of the effects, and follow-up and control (MetricStream par. 3).
Risk analysis entails the assessment of “the likelihood and consequence” of risks and prioritizing them for better management (Manuj and Mentzer 141). Firms use various methods to analyze the identified supply chain risks. An example is the bow-tie method that utilizes a cause-and-effect approach to link causes with effects ((Manuj and Mentzer 146). Other methods include the Delphi-technique, one-day analysis, and checklists, among others. General Motors in 2012 recalled about 3.1 million cars citing structural defects, which is attributed to a “low probability” event (Manuj and Mentzer 148). The firm’s ERM program lacked a feedback loop to detect faults in the ignition switches. Risk analysis helps rate risks from the most probable to the least likely event for proper analysis.
Reducing the effects of supply chain risks requires a firm to outline measures to mitigate identified risks. The common risk prevention methods used by US firms include employee training, fire protection, and spreading the risk through partnership agreements or outsourcing. The preventive actions help reduce the effects of SC risks and supports recovery.
Reducing the Effects
Enterprises must be prepared to mitigate the effects of risk such as a natural disaster. The negative effects can delay recovery if not addressed promptly. Companies can ameliorate the damage through administrative, technical, and legal actions that transfer the risk to a third party.
Follow-up and Control
This process entails regular reviews of the risk systems to reduce risk exposure. It involves a continuous review of the human resource, technology, and firm operations to inform a new SCRM strategy for the company.
An efficient SCRM strategy ensures that a company and its partners deploy effective measures to protect goods in transit. In this respect, supply chain security is important to prevent theft or merchandise damage. A streamlined SCRM strategy helps avoid the loss of goods and unauthorized intrusion of consignments. It includes measures for physical security, access controls, and staff training to secure cargo shipments. The major strategies used include:
- Physical security – suppliers and importers employ measures to prevent unauthorized access to shipments stored in warehouses (Iwan 18). Most warehouse facilities have physical barriers, cameras, and alarms to deter unauthorized entry into the facilities.
- Access controls – firms, such as HP, use authentication measures to identify staff and visitors. They use identification badges, uniforms, and biometrics to screen visitors and employees.
- Education and training – organizations train staff on security and safety procedures to prevent loss due to theft or natural disasters. Other firms have incident reporting mechanisms to detect and respond to risks in a good time.
- Procedural security – most companies have security measures or policy guidelines for handling/receiving and transporting shipments to the final destination. For example, DHL uses shipment routing to protect their merchandise and ensure timely delivery of goods to their supply chain partners.
SCRM Recommendations for Practitioners
Eliminating systemic globalized SC risks requires a multi-pronged approach that brings together all stakeholders, including governments, transport/logistics firms, customers, and border control officials. Based on the analysis, the following five recommendations have been suggested to practitioners.
- Interagency collaboration – geopolitical SC risks can be avoided through an interagency collaboration involving governments, corporate actors, and other stakeholders. Adopting standardized assessment tools can help eliminate risks associated with ‘customs delays’ and clearance.
- Integration of transport risks into SCRM strategy – enterprises should incorporate transport/shipment risks into risk management. Transportation risks constitute a major threat to the efficiency of supply chains. Therefore, an organizational SCRM strategy that evaluates routing and timing can help reduce costs and losses related to theft or damage.
- Strengthening SC networks – an effective SCRM strategy should include the entire supply chain elements, i.e., upstream and downstream actors. Strong relationships and feedback systems in a network involving firms, suppliers, customers, and governments can help detect and eliminate risks.
- Enhanced risk visibility – exchange of information between SC partners can create better responses to risks. Also, systemic disruptions within SC networks can be prevented through collaboration between firms, customers, and suppliers.
Faisal, Mohd, Dhaki Banwet and Ravi Shankar. Supply chain risk management in SMEs: Analysing the barriers.” International Journal of Management and Enterprise Development, 4.5 (2007), 588-607. Print.
Iwan, Vanany. “Supply Chain Risk Management, Literature Review, and Future Research.” Journal of Information Systems and Supply Chain Management 2.1 (2009), 16-33. Print.
Manuj, Ila and John Mentzer. “Global supply chain risk management.” Journal of Business Logistics 29 (2008): 133-155. Print.
MetricStream 2013, Supply Chain Risk Management (SCRM) and SCRM Process, 2013. Web.
Tang, Chin. “Perspectives in supply chain risk management.” International Journal of Production Economics 103.1 (2005): 451–488. Print.
Tarabori, Jim. Supplier Collaboration: The Game Changer in Supply Ecosystem, 2011. Web.
Appendix 1: Risk Management Framework