Managing Risk in a Global Supply Chain
Introduction
The supply chain of a globally oriented organization has a great impact on its financial performance (Wagner, Grosse-Ruygen, and Erhun 340-353). It also happens to be one of the areas that faces the greatest risk. Every aspect of supply chain carry some element of risk. There are many challenges in a global supply chain including but not limited to weather, acts of terrorism, natural disasters, environmental compliance, terrorism, regulatory requirements, piracy, quality issue, and security problems (Global Supply Chain Institute). An organization with a global outlook faces a number of risks such as disruptions in supply emanating from global customs, longer lead times, economic instability, foreign regulations, political instability such as civil strife, congestions at ports, and changes in the world economics such as fluctuations in the exchange rates (see Fig.1 below).
Risk Management in Supply Chains
Given the reach and scope of the supply chain, it has been suggested that the path to a successful risk management in a global supply chain begins with the establishment of a formal documentation process for effective and efficient management of risks within company operations and collaboration with other partners (Lavastre, Gunasekaran, and Spalanzani 828-838). Evidence shows that risk management in the context of global supply chain is one of the most discussed topics in conferences. However, an examination of various company’s supply chain risk management SCRM) strategies show that it appears in the bottom list of company priorities. This suggest discussions has not been followed by action. One of the likely reason that has been attributed to this laxity is absence of crisis to stimulate action. Organizations often prefer to adopt ad hoc responses when a crisis happen because most of them are not usually prepared to handle crises.
Impacts of Supply Chain Disruptions
The consequences of supply chain disruptions ranges from mild to severe and impacting negatively on the organizational performance. Studies of the nature of consequences have been carried out in the past. An investigation into the negative consequences of supply chain disruptions revealed three main findings. The first one involve the effect on sales. Companies who have had a supply chain disruption claim that the disruption resulted in a sales dip of 93% with a 33-40% drop in shareholder’s value for three subsequent years. The second finding was on the effect of shares. Research shows that the share price volatility climbs higher by 13.5% high following supply chain disruptions. Finally, the disruptions had an effect on the companies’ income and return on assets (ROAs). Investigations show that while the disruption caused a decline of 107% in the operating income, it resulted in a 14% decline of ROA (Hendricks and Singhal 35-52).
Although the supply chain risks cannot be totally eradicated, there exist strategies on how to identify, quantify, and mitigate them.
Solutions to Supply Chain Disruptions
Tang (33-45) proposed nine strategies for mitigating supply chain disruptions. According to him, supply chain disruptions can be mitigated by employing robust strategies such as postponement, strategy stock, flexible supply base, make-and-buy, economic supply incentives, flexible transportation (multi-modal transportation, multi-carrier transportation, multi-routes), revenue management via dynamic pricing and promotion, assortment planning, and silent product rollover. The following is a detailed description of these strategies.
Silent product rollover
In this strategy, new products are slowly introduced into the market without prior announcement. The idea is to create some unawareness of the specific features of the products that are being introduced into the market. Customers will visit stores only to find that the products they had gone to buy are no longer available in the market. In the process, it is expected that they will choose to buy the products they will find in the market instead of waiting products that are out of stock or products that are in the process of being phased out. Some companies have utilized this strategy effectively. For example, companies that produces a line of products once (no repetitions) such as those in the fashion industry have been found to introduce new line of products silently so that customers find substitutes within their collection of products. In the process, it helps them mitigate disruptions caused by demand/supply disruptions.
Assortment planning
Assortment planning involves manipulation of customer’s choice of product and demand by assortment of products. Products are conspicuously displayed on the shelves with information on their location in shelves, as well as the number of facings of each product. Assortment planning is one of the best strategies for enticing customers to buy products that are widely available in the market when their preferred products are facing disruptions in supply.
Revenue management via dynamic pricing and promotion.
This is mostly applied in selling of perishable products and/or services. The strategy has been used in selling limited seats in air transport when there is uncertainty in demand. This is achieved by dynamic adjustment of ticket price to meet uncertain demand in a scenario which has limited supply. Besides helping to increase revenue earnings, the method also helps in demand management in situations where the supply of a particular service/product is disrupted. It has been reported that Dell once faced supply disruptions from Taiwanese suppliers following an earthquake and had to introduce low-cost upgrade in their products to attract customers willing to buy similar Dell product but with components sourced from other suppliers.
Flexible transportation.
Transportation can be the ultimate cause that is responsible for a snap in supply chain. The idea is to avoid a transportation problem by adopting a flexible approach to transporting supplies. Three methods have been proposed: multi-modal transportation, multi-carrier transportation, and multi-routes.
Multi-modal transportation: this is used to prevent transportation of supplies from coming to a halt when there is a supply when disruptions occur in road air, ocean, and so forth. The idea is to use flexible logistics strategy with various types of transport. One company is reported to have used diverse of modes of transport including ships, trucks, helicopters, vans, rail, bicycles, and ship.
Multi-carrier transportation: supply disruptions can be caused by political instabilities leading to cancellation of landing rights. A times, strikes can paralyze supply deliveries. One method that has been employed by supplies transported by air is to switch carriers quickly in the event of supply disruption. For example, one can switch from Korean Cargo to KLM Cargo or Air France Cargo, or any other allied airline.
Multi-routes: A combination of port congestion and traffic jams can conspire to slow down and disrupt deliveries. As such, companies can adopt other sea routes or a combination o sea routes and rail transport, and so forth.
Economic supply incentives
Governments have used economic supply incentives to increase the number of suppliers in the market for critical supplies such as drugs. The increased entrants of suppliers enables the buyer (in this case the government etc) to have the luxury of switching suppliers. Such incentives include pre-negotiated future buying price, buying back of unsold stock, and looking for other markets.
Make-and-buy
This involves the decision to manufacture certain products in-house and outsource manufacture of other components to other suppliers. For example a company that manufactures Deskjet printers in Korea can produce 25% in-house and outsource manufacture of the remaining 75% to a company in Malaysia.
Flexible supply base
Sourcing a product from one supplier may enable the company to enjoy discounts and decreased supply management costs among others However, sometimes, the disruptions encountered from one supplier can be too costly that the benefits enjoyed from that single supplier lose meaning especially during fluctuations or disruptions. To avoid this, a manufacturer can have its two branches working together to manufacture excess stock to compensate a disruption that affect another branch.
Strategic stock
This involves storage of some inventories at certain strategic locations in warehouses, distribution centers, and logistics hubs to take care of supply disruptions. For example, a car manufacturer can choose to deploy some inventories at strategic locations which are shared by various distributors. In a disruption, the distributors share the inventories.
Postponement
It a strategy that utilizes concepts of product or process design including operations reversal, commonality, modular design, and standardization with an aim of delaying the point of product differentiation. This strategy allows firm to produce a generic product based on a general demand of all the products with the generic product being customized later. During a disruption from its major supplier, the postponement allows a company to reconfigure a product quickly and source components from the other company’s branches or other suppliers (Chopra and Sodhi). For example, the product can be reconfigured to conform to a component supplied by other manufacturers.
References
Chopra, S., & Sodhi, M. S. (2012). Managing risk to avoid supply-chain breakdown. MIT Sloan Management Review (Fall 2004). Retrieved from: http://sloanreview.mit.edu/article/managing-risk-to-avoid-supplychain-breakdown/
Global Supply Chain Institute. (2014). Managing Risk in the Global Supply Chain. University of Tennessee, 2014. Retrieved from: http://globalsupplychaininstitute.utk.edu/publications/documents/Risk.pdf
Hendricks, K. B., & Singhal, V. R. (2005). An empirical analysis of the effect of supply chain disruptions on long‐run stock price performance and equity risk of the firm. Production and Operations management, 14(1), 35-52.
Lavastre, O., Gunasekaran, A., & Spalanzani, A. (2012). Supply chain risk management in French companies. Decision Support Systems, 52(4), 828-838.
Tang, C.S. (2006). Robust strategies for mitigating supply chain disruptions. International Journal of Logistics Research and Applications: A Leading Journal of Supply Chain Management, 9:1, 33-45
Wagner, S. M., Grosse-Ruyken, P. T., & Erhun, F. (2012). The link between supply chain fit and financial performance of the firm. Journal of Operations Management, 30(4), 340-353.
