How risk management in supply chains affects supply chain performance? Judit Nagy assistant professor. Corvinus University of Budapest

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How risk management in supply chains affects supply chain performance?

Judit Nagy assistant professor

Corvinus University of Budapest

Lóránt Venter1 PhD student

Corvinus University of Budapest

Abstract

Supply chain management is a well-known and intensely studied field of management science. Our aim is to construct and test a model which summarises that besides the tools adapted to manage information flow, materials flow and costs and performance in supply chains to achieve high overall performance, managing risks is also inevitable. Supply chain management tools are to improve the efficiency of information sharing between supply chain participants (e.g. EDI) and to smooth materials flow carried out by the parties in collaboration (e.g. continuous replenishment, cross-docking). Cost management and performance assessment tools aim to explore the costs and profit realised by the cooperating companies as well as the entire supply chain. All the tools adapted either at a company or on supply chain level, strive to enhance the overall performance of the supply chain. The performance of a supply chain can be assessed by the value created for the end consumer and by the profit the partners realise. However, companies and supply chains adopt tools to manage the different flows, the way they face and handle risks coming either from the system or from the surrounding environment has a key influence on the performance achieved.

When constructing the research model we try to find and verify the linkage between the tools supply chains use for coordination and for managing risks and the performance achieved. Keywords: supply chain management, risk management, supply chain management tools

1 Corresponding author. Corvinus University of Budapest, Department of Logistics and Supply Chain Management. 1093 Budapest, 8 Fővám tér. +36 1 482 5226

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Introduction and research aims

The paper presents a research proposal which aims to discover the linkage between the performance of the supply chain and the tools used for managing the entire chain as well as risks. We have constructed a research model which indicates that the type of product (Fisher, 1997) and consequently the type of the supply chain determine the risks emerge in supply chain operations. In our concept, companies use different tools to manage the supply chain. They are using tools help to share information (EDI, computer-aided ordering, barcode, etc.), supporting the materials flow (continuous replenishment, cross-docking, vendor-managed inventory, postponement) and evaluating costs and performance realised by supply chain partners (activity-based costing, supplier and customer assessment). Companies in the different operational environment also use specific tools to handle risks. In our model (see Figure 2) we suppose that the tools adapted for managing the operations of the chain are sometimes also appropriate for managing risks, and we also indicate that the levels of application of tools as well as the variety of tools determine the performance the supply chain achieves. So our hypothesis is that the more sophisticated is the toolbox the companies used in supply chain and risk management the higher performance they achieve.

The aim of the research is to test the research model and the hypothesis. To achieve confirmation, we are intended to use a double methodology. First, we carry out interviews with company practitioners, to test the relevancy of the research model and question. We target two different industries traditionally using different tools for supply chain management and facing with diverse risks. We organise interviews in food and automotive industry asking two-two practitioners to tell us their opinion. After modulating the model (if necessary) we start the second phase of the research: the quantitative phase. In this phase, we are going to edit a questionnaire which aims to reveal the practice of Hungarian companies in supply chain management, the risks they face with, and the tools they use in coordinating the chain and the risks.

Literature review

Supply chain management is a well-known management concept which has a long research history (Mentzer et al, 2001; Lamming et al., 2001; LaLonde & Masters, 1994). We interpret supply chains as series of value creating processes spanning over company boundaries in order to provide value to the end consumer (Chikán, 2008). Supply chain management is the conscious management of supply chain processes in order to make supply chain participants achieve a higher competitiveness (Gelei, 2003). In our concept the product manufactured in a supply chain has a key role in what kind of risks emerge. Therefore we apply Fisher’s (1997) well-known theory about product (functional-innovative) and, on this basis, supply chain classification (physically efficient, market-responsive). We also believe that the supply chain risk management practice of different organisations influences the tools supply chains use to avoid risks. In our paper we define supply chain risks and their components by generally accepted definitions in management (Dowling & Staelin, 1994; Shenkir & Walker, 2007; Zoltayné, 2005). Defining risk and uncertainty has always been a tough call, Zsidisin et al (2004, p 397, in Ritchie & Brindley, 2007) provide a feasible definition that “risk is perceived

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to exist when there is a relatively high likelihood that a detrimental event can occur and that event has a significant associated impact or cost”. Zsidisin and Ritchie (2009) also provides a definition for supply chain risks. On this basis we can state that supply chain risk is a potential occurrence of an incident or failure to seize opportunities of supplying the customer in which its outcomes result in financial loss for the whole supply chain. Risks therefore can appear as any kind of disruptions, price volatility, poor perceived quality of the product or service, or any event damaging the reputation of the firm.

Performance of the supply chain

In a supply chain the performance of an entity can be measured individually by its direct cooperating partners (direct suppliers or customers) based on the metrics defined by the parties, but it is more interesting to evaluate the overall supply chain. Overall supply chain performance can be measured by the value represented by the product or the service manufactured and offered for the end consumer, as well as the profit achieved by and distributed amongst supply chain members. Based on Beaumon (1999) and Gelei (2006) the customer value consists of (1) the perceived benefits the customer experiences during consumption and which come from the quality of product and the linked services and (2) the perceived sacrifice consumer has to make to capture the product, so price (cost) and the life cycle costs emerging during the life cycle of the product. Profit is the reward for the efficient common activity of supply chain participants covering the costs and allowing sustainable operation.

Based on the above presented concept of customer value we interpret supply chain performance through the following metrics:

Share of supply chain-related costs / total revenue

Level of final customer satisfaction (no. of complaints / total no. of orders fulfilled)

Customer service level (on-time delivery, accuracy in volume, frequency of quality problems, responsiveness to changes in customer needs).

The selected dimensions of supply chain performance will be evaluated by the questionnaire we are intended to apply in second research phase. The survey will make it possible to find the linkage between the level of performance and the tools the companies use for managing the supply chain and the risks.

Risk management in supply chains

It is commonly assumed, that conscious risk management in organisations overlapping all processes and projects are able to mitigate the negative effects of risks and boost success and profit at the same time, and thus risk management should be linked with firm performance

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regarding the specific objectives of processes and projects (Gaudenzi, 2009). In a supply chain context risks span over organisational borders (Svensson, 2001). According to this approach, companies have to recognise threats generated inside and outside their borders as well as distinguish between them. Risk can be captured in different contexts, namely materials flows, information flows and the cost and performance assessment processes of various interdependent organisations and so risk affects the overall supply chain performance. But because these factors arise also in different functional areas within companies, the risks can be interpreted in several ways. Based on a thorough literature review (Dowling & Staelin, 1994; Mason-Jones & Towill, 1998; Jüttner, 2005; Johnson, 2006; Thun & Hoenig, 2008), we formulated some easily understandable and comprehensive categorisation of supply chain risk management tools. In our recent concept we outline two dimensions categorising the tools in supply chain risk management. The first dimension takes into account the channel through which the risk appears. In this dimension we distinguish between intra-firm, supply chain and

beyond supply chain risks. The second dimension concerns the supply chain risk management

process stage, in which the tools are applied. Here we differentiate identification, evaluation and management stages. We have to note that there are other classifications of supply chain risk management tools as well. Companies can prepare themselves to the management of some risks proactively, but there are risks that can be handled only in a reactive manner. Therefore the cause-oriented and the effect-oriented (see Wagner & Bode, 2009 for further description) supply chain risk management practices and tools can also be differentiated. Methods we examine can also be classified also by the purpose of their application: to avoid,

reduce, transfer or accept the risks affecting the supply network (Mullai, 2009).

Tools for managing the supply chain

The performance realised is highly influenced by the way the supply chain is managed. Usually there are management tools companies adapt to manage different kinds of processes within a supply chain, such as materials flow, information flow and cost and performance (Varma, 2006; Van Goor, 2001; Lee, 2000; Nagy, 2010). In our concept, we believe that there are special supply chain risk management tools, as well as tools belonging to the above three categories which can serve as supply chain risk management tools, too. The range of tools companies use reflects to how consciously the supply chain is managed, and conscious adaptation of tools also influence performance.

The first group of tools is intended to harmonise information flow between supply chain members. According to Cigolini et al., (2004) the toolbox of information sharing affects the application of all other supply chain management tools. An elementary part of the information system is the corporate or inter-firm ERP system, which may appear in the form of an on-line connection between partners (based on EDI or the Internet). Its role is to ease the information and document flow between companies; e.g. in standardised form it is making the data transfer more effective and decreases the time requirement of (order) processing. Standardised information sharing supports punctuality and better control.

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Automatic order transfer solutions (Computer-Aided Ordering) check the decreasing inventory level at the customers’ point of sales and send notices to the central warehouse for replenishment. Product identification systems (barcodes, RFID) help the flow of product information and support tracking and tracing throughout the supply chain. Common operated or shared databases make the information accessible to all members who are necessary to forecast, planning and operating the chain. The more accurate and up-to-date the information is, the more the chain is capable of adapting to demand changes. Distributing the exact demand data of end customers helps to decrease the inventory level in the supply chain and makes a positive impact on the bullwhip-effect (Disney & Towill, 2003). However, it has to be noticed that the information exchange between supply chain partners has to be mutual, selective and valid, but not necessarily symmetric (Lamming et al., 2001).

In smoothing materials flow, many activities of the operations have to be involved. The basis of optimising materials flow in the supply chain is a clear assortment of goods. Composition of the right assortment allows providing the goods that meet most of the customers’ needs, and they buy the most frequently, which results in a higher turnover and increased profit. One of the most important areas of materials management is inventory handling in the supply chain, because this is a typical source of redundancies and waste. Many solutions have evolved to handle inventories within the supply chain from vendor-managed inventory (VMI) to those systems where suppliers individually and automatically decide about replenishment of their customers’ warehouse according to the POS-data shared (Continuous Replenishment). Forwarding materials within the supply chain is important as well. This not only covers the planning and optimisation of costs of transportation, but application of specialised facilities in which the bulk of products can be broken down, as well as a quick order-picking is carried out to match customer orders, and goods can be transmitted quickly in smaller packages (cross-docking) (Gelei, 2008).

Cost and performance assessment is interpreted by Cigolini et al. (2004) not only for counting

costs and estimating overall performance, but supplier assessment as well, which can also be extended to customer assessment. Assessment systems can be applied both on the supply chain level and on the level of dyadic partnerships within a supply chain. Cost management systems spanning over the supply chain partners make it possible for managers to examine the total supply chain costs as well as the economic performance of individual firms. Before applying such a system it is very important to discover most of the costs related to the supply chain operations and their trade-offs. The most frequently adopted tool for this is Activity-based costing. Supplier and customer assessment tools are necessary to map the logistical and financial performance of supply chain partners.

Although globally popular paradigms such as lean management, just-in-time delivery or global sourcing can cause increased exposure to supply chain risks (Zsidisin et al, 2008), the specific tools listed above can also moderate the disadvantages involved in these approaches. Hence supply chain risk management tools concern both the above mentioned practices which can (even partially) be used for managing risks, there are also risk-specific tools (supply chain risk mapping, risk-adjusted revenue analysis, etc.) used by firms individually or together to

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achieve supply chain level results. Linkage and structure of tools used for coordinating the supply chain and/or managing risks is summarised in Figure 1.

Figure 1. Structure of tools applied in supply chain and risk management

All the tools are adopted by the supply chains in order to achieve a higher performance and exploit the benefits of strong coordination. However, neither a company nor a supply chain can be successful without taking care of risks originating from inside the firm or from the environment, and trying to manage it. Managing risks in a supply chain and the tools adopted for it, has a huge effect on the performance achieved.

Research model

Based on the literature review, we use the concept of supply chain management tools and admit their role in supply chain performance. At the same time we suppose that the tools adopted to discover and manage risks in supply chains also have an impact on supply chain performance.

In the research model which we have constructed, we indicate that the type of product (Fisher, 1997) and consequently the type of the supply chain determine the risks emerge in supply chain operations. In our concept, companies use different tools to manage the supply chain. They are using tools help to share information (EDI, computer-aided ordering, barcode, etc.), supporting the materials flow (continuous replenishment, cross-docking, vendor-managed inventory, postponement) and evaluating costs and performance realised by supply chain partners (activity-based costing, supplier and customer assessment). Companies in the different operational environment also use specific tools to handle risks. In our model (Figure 2) we suppose that the tools adapted for managing the operations of the chain are sometimes also appropriate for managing risks, and we also indicate that the levels of application of tools as well as the variety of tools determine the performance the supply chain achieves.

Supply chain risk management tools Supply chain management Tools supporting materials flow management Tools supporting information flow

management Tools supporting

cost and performance

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In our framework we assume that direct links exist between the product types and supply chain types, and the emerging risks the organisations face with. Finally, we hypothesise that the more sophisticated is the toolbox the companies used in supply chain and risk management the higher performance they achieve.

Figure 2. The research model

Research methodology

In our research, we differentiate two stages. First we are intended to test the research model in a qualitative way. We make interviews in the food industry which produces traditionally functional products to come across the risks they face and the tools they use in risk- and overall supply chain management. The automotive industry will also be studied to get familiar with the risks of innovative products market and market-responsive supply chains.

Literature review has addressed several questions which we would like to investigate in the qualitative part of our research to determine the current supply chain management background for the quantitative study:

1. To what extent are the supply chain members aware of the operations, the main actors, and the coordination processes of the supply chain?

2. What are the primarily used management tools and practices in the materials flows, information flows and the cost and performance assessment processes of the interdependent organisations?

3. What are the current practices organisations use to consciously manage their risks and how do they consider their application?

Supply chain performance Supply chain management tools Supply chain risk management tools Risks emerging in supply chains Type of product and supply chain

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4. How and on what criteria do firms and their suppliers/buyers judge their supply chain’s performance compared to the industrial average, and to what extent did they achieve growth in comparison with their competitors?

Interviews are carried out during February and March. We try to reach logistics and/or supply chain manager at firms operating in the selected industries, in order to get relevant a picture about the supply chain operations and the tools used for managing risks and the overall chain. The aim of the qualitative phase is to modulate the research model according to the opinions of supply chain professionals. As the research model is completed, we start the second phase of the research, the quantitative phase.

In the quantitative phase we are going to carry out a survey. The aim of the survey is to test the whole research model and the hypothesis, as well as to get an insight into the supply chain management and risk management practice of the Hungarian firms. The survey will be conducted during the summer of 2011.

Summary

The aim of the paper was to present a literature review and a research model based on it. Regarding the literature of tools used for managing the supply chains, the tools applied for managing the risks in the supply chain and the concept of supply chain performance we found that these are quite diverse concepts and nobody has merged them before. To be the first doing so, we formulated a model which indicates that there are tools in supply chains which are used to support information flow, materials flow, and cost and performance assessment which can also support risk management, considering that there are many other specific tools as well which are applied directly in supply chain risk management. Based on this supply chain and risk management tool-concept, we assume that the variety of tools adopted has an effect on supply chain performance. We formulated a hypothesis, too, which we are going to test in qualitative (interviews) and quantitative (survey) ways.

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