Principles And Strategies Of Effective Supply Chain Risk Management

Principles in supply chain risk management

Supply chain risk management is essential because it helps to maintain the delivery of important goods and services. It is also important to address unforeseen events that are beyond the control of risk managers (Abidi, de Leeuw & Klumpp 2014). Therefore, supply chain risk management plays a significant role in protecting the customers and ensure an organization’s reputation is maintained. Besides, it helps to build a credible shareholder value, increase profitability and maintain a reputation in the private sector (Ali & Shukran, 2016). Supply chain risk management enables an organization to manage those risks that are often over and above the risk from internal delivery.

Managing risks in supply chain involve the risks of suppliers closing business operations when the business is not performing well and problem as a result of substandard goods. The main important issues that supply chain risk management addresses include quality, financial factor and quality. Supply chain risk management is becoming a significant topic as a result of increasing international markets and complexity in the supply chain management (Chang, Ellinger & Blackhurst 2015). Further, these risks are enhanced by the relationship between markets, suppliers and the nature of data flow and information processing. The public sector spends huge sums of money with suppliers on services and goods for purposes of enabling various governments to meet their obligations and policies (Freise & Seuring 2015). Through effective management of such risks related to these supply chain is significant in helping various governments to deliver services (Chopra & Sodhi 2014). Supply chain risk management is equally important in the private sector. Various organizations often apply a broad range of risk management strategies based on their nature, size and complexity of the business.

There are several principles that are used in risk management such as risk cannot be managed, if they cannot be measured (Fredriksson & Wänström 2014). For this reason, it requires careful analysis of goods and services that are being delivered to the customers. Different aspects of risk need to be addressed separately depending on their nature and impact on the business. Risks are bound to be complex and the approach taken needs to reduce the complexity nature of the problem. In most scenarios, the approach to mitigating risks associated to supply chain involves identification of potential risks; ascertain the likelihood and impact of the risk and developing a framework towards addressing the risk (Ganguly 2013). A good risk management strategy will factor the cost of addressing the risk against the cost of not taking action towards mitigating the risk. There is need to manage potential risk in the supply chain because attempts to eliminate all the risks would be inefficient and expensive (Ghadge, Dani, Chester & Kalawsky 2013). A risk in supply chain change over time, therefore, mitigating a particular risk requires consideration of a wide range of information sources for purposes of updating the risk management process.

Strategies Used

Several key strategies are used to mitigate risks in supply chain management. The first strategy to risk management is to avoid the risk and only undertake the risk when the activity is significant. Avoidance of risk occurs when the risk related to an operation in a particular product market is considered unacceptable (Hou, Wei, Tian & Liu 2015). This strategy is often related to products markets or suppliers as well as customer organizations. If a supply chain is deemed unreliable, the organization may decide to drop the products, suppliers and markets (Kiessling, Harvey & Akdeniz 2014). It is important to address the risk through minimizing the impact and probability where necessary. Various organizations may decide to control contingencies arising from several sources as opposed to passively mitigating uncertainties as a result of normal operations. A majority of organization attest to using control as a strategy to manage supply chain risks. Various scenarios of control in supply chain include increased stockpiling, vertical integration, storage and imposing contractual requirements (Li, Chen & Jia, 2013). The cooperative approach towards mitigating risks involves a joint agreement between relevant stakeholders as opposed to a unilateral mechanism to mitigate risk in the supply chain. The significance of this approach is to improve the supply chain visibility for purposes of sharing important information on exposure to various risk sources (Lockamy,Archie, I., II 2014). This form of strategy towards addressing risks ensures sustainability and commonly used among key suppliers. The flexibility approach towards mitigating supply chain risk enhances the responsiveness by ensuring the predictability remains constant. This approach is normally used where companies are reluctant in decision-making or shipping a product to a particular destination (Punniyamoorthy, Thamaraiselvan & Manikandan 2013). The reluctance in decision-making reduces the dependency of an organization and increases the ability of a company to other areas such as disruptions of demand and responding to other variables.

Flexibility is also involved in multiple outsourcing as well as localized sourcing. Besides, managing risks involves spreading the risk through various forms such as taking an insurance cover. Accepting risks is also an important strategy especially where an organization does not take insurance cover for low capital goods which would be effective in reducing the cost of insurance.

To manage risks, it requires both capacity and capability which involves providing the right skills and training that is required to manage supply chain risks (Santosa, I.B.D.Y., Djatna & Arkeman, 2015). Mitigating risk strategies in the supply chain have to be analyzed from the perspective of risk drivers.

Capacity and capabilities

This may result in the building of several supply chain trade-off decisions such repeatability versus unpredictability where the trading benefits of repeatable processes over the cost of a lack of flexibility. Other decisions involve the lowest bidder versus the known supplier, centralization against dispersion in production and distribution as well as collaboration versus secrecy involved when sharing information. Addressing trade-off decision is a significant issue among supply risk managers which implies that strategies are designed for purposes of balancing compromise measures. For instance, holding a strategic emergency stock is considered important especially in cases of extreme disruptions. It is also significant in dual sourcing as a strategy where offshore suppliers depend on the bulk of procurement. However, there is often difficulty associated with the implementation of such strategies (Vilko, Ritala & Edelmann 2014). In addition, implementing a dual sourcing strategy where the local suppliers are offered a small fraction is also considered as a daunting task. Therefore, an effective risk management strategy does not require the elimination of risk but providing a timely access, strategy and circumstances which require mitigating risks proportional to the level of risk by involving governance and appropriate capabilities and resourcing.

Reference List

Abidi, H., de Leeuw, S. & Klumpp, M. 2014, “Humanitarian Supply Chain Performance Management: a Systematic Literature Review”, Supply Chain Management, vol. 19, no. 5, pp. 592-608.

Ali, I. & Shukran, K. 2016, “Managing Supply Chain Risks And Vulnerabilities Through Collaboration: Present And Future Scope”, The Journal of Developing Areas, vol. 50, no. 5, pp. 335-342.

Chang, W., Ellinger, A.E. & Blackhurst, J. 2015, “A Contextual Approach to Supply Chain Risk Mitigation”, International Journal of Logistics Management, vol. 26, no. 3, pp. 642-656.

Chopra, S. & Sodhi, M.S. 2014, “Reducing the Risk of Supply Chain Disruptions”, MIT Sloan Management Review, vol. 55, no. 3, pp. 73-80.

Fredriksson, A. & Wänström, C. 2014, “Manufacturing and Supply Chain Flexibility – Towards a Tool to Analyze Production Network Coordination at Operational Level”, Strategic Outsourcing: an International Journal, vol. 7, no. 2, pp. 173-194.

Freise, M. & Seuring, S. 2015, “Social and Environmental Risk Management in Supply Chains: a Survey in the Clothing Industry”, Logistics Research, vol. 8, no. 1, pp. 1-12.

Ganguly, K. 2013, “A Case Study Approach for Understanding Inbound Supply Risk Assessment”, Decision, vol. 40, no. 1, pp. 85-97.

Ghadge, A., Dani, S., Chester, M. & Kalawsky, R. 2013, “A Systems Approach for Modeling Supply Chain Risks”, Supply Chain Management, vol. 18, no. 5, pp. 523-538.

Hou, Y., Wei, F., Tian, X. & Liu, X. 2015, “Two Revenue Sharing Contracts in a Three-Echelon supply chain with a risk-neutral or a risk-averse retailer”, Journal of Industrial Engineering and Management, vol. 8, no. 5, pp. 1428-1474.

Kiessling, T., Harvey, M. & Akdeniz, L. 2014, “The Evolving Role of Supply Chain Managers in Global Channels of Distribution and Logistics Systems”, International Journal of Physical Distribution & Logistics Management, vol. 44, no. 8, pp. 671-688.

Li, Y., Chen, X. & Jia, L. 2013, “Supply Chain Disruption Assessment Based on the Newsvendor Model”, Journal of Industrial Engineering and Management, vol. 6, no. 1, pp. 188.

Lockamy,Archie, I.,II 2014, “Assessing Disaster Risks in Supply Chains”, Industrial Management & Data Systems, vol. 114, no. 5, pp. 755-777.

Punniyamoorthy, M., Thamaraiselvan, N. & Manikandan, L. 2013, “Assessment of Supply Chain Risk: Scale Development and Validation”, Benchmarking, vol. 20, no. 1, pp. 79-105.

Santosa, I.B.D.Y., Djatna, T. & Arkeman, Y. 2015, “A Supply Chain Risk Management Modeling for Balinese Aromatherapy Product by Pricing Optimization”, International Journal of Innovation, Management and Technology, vol. 6, no. 2, pp. 118-121.

Vilko, J., Ritala, P. & Edelmann, J. 2014, “On Uncertainty in Supply Chain Risk Management”, International Journal of Logistics Management, vol. 25, no. 1, pp. 3-19.

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