Risk Management in Supply Chain Management - Essay Example

?Risk Management in Supply chain management In modern times, organizational success is to effective strategies that are based on the ground realities and are in line with the objectives set. Ever since industrialization and modern times have over taken the organizational environment, the need has been more than ever for improved working structure and no or little mistakes. Under these new rules and procedures, the working environments and their constituent departments are no more individual entities; rather a collective system exists where each member department falls under the umbrella of the organization. These entities are not just limited to the inside ambiance of the organization, rather involves all those elements and factors who have a say and contribution towards the final outcome. Some of the salient features that define the organizational attributes in modern times are reduced inventories, effect supplies, staggeringly reduced cycle times, effective transportation mechanisms, further enhanced communication means both outside and inside the organization and factory. These all have been in practice in many organizations and are another name for successful supply chain management. Supply chain management is termed as chain and structure that defines all important elements of the process which contribute towards the output. In other words all the stake holders who have an impact in either way constitute a supply chain. It can be the transportation, can be the personnel, can be the policy, can be the objectives and can various other variables (Mentzer, 2011). The risks so faced can have various severe negative repercussions on the industry. It can lead to a financial loss, it can lead to mistrust, it can further lead to loss of contracts in severe cases, and most importantly could lead to losing the customers who are considered as the pivot towards the success or failure of any organization since their response and liking level of a certain industry can take any industry either way. Supply chain impacts rest of the industry activities in a direct manner. Supply chain risks identification and ultimately elimination and mitigation can result in better working environment, improved productivity, reduced un certainty, and various other factors that are non beneficial towards the organization. The entire risk phenomena can be split into four components which are: The Risk Sources: Supply Chain Itself: Risk mitigation Strategies: Adverse effects of Risks: Supply chain itself Risk Mitigation Strategies These are the four basic units which constitute a total discipline and each of these must be taken into consideration (Juttner, Peck, & Christopher, 2003). The relationship works in a dependent manner, the first is the source of risk, which falls under the initial phase, and its identification is very vital. This is followed by its adverse affects, and underneath it is the supply chain itself that is faced by the challenges and risks. Finally, the most important factor is the constitution of risk mitigation strategies, which could be prior to the occurrence of event or post event, however risk mitigation strategies are more successful and of more impact if implemented prior to the occurrence. The strategies so made must be able to work in a preemptive manner and should work on the principle of prevention rather than correction. Risks could be either from internal sources, or the external sources, or the organization itself. The last couple of decades saw many events that made all the stakeholders realize that risk management in the field of supply chain has become inevitable and proper actions must be taken to minimize its impact. For this purpose, it has been largely implemented at various organizations of large, medium and small sizes, and more emphasis is being laid on its implementation at every level of industry. For this reason, a more systemic and structured approach is in practice internationally which ensures covering all the areas of that are necessary to be addressed. Level of Risk Assessment: A basic management rule states that resolving an issue demands its identification and realization. Same goes for the risks faced in the field of supply chain management. Understanding the situation at hand and followed by its implications is very important. This gives an idea about how to go about it and what resources to utilize in order to reduce its impact. At times there might be situations where risks and damages are unavoidable, in such cases prioritization should be performed .An effective management tool called Pareto’s Rule (Pettit, 2011) can be used since it allows prioritization and helps finding the ways to resolving them. The Pareto’s rule enables clustering the problems and risks based on their level of severity and impact on the organization, In such cases, the risks which can have larger negative repercussions are handled first, followed by low impact risks. Source: (Supply Chain Risk Management, 2011)(www.meritstream.com/solutions/ supply_chain_risk_management.htm) The chart above provides a holistic view of the supply chain and the risks that may exisit in different forms. The above line explains the supply chain stake holders while the lower list specifies the kinds of risks that could be faced. Large number of surveys and researches have been conducted in this regard to identify the elements which lead to uncertainty and reduced profits and productivity in the organizations, many surveys and research studies have reported that large percentage of the top level managers as well as those involved in any other way termed supply chain risks as a serious threat towards the prosperous working of any organization and they termed it as the factor which could harm the industry more than any other factor associated ( Global, 2006). The need is not just identifying the risks, rather a working strategy should be devised that works to reduce the impact of risks and further efforts must be made to ensure that their occurrences are reduced to a level where they might not happen again, or even if they do so, their impacts are not severe and do not cause any disruptions in the supply process. As the name implies, supply chain is a certain list and chain of entities and stake holders namely suppliers, distribution holders, manufacturers, retail outlets, the components of the organization itself and various others. All of them have an important part to play in ensuring that the chain performs according to the need. They all serve as components of a body which each component complements another. Supply chain management is a separate discipline in itself and it pertains to ensuring that the activities go according to the plan in such a manner each stake holder performs its duties as per specification and requirement. It is the fulfilling of all those steps and conditions which are necessary to be taken into account while running a supply chain. The management of supply chain is also vital for identification of all those factors which could result in certain deviations and hence risks to the system and supply chain. Like any other entity of a management system supply chain is equally prone to the challenges and risks. These risks can be either at interior level or exterior level. Every organization that relies on supply chain for the processing of products and services ensures identification and elimination of risks that evolve related to supply chain management (Handfield, 2007). Supply chain risks can take up any shape; however an effective organization would dig into various aspects of supply chain risks as well as the factors which may contribute towards its harmful effects. Various factors can be attributed to the failure of supply chain and can subsequently be termed as risks, however few of the factors which make up for the threats and risks include: Price uncertainty Demand volatility Lead time reliability Effective means of communication Responsibility identification and realization Supply chain risk can be in shape of delay of the material. This is one of the main threats usually faced by many organizations since all the stakeholders are like extended helping hand to each other and dysfunctional single unit would mean the former and latter components also going down. As it is evident from the name, the chain would be broken. The delay could arise due to number of factors. Many studies and practical implementations have shown that effective supply chain can move an organizational performance chart either way. If its rules and methods are applied according to the specifications than the organizational growth can increase by many proportions, however an unplanned and in appropriate supply chain is bound to damage the entire organization in manner that it directly affects the output and the activities associated with it.( Vanany, Zailani, & Pujawan, 2009 ). The modern times in industrial age are driven by uncertainty and increased competition. Each organization aims to surpass the other in any way possible. In such a scenario, the supply chain effectiveness holds as the strong tool towards the success or failure of any organization. This entity of the organization is directly prone to risks and threats both on internal level and external, and the reason for it is that it is a constituent of both the internal factors inside the organization as well as the external. Therefore whenever a step is taken towards identifying and eliminating the risks and threats faced, both the internal as well as the external factors must be taken in to consideration. The homework on single factor might not be good enough to save the day. Globalized nature of supply chain operations: Supply chain always demanded risks identification and proofing; however with modern rapidness in the entire proceedings, supply chain field requires special consideration and work since the scope of supply chain has grown immensely in recent times and boarders are no more restrictions and stakeholders can be from across the other parts of the world. The means through which the entire chain are being handled, are mostly global and for that reason there is a greater chance of mishap and more need for working on the areas in supply chain which can create any risk. The margin for error and mis-happenings has always been smaller in the field of supply chain since it’s a chain that involves various factors and components and downtime of one element can hamper and obstruct the entire flow, therefore risks cannot be tolerated and risk measurement and prevention should be the top most priority. The global nature of operations provide large number of benefits and have speeded the entire operations, however they have create openings for many risks as well. Managing entities that are spread on a large scale becomes difficult and keeping them synchronized is further difficult a task, hence they pose a direct threat towards the supply chain getting dysfunctional. Internationally, many companies, understanding and realizing the need for effective supply chain as well as the risk mitigation, have implemented a structured mechanism for meeting the challenges that could be faced in the field of supply chain. International players like Nokia and Ericson can be quoted for their organized efforts towards effective supply chain and at the same time proactive implementation of risks mitigation in the incumbent field (Vanany, Zailani, & Pujawan, 2009). Mitigating this risk needs effective transportation system and further synchronization amongst the stake holders. Synchronizing the manner of informing rest of the components of the system about the timing of delivery, the timing of manufacturing and all other factors which are important and should be notified to the stakeholders. This is further followed by realization of the duties and responsibilities knowing that a letdown from their end would mean entire supply chain and ultimately entire organization suffering from their negligence and lack of professionalism. Improper Planning: A generic type of risk that can be faced in the supply chain category is the lack of planning. Planning is of immense importance to any stage of the project and activity under taken in the organization. Supply chain being the direct factor in determining the outcome of any organization, planning serves as the back bone towards the successful working of supply chain, it is being said that failing to plan is planning to fail, this applies aptly to the supply chain category since entire proceedings in this phase are subject to coordinated planning. Through planning, the delivery of material and services can be determined, synchronization can be established, purposeful delays and stoppages can be obtained. Planning is of importance in any area where there are at least two parties involved, since in the case of supply chain the entire organization and its components are involved, therefore planning is of vital value. Planning enables chalking out the activities, determining the roles, setting the deadlines, identifying the routes and procedures that would be followed in the working, hence not planning or improper planning serves as one of the most important risks towards the supply chain and it could result in the failure of entire supply chain mechanism. Improper Forecasts: Another type of risk faced in the field of supply chain is the inaccurate prediction in form of the forecasts conducted. Normally forecasts performed for larger periods are prone to failures in the context of supply chain. To mitigate and nullify this factor, small and intermediate level forecasts must be performed and most importantly, these forecasts must be based on realistic values and estimates, the forecasts so made, must take in to consideration the ground realities and situations and the capacity level of the stakeholders. Forecasting should be conducted on regular basis and should take into account the variable factors that change on daily basis. Inventory: The element of inventory serves as a lethal entity and risk towards the effective supply chain effort. Inventory in general is considered as a sensitive element and its presence in an excessive amount is never preferred. These days with modern and effective management approaches such as Just In Time and Lean management systems that have nearly nullified the need and effectively of inventory(Plenert, 2007) , inventory can be of negative impact towards the supply chain since it would not only hinder the process rather create a deadlock, since supply chain is the name of inflow from outward forces, in such cases, the inside environment should have minimum or no inventory, hence inventory serves as a direct risk towards the fulfillment of supply chain purposes . Vertical integrated models schemes have helped to a considerable degree eliminating and reducing the risks that might be faced in the supply chain department. Natural sources of risk: While mankind is directly responsible for risks in many areas of supply chain management, there are cases where mankind is just a mere spectator, and the causes are beyond its control and its capacity, these are termed as natural courses of risk which can occur and show up in various forms. They can be either in form of the disasters, earthquakes, loss of important personnel in the supply chain team, floods, loss of data and various other factors and causes that are termed as unforeseen and beyond the preventive control of mankind. However , this does not provide an excuse to mankind, in modern day, the organizations in international arena, have come up with back up plans which serve and work in case of natural disasters or any other event that are not predicted and not in control of mankind. Alternatives are being resorted and backup lines are in place in various professional environments which are on standby only for the purpose of coming in action in case of disasters and other various conditions. The natural sources of risk are total contrast to man created risks and those risks can take up the form of governmental contributions, the backing out of the suppliers, and various other socio-political situations which can result in a direct or indirect stoppage of proceedings. Elongated nature of supply chain body: With global trends in practice and large number of stakeholders contributing towards the formation of an entire supply chain body, it serves as a direct threat because handling a large entity is considerably difficult compared to handling of a small unit that has few and limited local players involved in it. Expansion in the partners list increases the margins for profit however they strike as direct threats at the same time. System Breakdown: Risk can be in form of system break down. The scope of system break down is not just limited to the internal system only, rather it can be the breakdown of entire setup. Internal system breakdown could be in form of the pack up of internal elements or disintegration of components inside the organization which results in extinction of the organization, External elements break down could mean the cancellation of the contract and accord and various other hiccups which results in the nullification of contracts and accords. A system breakdown can also happen due to the financial losses and other monetary break downs. There are certain industries which due to their characteristic nature are prone in certain ways. Those ways might not be of any threat and impact towards the other industries. For example the electronic industries are prone to the risks in terms of the short span of product life cycle and its in time delivery. Since technology has a characteristic trait of being very fragile and short lived, therefore delays cannot be afforded at all, and they have a short span of production, therefore long spans are not suited neither to the manufacturers nor the customers who seek those products. The task does not get completed at identification of risk, rather its handling and mitigating is more important, only identification serves the half way success and prevention. Number of solutions can be recommended towards their effectiveness and very generic suggestions and implementation models come in form of the modern management tools and techniques, such as Just in Time approach, Lean Manufacturing, Outsourcing, all these are identified as solutions to minimizing the risks involved in the supply chain discipline. The above statement tools and techniques of modern management systems are designed and crafted in such a way that they work on the lines which are in rightful consideration of the risks and threats that might be faced in this field. The impact of risks in the supply chain area is not limited to certain organizations, rather each organization is equally prone to the risks and organizations of large scale and those that are directly associated with number of stakeholders outside the organization, are more at risk from he threats of supply chain and they are more in need of the implementation of preventive layer. The modern times have changed the way how businesses operate and organizations go about various activities, prior to the industrial revolution and introduction of technology and scientific methods, large volume based operations were in practice which invoked direct risks in the category of supply chains. Automation, and fast communication means have reduced this risk to some percentage, however in time delivery and keeping intact at both ends is still the basic rule of the game in supply chain management. The globalized nature of organizational operations have strained the margin for mistakes at the same time they have brought about improvements in the category of supply chain handling, it has introduced the concept of more professional international level stakeholders, they have allowed creation of more options compared to the past. Use of Supply chain Tools and Techniques: Risk mitigation can be made possible through use of appropriate tools and techniques. Supply chain mapping enables identifying risks; further critical path method can also help reducing the occurrence of any risk. This method allows identification of risks and weak lines in detail and allows reaching to those areas that are directly vulnerable to threats and risks (Wu & Blackhurst, 2009). Need for effective Communication channel: Communication serves as the basic towards success of any project and organization. The importance of proper communication cannot be denied in the field of supply chain. Communication serves as the bridge between two entities and especially amongst those that are on both sides of the organization that is inside and outside. Therefore risk mitigation also requires proper communication means. This variable reduces the chances of mishaps and un desired situations to large degree. Backup Plans: Having identified the factors which contribute towards the risks, there is a need for creating a backup line which serves as the second tier option in case of any mishap and unforeseen situation. The backup plan should be focused on ensuring the business continuity, it must ensure that no matter how severe the damage and risk, the main working of the industry must not stop and should be operational on alternate lines. The risk management discipline at times costs considerable amount, however it must be noted that the amount invested results in saving the face of organization and multiple times the damages that might incur in form of any risks taken. The remedial action plan should be based on structuring the industry working environment in such a manner where it is being ensured that such threats and others of similar nature do not repeat in future. Many industries in Japan suffered due to the natural disaster that came along recently, Toyota motors had to plan intensively to meet the challenges faced in form of supply chain disruption due to natural calamity that struck the peninsula. Toyota suffered large amount of losses due to unpreparedness for the unforeseen risks from nature (Canis, 2011). Similarly many hurricanes and floods and other natural disasters affect the supply chain management in the manufacturing industries across the United States of America. All these industries have prepared multi tier prevention layer against such risks and ensure that the normal proceedings do not suffer. In modern times, the risk assessment of supply chain related issues has been made integral part of organizational structure and trainings are being conducted in this regard. The knowledge of implementation of skills at a certain level and time period are being spread. The use of right kind of tool and technique is being promoted along with the education of prior knowledge about the situation. Still there is a need for promoting this discipline amongst the medium ranged enterprises who are little aware of its positive impacts and benefits. Bibliography: 1-Canis, B. (2011). Motor Vehicle Supply Chain: Effects of the Japanese Earthquake and Tsunami. DIANE Publishing. 2-Global, F. (2006). The New Supply Chain Challenge : Risks In Global Economy. FM Global. 3-Handfield, R. B. (2007). Supply Chain Risk Management: Minimizing Disruptions in Global Sourcing. Auerbach Publications. 4-Juttner, U., Peck, H., & Christopher, M. (2003). SUPPLY CHAIN RISK MANAGEMENT. International Journal of Logistics : Research & Applications, Vol. 6, No. 4, 2003, 197-210. 5-Mentzer, J. T. (2011). Supply Chain Management. Sage Publications. 6-Pettit, J. (2011). Strategic Corporate Finance: Applications in Valuation and Capital Structure. John Wiley & Sons. 7-Plenert, G. J. (2007). Reinventing Lean: Introducing Lean Management Into the Supply Chain. Butterworth-Heinemann. 8-Supply Chain Risk Management. (2011, July). Retrieved from MeritStream: http://www.metricstream.com/solutions/supply_chain_risk_management.htm 9-Wu, T., & Blackhurst, J. (2009). Managing Supply Chain Risk and Vulnerability: Tools and Methods for Supply Chain Decision Makers. Springer. 10-Vanany, I., Zailani, S., & Pujawan, N. (2009). Supply Chain Risk Managment. Int’l Journal of Information Systems and Supply Chain Management, 16-33. Read More