Report Risk Management in the Global Supply Chains
Report:Risk Management in the Global Supply Chains
Withthe increased growth in the international market, firms reap benefitsresulting from wide markets, but, remain vulnerable to risksassociated with long supply chains. These potential risks include thedemand, supply and operational risks. The most common factorsfacilitating the occurrence of the stated risks include theenvironmental, technological and economic factors. Some environmentalfactors such as earthquakes have resulted to significant supply chaindisruptions over the past years.
Theprocurement functions in organizations should identify the potentialrisks in the supply chains involving distribution and purchasinggoods through reviewing the organizations’ risk registers. Inaddition, they should analyze the risks, forecast and develop viableplans applicable in the occurrence of risk (Chan, Lettice &Durowoju 2012, p. 45). Some of the methods adopted to mitigate therisks include ensuring the constant supply of goods, properoutsourcing techniques, use of efficient means of transportation andmore.
Asthe businesses participating in the international trade, today,expand, they are becoming more vulnerable to supply chaindisruptions. In risk management, firms ought first to identify thesupply chains risks before developing plans for mitigation of thesame risks. The potential international supply chain risks revolvearound demand, supply and business operations (Sodhi and Tang 2012,p.78). Supply disruptions, demand disruption and operationaldisorders are the most common risks in the global supply chains. Inaddressing the global supply chains, firms should declare theirownership of the risks, identify the risks and prioritize the riskthrough risk valuation. Additionally, they should develop controls,monitor and mitigate the particular supply chain risks.
GlobalSupply Chain Risks
Inan organization, supply disruptions occur when the organization’ssupply chain becomes unable to meet the consumer demands in terms ofthe quantity and quality of the finished goods (Evangelista 2012, p.74). When businesses are expanding, their supply chains expand aswell, increasing their vulnerability to these disruptions in theglobal market. Many companies incur losses when supply disruptionsoccur (Kotabe 2006, p. 98). For, example, in 2010, Toyota incurredhuge costs amounting to $ 2 billion in correcting the mistakesfollowing customers’ concerns over faulty brakes (Oxland and Kettle2013, p. 1).
Ata global scale, developing firms should appreciate that their goodscan once fail to satisfy the consumers. As a result, they shouldaddress the potential risk by ensuring efficiency in production inorder to supply high quality goods. Organizations should appreciatethat, in case of supply disruptions in their structure, somecompetitors might benefit, and as a result, they would be lesscompetitive in the market (Evangelista 2012, p. 74). Take the case ofApple Inc., which supplies devices that usually have a short lifespanin offering service. If consumers realize their phone devices havedefects, they will go for Nokia and Samsung. Therefore, Apple Inc.would lose its customers to the competitors due to supply of lowquality mobile devices.
Theunexpected fluctuations in demand are also potential risks ininternational supply chains. Longer supply chains both operatinglocally and globally is usually vulnerable to fluctuations in demand(Kersten 2011, p. 67). Therefore, organizations should be aware ofthe possible disruptions as they elongate their supply chains (Wu andBlackhurst 2009, p. 65). For the past five years, Apple Inc. has beenobserved to obtain its large source of revenue after releasing a newproduct. Therefore, Apple Inc. increases its risk to make losses ifthere are repeated demand fluctuations among its customers (Wu andBlackhurst 2009, p. 70). Organizations should identify the possiblefactors that can influence the occurrence of fluctuations in demandfor their products. The most appropriate approach to this issueinvolves assessing whether a firm can be able to constantly supplygoods to the consumers or not (Kouvelis 2011, p. 56). Then, firmsshould find out the best quantity of goods that they can afford tosupply in the short run and long run. Such evaluations would achievestreamlined supply of goods that would alleviate the anticipateddemand fluctuations (Kouvelis 2011, p. 56).
Politicaland economic changes can facilitate the occurrence of demandfluctuations where governments put trade restrictions or get involvedin conflicts. Demand shocks usually at such times where consumers buygoods in large scale and at other times at small scale. Firms shouldconsider such economic factors while identifying the potential risksin the global market.
Anysignificant supply chain disruptions resulting from the occurrence ofdemand, supply and operational risks threatens the production andsupply of goods. Evaluation of these risks is very important becausein occurrence of a risk, firms cannot produce goods or sell them.Firms ought to be keen in addressing such issues to avoid theincurring high costs, reduction of market share, reduction ofrevenue, as well as, damages on the credibility that the firm haswith the stakeholders.
Operationaldisorders in the global supply chains also forms potential risks fororganizations operating in large scale. They are commonly known asoperational risks (Kersten & Bemeleit 2006, p. 78).Transportation problem is an example of an operational risk thatimpacts the supply chain itself impairing supply of goods andservices on time. In general, the operational risks affect the supplyof finished goods or their parts within the specified requirements ofcost, time and quality. In any supply chain, transportation isessential in ensuring the goods reach the final consumer (Kersten&Bemeleit 2006, p. 79). In a hypothetical supply chain involvinga producer, agents, distributors, wholesalers, retailers and finalconsumers, transportation, as well as, communication are the mostimportant facilitators of smooth supply chains (Kersten &Bemeleit2006, p. 84). Therefore, in case there are failures in transportationsystem while goods are on transit, the goods can deteriorate and failto be delivered on time.
Theprocurement functions in firms should also identify the possiblefactors that can cause the occurrence of operational risks.Environmental and technological factors are the most common factorsthat contribute to transportation and communication system failures(Choi and Cheng 2011, p. 89). Some natural disasters, for example,earthquakes and tsunamis, can influence the supply of goods byinterrupting the shipping activities. Firms should identify theuncontrollable environmental factors and the controllable ones inorder to establish appropriate procedures for achieving smooth andconstant supply of their goods and services (Choi and Cheng 2011, p.90). Environmental factors have an impact over supply chains, forexample, in 2004, the Boxing Day Tsunami in the Indian Ocean affectedmany shipping activities that were taking place at that time (Oxlandand Kettle 2013, p. 2). More examples include the Haitian Earthquakein 2010 that disrupted the transportation and communication systemsat that time.
Sincemost companies have increasingly adopted the information technologiesin supply chain management, they increase their vulnerability tosupply chains disruptions. In case the information systems sufferfrom technical failures, communication is affected, which means,either the services and goods will not be delivered on time or theywill go bad while on transit.
Mitigationand control of the potential international supply chain risks
Theprocurement functions can reduce the serious effects posed by supplychain risks in two dimensions. They include mitigation of risksarising when they are buying materials and mitigation of risksoccurring during the supply of their goods and services (Sodhi andTang 2012, p.79). Procurement functions are essentially meant tocontrol the distribution of goods, purchase of materials and controlof internal functions of the company (Sodhi and Tang 2012, p.79).Most firms today are outsourcing the raw materials and parts to aidin manufacturing. Outsourcing is being adopted in many firms today,in order to lower the production costs and reap benefits resultingfrom the same practice (Szymczak 2013, p. 140). The developing globalsupply chains have facilitated outsourcing, which increases thefirm’s vulnerability to potential risks associated withinternational supply chain. Therefore, procurement teams must developstrategies aimed at mitigating these potential risks (Brindly 2005,p. 94).
Accordingto a report prepared by the Aberdeen group, in 2009, 58 percent ofthe companies that participated in outsourcing incurred hugefinancial losses due to supply chain disruptions (Szymczak 2013, p.143). The key undertakings in mitigation of risks involveforecasting, identifying and managing them. In minimizing theexposure to risk, the procurement team should define the factorsaffecting the global supply chain. Then, they should analyze thosefactors by use of the simulation systems and other planning tools.Firms should always examine the global supply chains even when thereare no alterations in the supply chains (Lan and Unhelkar 2006, p.190).
Thefirms should develop a vision and appropriate approach to theirglobal supply chains. In mitigating risks, firms should not assumeminor signs of supply chain risks as this can lead to huge losses(Kotabe 2006, p. 99). If the company decides to change the supplychange, it should affect the flow of the outsourced materials. Theprocurement functions should also develop a plan with the supplier inorder to streamline the supply chain that involves manyintermediaries.
Theprocurement should critically assess the performance of the globalsuppliers and select the most appropriate suppliers for theirmaterials. They should assess the quality, flexibility and thegeographical located of the suppliers. If the selected suppliersdemonstrate the quality and cost of goods, the firms can reward themaimed at reducing the occurrence of risk in the long run.
Inmitigating risks, the firms should not totally rely on theirsuppliers, but, they should acquire the information managementsystems that are capable of managing the global chain flowsefficiently (Brindly 2005, p. 95). Due to the increasing costs oftransportation, firms can outsource their materials from nearbylocated suppliers. Therefore, companies should change theirstrategies to ensure there is profit maximization through reducingthe transportation costs. Firms, therefore, protects themselves fromsupply chain risk through shortening the supply chains. Despite theincrease in transportation costs, some firms such as the Europeancompanies still outsource their materials from far places. Somecompanies in Europe outsource their materials from South East Asiaand China, which are far places (Khan and Zsidisin 2011, p. 167).
Otherthan that, in preventing many consequences when catastrophes occur,firms should develop a continuity plan despite the losses incurred.Then, they can take insurance covers that would compensate for anyfinancial losses resulting from interruption of business activitieswhen they are implementing the business continuity plan. In this way,they would be mitigating damages caused by the earthquake, tsunami orhurricanes.
Onthe other hand, the firms should address on the potential risks thatare likely to affect their distribution systems either locally orglobally. Firms should not tolerate any minor failures in the supplychain systems as they can lead to complications, which results tohuge losses (Oxland and Kettle 2013, p. 3). The most appropriateprocedure in supply chain management is as outlined.
First,the company should take the ownership of the supply chains andinternal operation. The department involved in the distribution ofgoods and services should also take part in mitigating risks even ifthere are specific risk management functions in that business (Oxlandand Kettle 2013, p. 3). Secondly, the firm should identify the risksassociated with the supply chain systems. The procurement shouldreview the company’s risk registers that would be present in thecompany. In conjunction with other risk evaluators, the procurementshould identify the major risks in the supply chain, as well as, theabilities of the company to manage such risks. Some of the identifiedrisks would include supply, demand and operational risks (Oxland andKettle 2013, p. 3). Here, the group would get involved in planning,forecasting, analyzing the potential risks in the global supplychains, distribution and purchase of materials. In addition, theyshould ensure there is the full vision of the potential risksspeculated to occur in the short run and long run (Olson and Wu 2010,p. 134).
Thirdly,risk valuation, as well as, prioritization should be carried out.Before prioritization, the team should calculate the risks onfinancial value basis. The financial value of risk would be the costof risk *the probability of occurrence of risk. Then the risks shouldbe prioritized. The financial value of the risk assessed would meanthe losses that would be incurred by the business in the occurrenceof risk (Oxland and Kettle 2013, p. 4).
Controlsand strategies should be established in order to reduce theprobability and impact in occurrence of the identified risks. Inmitigating the supply disruptions, the firm can enhance the qualityof goods supplied to the consumer or another producer (Brindly 2005,p. 90). For example, a Californian company supplying assembly partsto Apple Inc. in US can ensure that the quality of those partssatisfies the specific requirements set by Apple. In this way, thebusiness would reduce the supply risks for its products. In managingfluctuation of demand for a certain company’s product, wouldinvolve accuracy in anticipating demand with the help oflogisticians. The company should identify the market trend in thecustomer’s region considering factors such as demand shocks andtrade restrictions (Kouvelis 2011, p. 58).
Thecompany should allocate adequate resources to address such risks. Forexample, a company can keep stock so that in case the customerscomplain of shortages they can supply them, thus mitigating thesupply chain risks (Kersten and Hasin 2010, p. 109). In mitigatingoperational risks, the firm should select the most appropriate meansof transportation so as to avoid delays in supply goods to theircustomers. Also, they can hire companies efficiently transports goodsin order to minimize the costs incurred if the goods deteriorate, forexample, flowers (Kersten and Hasin 2010, p. 110). Some catastrophesand cyber attacks are uncontrollable to the firm, for example,earthquakes and tsunamis. However, if the anticipated risks occur thefirms should develop appropriate business continuity plans to ensurethe running of the business despite the losses incurred.
Inconclusion, the potential international supply chain risks can occurwhen a company is purchasing materials, as well as, distributing itsfinal products. The most common risks likely to occur whiledistributing goods include operational risks, supply risks and demandrisks (Wu and Blackhurst 2009, p. 65). Occurrence of these risksresults to the reduction of revenue, loss in market share and hugecosts in correcting the damage. Economic, technological andenvironmental factors facilitate the occurrence of the stated risks,for example, tsunamis, cyber attacks, economic crises and more.
Inmitigation of the potential risks, the procurement functions shouldfirst identify the potential risks. While identifying the risks, theyshould review the company’s risk registers, analyze the risks andforecast the financial values of the risk, as well as, the lossesthat would be incurred in occurrence of the risk (Chan, Lettice &Durowoju 2012, p. 46). In mitigating the risks, they can allocateenough resources that would ensure minimal or no demand and supplydisruptions.
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