Risks Implied in Supply Chain Management
By remaining in the context of an environment in which natural and man-made catastrophes shows to be increasingly common, the issue of supply chain risk has enforced itself onto the corporate agenda of all the world’s largest multinationals.
The susceptibility of supply chains has been aggravated over the last three decades by strategies aimed at keeping labor and inventory costs to a minimum. Lean inventory strategies; centralized distribution; just in time delivery schedules; remote, off-shored production; sourcing from developing countries and multiple tiers of suppliers have all improved companies’ bottom lines, but not without cost. The fact that many of these costs are deferred until a disaster results in a supply chain failure means that many decision makers treat them as if they do not exist. This is not the case.
There are two categories which are Internal and External to the firm but internal to the supply chain network, these are largely under the domain of the company, but External to the network is mostly outreach to its control, however better information can improve readiness for disruption.
In terms of supply chain, the latter two categories are relevant as they threats which specifically affect the scattered networks in which most companies in the contemporary business scenario operate.
This must not to think that internal risks of process and monitoring do not influence upon the broad way supply chain. One main issue arises from a lack of visibility up and downstream; for instance, a large order not handled by a vendor could create a bottleneck disrupting supply. Lack of shared information means that several corporations are forecast-driven, not demand-driven, and similarly find it hard to react frequently to changing market conditions. Increasing inventory levels derives risks of redundancy, defects, compressing, financing etc but cure external risks.
The way by which supply chain risk can be quantified by:
Risk = Probability (events occurring) x Severity (negative impact on business)
Three Risk Mitigating Strategies
When talking about risk, manufacturers usually adopt one of three strategies, each of which involves a cost element:
1 Inventory Management
When going to quantify the impact of supply chain disruption, one technique can be to assess the probability of various events taking place.
One project undertaken for a consumer packaged goods manufacturer attempted to do this by first categorizing the major threats into three classes:
• Natural calamities.
• Outer disruptions (such as failure of);
• Inner disruptions (such as explosive/fire or IT failure).
In a very multifaceted situation, involving the physical interaction of human, technological and environmental factors, it can be not easy to know the reasons behind an event which causes supply chain disruption.
(Lee, Preston and Green, 2012) has classified risk into three categories:
1 Black Swans: it is known as ‘unknown unknowns’ which is not possible to forecast but which have the latent to do huge vulnerabilities to economies and businesses. If doing planning for an event is not possible, it is likely to build optimum resilience.
2 Known and Prepared For: These events had already occurred in the past, like a earth quack pandemic or flood, and are likely to occur again in the future, however at a time and place unknown. A large degree of readiness can be achieved, and the issue is about the level of resources that should be acquired.
3 Known and unprepared for: This situation could include events which have been foreseen but for which officials of governments or businesses have discounted ‘worst case scenarios’. This is obviously a poor judgment for which there cause political or commercial disadvantages.
Understanding Network Failure
In the developed countries the strong grid is very necessary to every part of the economy and society. In some regions, where it is not in prevailing or unreliable, contingencies are put in place should it fail. In Pakistan during last decade industries faced a great shortfall of energy crisis.
By supply chain view electricity is very necessary for powering warehouses but also highways and even fuel pumps. Along with this it also powers information and technology. The reliance on an energy source makes the logistics sector highly threatening to power cuts.
Information and Technology
IT networks provides visibility into warehouses, making efficient transport system, GPS data, facilitating communications between vendors, shipper, logistics service provider, final customer, customs and border etc. moreover it is very important for air traffic control, traffic management in metropolitan areas and port aviation systems.
This terminology could refer to both the tangible infrastructure and the traffic flows through the infrastructure. It is important from a risk perspective as trading goods and passengers interact more intimately with other networks like ICT in the normal conduct of its business.
The different networks interact simultaneously at nodes. Essential nodes for travelers and cargo movements, are by default bottlenecks and highly vulnerable. In the freight sector in particular traffic is going increasingly limited on a shrinking number of ports which is increasing the risk.
The type of goods transported through air is also important as it cause impact on other networks, which include medical and electronic integrated components for telecommunication.
External Risk Categories
It is likely to split external threats into four core categories.
This category includes a vast range of devastating calamities including extremely bad weather, strong earthquakes, floods tsunamis and volcanic eruptions.
In the wake of major natural disasters, such as the Japanese tsunami, man-made disasters such as ‘mismanaged urban population’ are more possible to be disruptive in the next coming decade than earthquakes and volcanic eruptions volcanic.
During these years the problem of supply chain risk has been placed on priority on the corporate policies by occurring together of natural disasters and terrorist actions. The Supply Chain risks usually occurs on both micro and macroeconomic level. Other economic risks are also seen very important .For example, than bad weather or terrorism.
Other vulnerable supply chain risks from an economic view is ‘demand shocks’. A number of the issues were brought on by makers ‘changing off’ supply from remote providers, and in spite of the fact that this had a transitory beneficial outcome on inventories and balances. Manufacturers are perpetually presented to currency risks given the globalized way of their vendors and customers. Given the debt crises of numerous economies and the effect this is having on the strength of the euro, dollar and different monetary forms, this risk is probably going to proceed in the coming years. Unstable monetary forms are likewise unhelpful to the advancement of exchange.
‘Supply shocks’ are less apparent, but material threats all the same. The instable nature of shipping rates could fall under this classification.
Uncertainty in the oil market directly influence on the supply costs of shippers, whether they are functional on a national or international basis. In most established markets, fuel is considered for around a 35 percent of transport operating costs and an instability in these expenditures has a major effect on distribution and sourcing strategy decisions.
Trade Disruption and Border Delays
A lack of formalization of documentation of trade regulations in disruptive to the flow of trade networks. High levels of space between departments increases the possibility of errors, delaying cargoes. Integration into global supply chains depends on not only visibility of supply chain but also reliability of source.
Another possible risk to importers and exporters is the incidence of trade wars. As markets compresses under increasing economic burden, more barriers will come in front of trade growth, to the detriment of international supply chains.
A rise in work stoppages and slowdowns by labors or transporters throughout the world is having a significant impact on supply chains.
Work slowdowns is amongst the most important supply chain risks that companies need to account for and manage accordingly. However, with the continued economic uncertainty throughout the world, this will prove difficult as labor unions combat to maintain existing jobs in ports and other transportation nodes. This will likely create a vicious cycle as strikes which cripple an economy
Tension on Geo-political level
There are many warm issues of geo-political tension around the world: the tension between India and Pakistan due to concerns over issue of Kashmir caused ban on trade among both countries. Other most problematic supply chain risk is the Middle East. The instability is occurred due to Arab Spring throughout the region. Moreover, ban on trade by U.S. against Iran have led to threats by the country’s leaders to stop the Straits of Hormuz by which most of the world’s oil supply goes.
Terrorism is also a major drawback in terms of supply. Risks to the supply chain arises from the terrorists and from regulators pursuing to limit the impact of a terrorist incident by increasing degree of security seeking rules and procedures. Despite looking counter-productive, it is a typically politically expedient reaction to a crisis.
Crime Involved in Cargo
In many countries a collapse of law and order has made shipments of goods highly susceptible to stolen by criminal mafia. Even in some developed countries like in North America and the EU, this is very substantial. The actions of the security agencies is often weak due to the low priority on this issue by politicians and negligence by police; the minor misconduct often expanded different regions and in most countries ‘cargo crime’ itself has no separate legal status.
Shipments are often theft and physically moving. Further, hijacking ships during movement is becoming more prevalent. Rather they are most susceptible in warehouses, sea ports, airports, intermodal yards etc.
Shippers bears corruption costs in terms billions of dollars a year, and t it is widely spread in markets multiple forms of it are systemic to the logistics industry all across the globe. The well-known form of corruption is the bribery needed to facilitate the transit of goods across international borders. Customs officials are highly paid in many countries. Connections with organized crime can be powerful to ensure that illegal shipments are not inspected.
Moreover, duties paid by importers, and this also includes a very large numbers of customs officers at all degrees. Shippers have to pay either directly or indirectly the cost of bribe in the expanding market either as import or export markets, it would indeed increase their exposure to corruption and crimes.
Piracy is another a main issue for supply chains, however the right cost of the problem is largely hidden. Other costs comprises of security and guards; increased insurance; not to mention indirect payments for military operations; higher wages for seamen (danger money); increased steaming speeds and not to mention indirect payments for military operations.
Technology outage is a big issue for shippers, although as yet there have been few significant incidents. A lot of money has been spent by agencies in planning and assessing for a ‘cyber terrorist’ attack. Further slight disruption to date has come from energy failures and accidents. By relying more in the future will be put on information and communications technology networks as the supply chain business going more paperless and this will only increase the risks.
Risk is the probability of severity events occurrence. Delays, redundancies, overstocking, disruption in supply, non-availability of suppliers, shortages of raw material and quality issues and several other issues regarding logistics, warehouse capacity, supply and fulfilling demand on time, natural calamities, terror and security risks, piracy, corruption in custom and clearance, failure of network and technology, infrastructure issue, power shortfall and transportation stoppage or accidents, etc.
These are the concerns that need to be mitigated by better understanding of problem, analyzing risk, giving weights to possible solutions, formulating effective strategy synthesizing, Implementing and evaluating the consequences.