supply side

Risk-based Classification of Supplier Relationships

Daniel Dumke — Wed, 08 Jun 2011 13:42:00 +0000

A large proportion of the efforts in supply chain risk management focus on the supply side, even though, using common definitions of supply chain management, the supply chain of course not only contains the suppliers but also the customers down to the end-customer.
Focussing on the supply side, Hallikas et al. 2005 studied the different classes of supplier relationships and what risk mitigation strategies might be effective with these classes. This classification can help both affected parties, in understanding the effects of risk on their relationship.

Methodology

The authors conducted a single-case study with a high-tech OEM from Finland. To analyze the company’s relationships with its first tier suppliers, 42 of them participated in a survey on relationship parameters and the risks involved.
The goal was to support or reject hypothesis regarding the collaborative learning (“H1: Collaborative learning in supplier relationships differs according to the type and extent of the risks involved.”) and risk management (“H2: Risk-management practices vary according to the type and extent of the risks involved in supplier relationships.”).

Risks and collaboration

The suppliers in the sample are described in figure 1. Most of the respondents were in CEO or Director positions.

Figure 1: Description of the Sample (Hallikas et al., 2005)

Four different generic, relationship risks were considered:

Hold-up risk
describes how specific the assets for this relationship are and if they could be used again outside of the relationship. Example: A computer would pose little hold-up risk, whereas a specific machine which only produces a product for a specific client would pose a high relationship risk.
Demand risk
is high, when demand fluctuations are rapid and significant.
Replaceability risk
is the chance of the OEM to being able to replace the supplier.
Value added
the importance of the supplier towards the end product.

Those risks were evaluated by the survey participants, if they are important for the specific relationship (see figure 2).

Further on the participants were asked about their collaboration efforts in the following categories:

Operational single-loop learning (SLL Operational)
refers to collaboration with the goal of small, incremental improvements.
Strategic double-loop learning (DLL Strategic)
aims at long term efforts with mutual investments to improve the capabilities.
Operational double-loop learning (DLL Operational)
refers to drastic operational improvements, which require close collaboration.

Six risk management measures have been part of the survey as well. Starting with measures which do not require intensive collaboration like “Measurement” of the relationship’s output, and “Fault management”. Further risk management measures are “Innovativeness”, “Prioritization”, “Protection of relationship related knowledge” and the amount of formal and informal “Communication”.

Figure 2 shows the results to the questions in each of the above mentioned categories and if they apply to the relationship at hand.

Figure 2: Survey Results (click to enlarge; Hallikas et al., 2005)

Findings

Cluster analysis shows that three groups can be distinguished. Relationships can be:

Non-strategic, where replaceablity is high and for both partners the hold up risk is relatively low.
Strategic, where both partners depend on each other.
Asymmetric, i.e. one of the of the partner’s is dependent on the other but not vice-versa.

Figure 3 shows the possible combinations and the clustering framework suggested by the authors.

Figure 3: Framework for the Classification of Supplier Relationships (Hallikas et al., 2005)

Figure 4 shows the results of the survey, when clustered.

Figure 4: Clustered Results (click to enlarge; Hallikas et al., 2005)

The authors conclude:

DLL Strategic (strategic double-loop learning) showed a significant difference across the clusters [and is highest with in the Strategic cluster]

Both the protection of relationship-related knowledge (RM 5) and the amount of communication (RM 6) were exploited most in the strategic relationships

[RM 1 and 3] (see figure 2) were widely used in strategic relationships and only moderately used in asymmetric and non-strategic relationships.

Our study indicates that the risks and risk-management activities that suppliers perceive in their relationships are predominantly mutual with the customer.

It could be concluded that the level of risk and dependency in supplier relationship has an effect on the exploitation of risk-management means.

Conclusion

To evaluate this paper one first has to analyze the methodology used. In this case a case study seems to be adequate for a topic where no further research exists, a reader of this article still has to keep in mind that the results are not representative for a population and, since only about 60% of the supplier’s of the OEM took part in the survey, the results may not even be representative for this company.

Furthermore I found there was too little overlap between the literature review and the survey. E.g. the risks discussed in the review were only partially reflected in the survey section.

On the other hand I think the framework can be used to distinguish and describe a large proportion of relationships and the findings above can be used as a guideline how to prioritize risk management efforts within each of these categories.

Reference:

Hallikas, J., Puumalainen, K., Vesterinen, T., & Virolainen, V. (2005). Risk-based classification of supplier relationships Journal of Purchasing and Supply Management, 11 (2-3), 72-82 DOI: 10.1016/j.pursup.2005.10.005

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Managing Supplier Sustainability Risks

Daniel Dumke — Mon, 30 May 2011 12:47:00 +0000

For many years sustainability risks have been largely neglected. Reputational damages caused by incidents like the Brent Spar platform can reach tens of millions of dollars. But in a supply chain context companies are not only held responsible for their own actions but also for the actions of their suppliers.

In their 2010 paper Foerstl et al. analyze supplier sustainability risk and develop and test a framework for its mitigation.

Research question

Scholars agree that sustainable supplier management (SSM) cannot only rely on a supplier’s compliance declaration. Nonetheless, there has also been consensus, that risk mitigation measures are costly and therefore have to be targeted towards the most risky suppliers. The authors address the following research questions:

How do firms configure sustainable supplier risk management processes in congruence with dynamically changing sustainability requirements?

How can supplier sustainability risk mitigation strategies and processes be a source of competitive advantage to the buying firm?

Research framework and methodology

The authors use the research framework in figure 1 as foundation for their further research. The framework describes the process within a company from the “supplier sustainability risk identification” to the related “performance outcomes”.

Figure 1: Extended Research Framework to Manage Supplier Sustainability Risks (click to enlarge; Foerstl et al., 2010)

Since the research on how firms account for sustainability-related risks are still in an exploratory / early stage the authors decided to use a case study design to build new hypothesis is this field.

The case study participants (5 overall) have been selected to be from the chemical industry, since

first, environmental protection has high strategic relevance in the chemical industry since its costs are among the highest of all industries. Second, the industry’s high profitability and a long history of incidents have led to close scrutiny by its stakeholders, emphasizing the relevance of responsible environmental and social behaviour.

Data analysis

The findings fit into the above mentioned framework and are denoted in figure 2 by P1 to P5.

Figure 2: Summary of Research Findings (click to enlarge; Foerstl et al., 2010)

Proposition 1
The initial development of sustainability risk assessment is based on the perceived stakeholder pressure, but the chosen risk assessment method is independent of the pursued sustainability dimension.

Proposition 2a
Supplier sustainability risk assessment enables an effective sustainability risk mitigation response.

Proposition 2b
The initial configuration and deployment of supplier sustainability risk management capabilities is valuable in building excess capacity, which enables firms to broaden the scope of their sustainability risk management processes.

Proposition 3a
The ability of sustainable supplier selection, development and phase-out strategies to mitigate sustainability risks depends on the rigor with which they are applied.

Proposition 3b
The ability of sustainable supplier assessment and development capabilities to mitigate sustainability risks depends on the astuteness with which they are created and applied.

Proposition 4a
Sustainability risk assessment capabilities allow for effective supplier selection, leading to risk reduction, which constitutes a source of competitive advantage.

Proposition 4b
Beyond the reduction of supplier sustainability risks, sustainable supplier development has a positive effect on operational performance and hence competitive advantage.

Additionally, the author discovered the issue of “external responsiveness”, which has not been part of the original model. It relates to the response time towards new social and environment standards. Two of the interviewed companies also directly approached Non Governmental Organizations (NGOs) to integrate these groups into their sustainability risk management processes.

Proposition 5
Under the presence of dynamic stakeholder stimulus, external responsiveness has a positive effect on sustainability risk identification, assessment and mitigation processes, which in turn affect sustainability risk performance outcomes.

Results

As a summary the authors conclude that

the earlier firms begin to assess their suppliers for sustainability, the greater the accumulation of sustainability-related risk management capabilities relative to their competitors will be.

sustainable supplier assessment and development has positive effects on the buying firm: 1) more profound mitigation of corporate reputational risk and 2) enhanced operational performance.

supplier assessment, selection, and development must be tightly interlocked to effectively manage the sustainability risk exposure caused by individual suppliers or the supply base as a whole

Conclusion

The authors did a great job presenting their results. I was positively surprised to see that they elaborated on three pages about the application of the case study methodology and the sample companies. The sample selection towards companies with great emphasis on sustainability overall (e.g. the companies have all been picked from major sustainability related stock indices) of course leads to a skewed sample which cannot be seen as a representative average, but more as a best practice example.

Reference:

Foerstl, K., Reuter, C., Hartmann, E., & Blome, C. (2010). Managing supplier sustainability risks in a dynamically changing environment—Sustainable supplier management in the chemical industry Journal of Purchasing and Supply Management, 16 (2), 118-130 DOI: 10.1016/j.pursup.2010.03.011

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Securing the Upstream Supply Chain

Daniel Dumke — Wed, 23 Mar 2011 05:38:00 +0000

In this article the authors, Giunipero and Eltantawy (2004) explore situational factors which contribute to the company’s level of investment into risk management activities. These factors are:

degree of product technology

need for security

importance of the supplier

the purchasers’ prior experience

Risk Management Steps (Giunipero and Eltantawy, 2004)

Risk Buffering and Risk Management

The authors argue that in literature and practice alike risk buffering activities are used too often instead of strategic risk management activities (see figure 1). Buffering strategies are those which are activated after the risk materializes. Examples are extra inventory or multiple suppliers.

But ultimately, long term stability can only be achieved by driving performance. So the goal should be to align risk management strategies and performance. Such could include purchasing practices as: industry consolidations, e-procurement, just in time deliveries.

Of course these strategies are likely to increase the risk of disruption at the same time.

Situational Risk Management

With this tradeoff in mind let’s think about what factors are important for the level of risk management? And how do these factors influence the level of investment?

From a literature study the authors concluded on the following propositions:

Product Technology: High-tech markets require more extensive risk management than other low-tech markets with slower pace of technological changes.

Security Needs: Those suppliers who provide items that have high security requirements require more extensive risk management than those providing items with relatively less security needs.

Relative importance of suppliers: Major suppliers of high volume, value and/or critical items require more extensive risk management than those who supply fewer or less critical items.

Purchasers’ prior experience: Suppliers with whom purchasers have less experience require more extensive risk management than those with whom there is a history of purchasing.

This propositions can be used for the rationalization of decisions on supply chain risk management, since

Supply professionals must have top management support. If a risk never materializes, it becomes very difficult to justify the time spent on risk assessments, contingency plans, and risk management

Conclusion

I think the last point is a very important one: Getting managements support for risk management investments. The propositions might seem to be only rule of thumb, but keep in mind that also any more sophisticated supply chain design method will be subject to scrutiny, and may lead to very similar results.

Reference:

Giunipero, L., & Eltantawy, R. (2004). Securing the upstream supply chain: a risk management approach International Journal of Physical Distribution & Logistics Management, 34 (9), 698-713 DOI: 10.1108/09600030410567478

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Purchasing's involvement in risk management

Daniel Dumke — Tue, 15 Mar 2011 09:02:00 +0000

I already reviewed one of the articles of Zsidisin (Perception of Supply Risk). Today I had a look at an article about how the purchasing organization is involved in the supply chain risk management activities.

Exploratory Study

Zsidisin et al. did an exploratory study with semi-structured interviews with purchasing professionals in nine companies from the manufacturing industry.

Semi-structured, open-ended interviews were employed to gain an understanding of how purchasing organizations conduct supply risk assessments and incorporate contingency plans.

Findings

The analysis show that the formalization of the risk management techniques used are quite different. The most commonly used method for risk mitigation is: multiple sourcing for strategic parts. But some of the respondents also had more elaborate approaches to reduce risk, like:

Closer relationships with suppliers
Taking suppliers responsible for risk mitigation
Common product platforms and industry standards

Furthermore buffer strategies are used, as of course holding safety stock, controlling stock within the whole SC or multi-sourcing strategies.
Risk management are seen as important functions, but most also stated that the priority is set very low.

Conclusion

It is interesting to see that similar patterns, like the divergence between the expressed need for risk management activities and the current state of those, arise also in talks I had with SC professionals in the last year. So compared to ten years ago not so much seems to have changed in this regard.

Reference:

Zsidisin, G., Panelli, A., & Upton, R. (2000). Purchasing organization involvement in risk assessments, contingency plans, and risk management: an exploratory study Supply Chain Management: An International Journal, 5 (4), 187-198 DOI: 10.1108/13598540010347307

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Supplier Selection in a Turbulent World

Daniel Dumke — Thu, 21 Oct 2010 09:42:00 +0000

At the moment I am focussing more on the interviews I am conducting for my research, so I am not reading as much anymore. I therefore try to select articles which are both useful for my research and my blog.

Today I read an article with the fuzzy title “Supply chain risk in turbulent environments — A conceptual model for managing supply chain network risk” by Peter Trkman and Kevin McCormack.

The authors present a framework for the identification and prediction of supply risk.

Conceptual Framework for assessing Supplier Risk (Trkman and McCormack 2009)

Risk and Turbulence

The authors define risk as an adverse event with a given likelihood and outcome. They further distinguish the source of risks similar to Christopher and Peck (2004) depending on the origin of the risk: a) Endogenous uncertainty (from within the Supply Chain) and b) Exogenous uncertainty (discrete events and continuous risks). Turbulence is not defined per se but turbulent conditions are defined by …

… frequent and unpredictable market and/or technological changes with in an industry which accentuate risk and create an inability to forecast accurately.

Major drivers of turbulence are market and technological turbulence.

Prediction of supplier risk

Supplier Performance and Uncertainty Matrix (Trkman and McCormack, 2009)

The authors suggest to measure the supplier performance on three levels:

strategic (eg. quality)
tactical (eg. order cycle time) and
operational (eg. number of complaints).

But they also admit that these indicators are not sufficient to predict supplier risks and should be enhanced by additional information on the the supply chain (type and structure) and the business structure. All factors can be found in the figure above.

These indicators then form the basis for a decision on the supplier portfolio. To support this process the authors also developed a supplier performance and uncertainty matrix.

Conclusion

I liked the idea of the article: How can you best identify and assess/predict risks in the supply chain? This is one of the most important questions in Supply Chain Risk Management. But I think the implementation leaves more holes than it needs to.

The Pros:

The authors are conceptualizing a more holistic approach to assess supplier risk
They also give hints on how to this process can be supported (by the matrix for supplier selection)

The Cons:

I would have loved to see more detail on many of the points mentioned, so I would think twice before using the framework without modification.

Fuzzy wording

The title promised new research on supply chain risk in turbulent environments, but the article was only about the supplier selection process. Until chapter three it was not made clear that the authors are only talking about supplier risk (before it was still called supply risk). And there is no explanation on why they used risk and uncertainty interchangeably
Definitions

I did not find a definition for turbulence or any other term beside “risk” (see above)
Framework

Due to the fact that the framework is conceptual I would have loved to see more arguments on why the selected factors have been chosen and why the framework is complete.
Matrix

Even though I like this way of thinking about the supplier selection, the matrix is flawed since the axis are not independent (performance usually is contingent on the turbulence around, but I have to admit that’s the same for the Growth-Share-Matrix as well)
Prediction

The authors talk about predicting the risk of suppliers, but do not give any (conceptual) hint on how to do this with the given framework.

I hope this review was helpful for you! If you have any comments, questions or suggestions you can use the comment section below or contact me directly.

Reference:

Trkman, P., & McCormack, K. (2009). Supply chain risk in turbulent environments—A conceptual model for managing supply chain network risk International Journal of Production Economics, 119 (2), 247-258 DOI: 10.1016/j.ijpe.2009.03.002

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Perception of Supply Risk

Daniel Dumke — Fri, 16 Jul 2010 16:06:00 +0000

One of the most published supply risk researchers is George A. Zsidisin. In his 2003 article he describes the characteristics of inbound supply that affect the perception of risk.

Supply Risk

The author defines supply risk as

the potential occurrence of an incident associated with inbound supply from individual supplier failures or the supply market, in which its outcomes result in the inability of the purchasing firm to meet customer demand or cause threats to customer life and safety.

He therefore includes the probability and significance of an adverse event.

Methodology

With the above mentioned definition and a literature review as a basis Zsidisin establishes a case study with seven companies from different industries (Aerospace, Computer, Electronics, Semiconductor).

The data from these sample companies is then analyzed and common patterns are revealed using open and axial coding analysis.

Findings

Three categories which affect risk perception are found (see figure below): item(/product)- , market- and supplier-characteristics.

The influences are pretty straight forward. Examples:

Item Characteristics: new products have a higher perceived risk than existing products
Market Characteristics: unstable marked prices lead to a higher perceived risk
Market Characteristics: the lower the number of qualified suppliers the higher the perceived risk
Supplier Characteristics: low quality levels with suppliers lead to higher perceived risk

Characteristics influencing Supply Risk (Source: Zsidisin 2003)

Conclusion

The proposed categories can be used by supply professionals who are assessing their risks. Caveat: The findings have been generated using case study research the framework therefore cannot guarantee theoretical completeness.

Reference:

Zsidisin, G. (2003). Managerial Perceptions of Supply Risk The Journal of Supply Chain Management, 39 (1), 14-26 DOI: 10.1111/j.1745-493X.2003.tb00146.x

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