Supply Chain Risk Management in Financial Crises

Daniel Dumke — Wed, 03 Aug 2011 14:44:00 +0000

I am still abroad right now, but nonetheless I still want to keep the German share within the articles high. So I present to you the second article from German authors in just one week. On monday I already talked about Supply Chain Risk Management in the German Automotive Industry and so the second is today on how supply chain risk management is performed during a financial crisis.

The authors Constantin Blome and Tobias Schoenherr are both from the European Business School (EBS), one of only few privately owned German business schools. Their 2011 paper is on supply chain risk management during times of a financial crisis.

Methodology

The authors employ a case study design for two reasons:

Only little is known of the consequences of a economic crisis on supply chain risk management (and there are no other studies concerned with this topic).
Case study research is furthermore a good method to study complex phenomena.

The authors decided to focus on the procurement departments of eight participating companies, overall conducting 25 interviewees.

Results

From the interviews the authors inferred propositions in four categories:

Impact on SCRM

The effect of the financial crisis on SCRM process (risk identification, analysis, mitigation and monitoring) has been analyzed. The interviews indicate that the tasks within SCRM process are shifting towards a more comprehensive approach concerning all aspects.

A typical statement concerning the risk analysis is:

Before the financial crisis we didn’t have a very professional assessment of our suppliers’ financials; now we have a very good system working

Risk mitigation vs. acceptance

The authors differentiate two major strategic orientations: Risk acceptance and risk mitigation. They were able to identify two company classes: direct spend (most purchases are raw materials and input products; especially in manufacturing companies) and indirect spend (mostly service companies).
Based on this classification the authors found:

The current financial crisis fosters especially a risk acceptance (as opposed to mitigation) approach in direct spend firms. Indirect spend firms are already more focused on risk acceptance approaches and have not changed their behavior.

Service vs. manufacturing

Next the authors analyze the findings concerning the relationship between manufacturing and servicing companies and conclude:

Overall, we found that the emphasis on the four risk management processes was greater among firms procur- ing predominantly direct materials (manufacturing firms) than for firms producing primarily indirect items (service firms).

Enterprise risk management and SCRM

Finally the author analyzed the relationship between supply chain risk management and enterprise risk management and find that:

“The financial crisis has not influenced the relationship between ERM and SCRM.”
“The existence of an ERM system is a major antecedent for the implementation of a SCRM process.”

Conclusion

Case study research is meant to be the qualitative foundation for further in depth analysis using other methods like surveys, simulation or similar. Blome and Schoenherr deliver exactly this basis, by stating their results in the form of four propositions.

Reference:

Blome, C., & Schoenherr, T. (2011). Supply chain risk management in financial crises – A multiple case-study approach International Journal of Production Economics

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case study

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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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