Risk can be found and encountered every where and any time. It can also be defined in several manners. Skipper (2007) stated that risk has no general definition, thus it can be defined as the variability of the results or consequences. On the other hand, Shimpi (2001) described as the lifeblood of every company, therefore managers focus on managing risk head-on when it appears. In addition, it is important to take note that risk is not just perceived or considered as threats but is also being considered as possible opportunities (Gupta, 2011). This is the reason why companies and organizations from different parts of the globe are spending high amount of money, involve great effort in order to come up with the strategies and procedures in risk management.
Nowadays, the world is becoming more and more risky due to the different changes and development in the global arena, particularly due to the influence of globalization and the improvement of technology, particularly communication and transportation, together with those factors that are not made by man, specifically the issue of climate change. As a result, risk management is considered as one of the most important strategies and actions being implemented inside any organization in any industry or sector in any part of the globe.
The changes in catastrophes in 1970s and 1980s, enabled to materialize risk management as a separate discipline in the corporate world during the 1990s. Risk management techniques commonly include those related to, according to Doherty (2000) as:
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Safety, quality control and danger training and education;
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Alternative risk financing; and
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Insurance (i.e. self-insurance and captive insurance) (cited in Gupta, 2011).
However, due to the continuous changes in the global economy and arena, risk management is becoming a vital and complex activities and strategies for managers and the entire organization. It is important to take note that each and every organization is facing and encountering unique types or forms of risks.
Risk management is defined as the systematic application of standards, approach, methods and procedures to the tasks of identifying and evaluating risks, and then planning and implementing responses towards the risk (Great Britain Office of Government Commerce, 2007). Risk management must always be considered as a supporting element of the entire development and operational aspects of an organization or company, regardless of the industry or place it operates. Thus, it must be handled as best practices for companies, which will focus on safeguarding the interests of both corporation or company and the employees via well-development policies, standards, procedures and plans (Blyth, 2009). According to Jorion (2007) even though the success of an organization is dependent on the risk management, manufacturing companies are still not sensitive enough to handle and focus on the different types of risks.
There are many models that are used for risk management; however, figure 1 shows its essential elements.
Figure SEQ Figure \* ARABIC 1 7-Step Process of Risk Management
Source: (Blyth, 2009)
2.2 Supply Chain Risk ManagementSupply chain is defined as a network of an organizations which are involved through upstream and downstream connections, in the various procedures and activities which produce value in the form of products and services in the hands of the final customer (Christopher, 1998 cited in London, 2007, 1). Mentzer et al. (2001, 4), defined supply chain as:
“a set of three or more entities (organizations or individuals) directly involved in the up[stream and downstream flows of products, services, finances and/or information from a source to a customer” (cited in, Horch, 2004, 14)
Based on this definition, there can be three levels of coverage of supply chain, which include direct, extended and ultimate. The direct supply chain is consists of a company the extended supply chain includes suppliers of intermediate supplier and customers of the immediate customer; and the ultimate supply chain includes all organizations which are involved in the upstream or downstream flows (Horch, 2009).
On the other hand, supply chain management is a theory of grounded in the logistics field which was introduced by Houlihan in 1984. Its development was preliminary along the lines of physical distribution and transport, with the use of strategies of industrial dynamics, which is based from Forrester work. One of the first authors who have recognized the needed widening of the “old or traditional” view of logistic was Lalonde, which he argued that supply chain is consists of procedures in managing the flow of physical goods, together with those connected information and cash from sourcing to consumption (Kannt, 2002, 19).
Risk management has become a vital aspect in most field of management decision and control, particularly in the supply chain management field. According to Brindley (2004) global competition, changes and development in technology and the continuous search for competitive advantage are the primary reason of companies in turning towards risk management approaches (cited in Ritchie and Brindley, 2007).
According to Norrman and Jansson (2004) some of the current business trends and changes which increase the vulnerability to risk in supply chains are:
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Increase used of outsourcing of manufacturing and R&D to suppliers;
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Globalization of supply chains;
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Lessening of supplier base;
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More integrated and connected procedures between organizations;
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Reduced buffers;
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Increased demand for on-time deliveries in shorter time windows and shorter lead times;
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Shorter product life cycles and compressed time-to-market;
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Fast and heavy ramp-up of demand early in product life cycles; and
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Limitation of capacity of vital components and elements.
The report of IBM (2008) about supply chain risk management summarized the types of supply chain risks based on the work of Deleris and Erhun (2007). The categories are: operational/technological, social, natural/hazard, economy/competition, and legal and political. Table 1 shows the examples of these categories or types of supply chain risk.
Table SEQ Table \* ARABIC 1 Supply Chain Risk Categories
Category
Examples
Operational/Technological
Errors in forecasting, shortage of raw materials and or components, constraints in capacity and capability of the organization, problems in quality, failure and downtime of machineries and facilities, failure in software, imperfect yields, efficiency, changes in procedures or/and products, loss of property due to accidents, theft, etc., risks in transportation, such as delays, handling damage, etc., risks in storage or inventory such as incomplete order of the customers, insufficient holding space, etc., budget overrun, materialization of disruptive technology, contract terms, and communication or IT disruptions.
Social
Shortages of staffs and human resources, loss of key personnel and employees, strikes, accidents, absenteeism, human errors, organizational errors, union and/or labor relations, negative coverage and feedback from media, perceived quality, coincidence of problems with holiday, fraud, sabotage, pillage, acts of terrorism ,malfeasance, decrease in the productivity of the employees.
Natural/Hazard
Fire, flood, wild fire, severe thunderstorm, monsoon, blizzard, ice storm, drought, heat wave, tornado, hurricane, typhoon, earthquake, tsunami, epidemic, famine, avalanche.
Economy/Competition
Interest rate fluctuation, exchange rate fluctuation, commodity price fluctuation, price and incentive wars, bankruptcy of partners, stock market collapse and global financial crisis.
Legal/Political
Liabilities, law suits, governmental incentives/restrictions, new regulations, lobbying from customer groups, instability overseas, confiscations abroad, war, tax structures, customs risks (inspection delay, missing data on documentation).
Source: (Adapted from Deleris and Erhun, 2007; cited from Deleris and Erhun 2007)
Another widely used and applied classification of risks in supply chain is that of Ghoshal (1987), which is showed in table 2.
Table SEQ Table \* ARABIC 2 Classifications of Risks (Ghoshal, 1987)
Classification
Examples
Macroeconomic Risks
Economic shifts in wage rates, interest rates, exchange rates and prices.
Policy Risks
Unexpected actions of national and/or local governments
Competitive Risks
Uncertainty regarding the activities and strategies of competitors in foreign markets
Resource Risks
Unanticipated differences in resource requirements in foreign markets
Cited from (Manuj and Mentzer, 2008)
The study of Manuj and Mentzer (2008) of 14 in-depth interviews and focus group with senior supply chain executives, found out that the most common risks related to global supply chains are: currency, transit time variability, forecast, quality, safety, business disruption, survival, inventory ownership, culture, dependency and opportunism, oil price fluctuation and risk events affecting supplies and customers. Figure 2 shows the relationships between the different types of risks.
Figure SEQ Figure \* ARABIC 2 Interactions between Types of Risks
Source: (Manuj and Mentzer, 2008)
2.3 Services (Outsource) Risk ManagementOutsourcing is the contractual interaction and connection between the conditions and terms of business services by external source. Therefore, an organization pays for another organization to do work for it. Currently, outsourcing is considered and established as one of the most important and significant trends in business world. Belcourt (2006) stated that outsourcing “occurs when an organization contracts with another organization to provide services or products of a major function or activity.”
The study of Outsourcing Institute of Survey (1998) showed that there are 10 reasons for its members in outsourcing their important business procedures, which include:
Lessen and control costs of operation;
Improvement of the focus of the company;
Gain access to world-class capabilities and abilities;
Free internal resources for other important purposes;
Resources are not available internally;
Accelerate and improve re-engineering benefits and opportunities;
Function difficult to manage/our of control;
Enable the availability of capital funds;
Share risks; and
Infuse cash (cited in Chou and Chou, 2011).
All of these important advantages, benefits or opportunities enable companies from different parts of the globe to focus on the different actions that will enable them to gain and maintain competitive advantage. This is very important because of the increasingly globalized economy, at the same time, in the current increasingly competitive market, wherein companies must find strategies that will make them different from their competitors, at the same time, focus on the different strategies that will help them to meet the changing demands and needs of the customers due to the different economic, political, social and technological changes in the environment.
However, despite of outsourcing benefits or advantages, it can also offer risks and threats, which is, again due to the different changes in both micro- and macro-environment. According to Bragg (2006), some of the common risks related to outsourcing are: future change in supplier circumstances; perceived risk lower than actual; political fallout; supplier failure; loss of confidential information; local responsibility; and job loss (Bragg, 2006). In particular, the most important risks in outsourcing focus on the loss of control and the possible loss of confidential or important information. These are very important for the control and information are considered as important factors inside the organization. In particular, information is considered as one of the most important resources for companies, particularly in the modern times, wherein information enables companies and organizations from different industries and sectors to gain competitive advantage.
According to Cooper, Grey and Raymond (2005) outsourcing can be thought of in 3 different stages, which risk management can be applied. The three stages are (figure 3):
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Strategic analysis – decide whether to outsource, and, if so, what functions or services to be outsourced;
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Transition planning – develop the plans that are needed in order to outsource and to move in-house activities to outsourced activities; and
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Implementation – the implementation of the plans and strategies (Cooper, Grey and Raymond, 2005).
Figure SEQ Figure \* ARABIC 3 The Phases of Outsourcing
Source: (Cooper, Grey and Raymond, 2005)
With all these, Cooper, Grey and Raymond (2005) summarized the risk management which can be applied in each stage of outsourcing, which is showed in table 3.
Table SEQ Table \* ARABIC 3 Risk management at every stage of outsourcing
Stage
Perspective
Focus of Risk
Treatment Results
Strategic analysis
Strategic and organizational factors: vision, mission, aims, objectives and goals, value chain, competitive strengths and capabilities
Strategic risks
Strategic decisions: what to outsource; costs and benefits analysis of internal improvement activities
Transition Planning
Policies, strategic issues, organizational structure and culture, patterns of work and behavior and capabilities
Transition risks
Review of strategic outsourcing decisions; Transition plans; and Rendering Strategy Outline
Implementation
Draft contract, possible contractors, required service standards and policies
Tendering contract and delivery risks
Revises terms of contract and the plan of implementation
Source: (Cooper, Grey and Raymond, 2005)
As a support, the study of Ritchie and Brindley (2007) based on the review of different important literatures recommended supply chain risk management, which is showed in figure 4. This framework shows the main strands of risk management in the supply chain management
Figure SEQ Figure \* ARABIC 4 Supply Chain Risk Management Framework
Source: (Ritchie and Brindley, 2007)
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Risk and Performance: Source, Profile and Drivers – this include environmental characteristics; industry characteristics; supply chain configuration; supply chain members; organization’s strategy; problem specific variables; and decision making unit (Ritchie and Brindley, 2007).
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Risk Sources and Risk/Performance Consequences – this include the process of recognizing, evaluating, prioritizing and assessing the sources and drivers which will yield an evaluation of the ex-ante risk and performance consequences for the company at a given point of time (Ritchie and Brindley, 2007).
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Risk Management Responses – include risk insurance, information sharing, relationship development, agreed performance standards, regular joint reviews, joint training and development programs, joint pro-active assessment and planning exercises, developing risk management and awareness and skills, joint strategies, inter-partnership structures and relationship marketing initiatives (Ritchie and Brindley, 2007).
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Risk and Performance Outcomes – pertains on the ex ante perspective of the risk management decision makers which is vital in knowing the assessment of the risk drivers and their responsiveness in focusing on the risk management solutions (Ritchie and Brindley, 2007).
Third Party Logistics or 3PL involves the use of external organizations in order to manage some or the entire logistic functions of the organization that have been done internally in the past. These functions or activities done by the third-party can include the entire logistic procedures or chosen activities in the process. Thus, the providers of 3PL have given logistics core competencies, and they can manage logistics procedures more efficiently and effectively compare to their partners (Perçin, 2009).
Currently, 3PL or its providers has the following attributes:
Integrated (or multi-modal) logistics service provider;
Contract-based service provider; and
Consulting service provider (Nemoto and Tezuka, 2002).
The use and application of 3PL in the world had increased for the past few years. It is considered as a promising and rising vital boundary of competition. Good performance in terms of logistics is in need of tradeoff between the requirement in lessening overall supply chain inventory and lead times, at the same time; it can also help in order to capture vital economies of scale and advancing overall performance of a business (Sahay and Mohan, 2006). According to Trunick (1989), the adaptability and flexibility of the 3PL service providers help them to sustain tradeoff by revolving fixed costs into variable costs for organizations and firms in using their services (cited in Sahay and Mohan, 2006). Furthermore, it is important to take note that by outsourcing logistics activities, organizations or companies will enable to save money in terms of the capital investments, at the same time, lessen the financial risks involved. Furthermore, initial investments and capital related on the logistics assets, which include those facilities for physical distribution, communication and networks are commonly are in great need of huge amount of capital or money, which again will add up to the financial risks to be faced by the company in case of any misfortunes or events (Nemoto and Tezuka, 2002).
2.5.1 3PL Risks3PL is also offering different risks, problems and threats for its customers or users. For some companies which failed to spend time and resources to support important business practices, policies and strategies to support 3PL, they experienced failure due to the complicatedness and inappropriateness in the relationships and connections of 3PL, the fear of loss of the internal control and the different indecisions and doubts regarding the levels of services to be offered by the providers of 3PL (Perçin, 2009). The study of shows that it is hard to establish reliable and strong relationship between the provider and the firm (Nemoto and Tezuka, 2002).
The study of Huang and Li (2009) showed and summarized the different risks or threats involved in outsourcing logistics or 3PL from diverse literatures. In the Reviews Of Business Outsourcing Research Result In West by Xhu Shu (2003), the author believed that the most vital and significant risks and threats involved in outsourcing logistics include the increase in contract cost due to the different factors and events, including the disputes at law (difference between the provider and the firm); measures and complexities in negotiating contract, increase in hidden costs due to increase in management cost, and other related cost, the possibility of decline in the quality of service, losing knowledge and expertise and the innovative capability and the deterioration of the overall competence of the organization. On the other hand, in the Business Outsourcing into Decision-Making and Guarding Against the Risk of Nanfang, Yi and Shuxian (2006), the risks include the limited rationality, opportunism coming from the suppliers and contractors, and possible after-cost. As a result, the Third Party Logistics Collaboration and Guarding Against the Risk of Xiangyun (2004) stated that because of these different reasons or risks related to 3PL, it can create problems related to the relationship between the provider and the firm, which include misunderstanding, difficulty of meeting the demands and needs of the customers, termination or cancellation of the contract and profit loss. In conclusion, the study of Zhong et al. (2005) categorized the most important risks related to 3PL, which include: management, information, financial and market (cited in Huang and Li, 2009).
2.5.2 How to Reduce/Avoid 3PL RisksA. Establish Trustworthy Relationship
Nemoto and Tezuka (2002) proposed that 2 stages must be made in selecting and contract signing with 3PL providers in order to create and maintain trustworthy relationship.
5 Case StudiesLesson Learned
Conclusion
References
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