Identifying Risks in the Supply Chain Essay Example

whether the supplier will opportunistically raise prices unless contractual agreements are in place to prevent this.

Hazard encompasses both the potential outcomes and the probability of their occurrence. According to Bernstein (1996), risk is primarily about making choices. The actions we are willing to take, based on our freedom to make decisions, shape the narrative of risk. It has been suggested that opting for a long-term partnership with a provider can yield significant advantages for a customer.

However, if one spouse defaults or tries to exploit the other, the risks can also be significant. Therefore, risk includes both the possibility of loss and the potential for gain. However, when examining how organizations perceive risk, it is the negative intentions of risk, such as loss rather than gain, that seem to concern managers. Risks can be classified as Systematic, meaning they can be controlled or avoided, and Unsystematic.

The hazards related to Supply Chain Management (SCM) are both unmanageable and ineluctable, and can be classified as internal or external. Systematic hazards include information dissymmetry, coordination and trust deficiencies among chain members, unpredictable demand patterns, and unequal capacity. Uncontrollable hazards include sudden demand changes due to technological advancements, natural disasters, accidents, or disruptions.

Careful planning and enhanced coordination among spouses can completely avoid systematic hazards, while the same can minimize unsystematic hazards. Consider the example of Neodymium, a rare Earth metal with magnetic properties required for Hybrid electric vehicles. Currently, the largest reserve of this metal is found in China, which poses a significant threat to vehicle manufacturers due to the high demand and market for hybrid electric vehicles worldwide.

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Toyota aims to produce 1 million hybrid vehicles by the

end of 2011, relying heavily on a specific metal. However, Toyota does not use the metal directly; instead, it is utilized by the tire providers who manufacture the durable magnet components for electric vehicles. Unfortunately, the Chinese Government has recently imposed restrictions on the export of this metal, creating challenges for automotive manufacturers. The complexity of supply chain composition is a result of modernization and globalization. It is evident that the components of a business are no longer limited to a single entity but involve all entities directly or indirectly related to a particular business. For instance, in 1997, Toyota had to temporarily halt operations on its 20 assembly lines due to a fire at a major brake-fluid proportioning valve supplier. It took approximately one month to restore production capacity to normal.

The disruption caused in one part of the world can have adverse effects on a business located hundreds of miles away. An example of this is the financial crisis that originated from America. In supply chain management, forecast risks occur when company projections do not match current demand. If forecasts are too low, products may not be available for sale. Conversely, if forecasts are too high, there may be excess inventory and price markdowns. [7]

There are several reasons for inaccurate forecasts, such as long lead times, seasonality, product variety, short life cycles, and a small customer base. The "bullwhip effect" or information distortion can also occur due to sales promotions, incentives, lack of supply-chain visibility, and exaggerated demand during product shortages.

Intellectual property hazard is another risk that has increased with the globalization of supply chains and the outsourcing of production to the same

manufacturers used by competitors.

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The grounds for the hazard are: Vertical integration of supply chain; Global outsourcing and markets; Procurement Hazard, which refers to unforeseen increases in acquisition costs resulting from fluctuating exchange rates or supplier price hiking.

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Breaks refer to the delays and disruptions in the flow of materials or finished goods due to external or uncontrollable factors like natural disasters, strikes, economic upheaval, intentional damages caused by agents such as terrorist attacks, and typically happen without warning. Breaks in supply chain can also occur due to supplier bankruptcy or incapability.

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Receivables refer to the risk arising from the inability of a company to collect the revenues of services already rendered.

Currently, many companies offer services on a recognition basis to accommodate their clients.However, there is a significant risk associated with the recovery of recognition sales.Inventory poses a hazard when it is either too high or too low.If there is excessive inventory, costs become exponential.In contrast, if inventory is too low, there is a risk of not satisfying customer demand on time.Capacity is another risk that concerns the business's manufacturing capacity or service delivery capacity.Unlike inventory, the capacity of a business cannot be instantly enhanced."Assurance in supply chain is weakened when the end-to-end pipeline time, which is the time it takes for material to flow from one end of the supply chain to another, is long.Often, one member of a supply chain risks without detailed knowledge of what happens in other parts of the chain, such as finished goods inventory, material inventory, work-in-progress, pipeline inventory, actual demands and forecasts, production plans, capacity, yields, and order

status."To enhance supply chain visibility, it is important to promote information transparency among all participants of the supply chain.

The phrase "information is power" does not always hold true in supply chain. However, when information is accessible to all members of the supply chain, it can significantly increase power by reducing uncertainty. According to Mason-Jones Towill (1997 and 1998), supply chains that have access to information beyond their corporate boundaries perform better than those that do not. This emphasizes the importance of "information-enriched" supply chains.

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Visibility in supply chain management helps to avoid problems and seize opportunities within the company. Another crucial concept in supply chain assurance is the ability to control operations. Supply chain managers should have visibility of the entire pipeline, rather than just certain parts, as it is challenging to make quick changes when something goes wrong. To minimize variability, the "Six Sigma" methodology is utilized to identify possibilities.

The supply chain often faces buffer stock issues due to a lack of visibility and control. Supply chain managers use buffering as a strategy to mitigate uncertainties and risks in the supply chain.

Supply Chain Risk Management

The Risk Spiral mentioned earlier is one of the prerequisites for reducing risks. However, effective supply chain management is still in high demand, particularly in relation to managing risks.

The term Supply Chain Risk Management (SCRM) is widely used in recent literature [18]. However, most companies are still in the early stages of implementing SCRM. The demand for SCRM is increasing due to globalization and more agile supply chains. While many organizations are actively identifying risks, there is a lack of strategies to mitigate them. According to a survey conducted in

2009 by the Bearing Point Group and Supply Chain Magazine [19], most organizations are not involved in risk management. Those that do focus only on risks related to Purchases (Supply Risks), Planning (Demand Risks), and Inbound Logistics (Distribution Risks). The same survey outlines four steps for effective SCRM:
Phase 1: Hazard Identification - This phase involves detecting potential hazards.
Phase 2: Hazard Assessment - The second phase includes assessing the likelihood and impact of specific problems for the organization.
Phase 3: Hazard Treatment - This step involves implementing hazard barriers and protective measures.
Phase 4: Hazard Monitoring and Control (Resilient Supply Chain) - This step focuses on reducing risk factors and their impacts. It suggests establishing Resilient Supply Chains by identifying vulnerable points and promoting agility throughout the supply chain. Additionally, organizations should foster a culture of risk awareness and take necessary actions for implementation.The aim is to avoid or reduce the effects of future disruptions, based on previous experiences. As stated in the theoretical section, supply chain management problems can arise in different aspects including information channels, transmission of information, flow of people, resources, goods, and money.[21] For instance, Apple Inc., a well-known company, serves as an example.

The introduction of the iPad, hailed as the future of mobile and computing devices, caused a delay in international shipments of new iPad tablets due to their high sales. This delay can be attributed to interconnected risks in the supply chain, as Apple underestimated the actual demand for iPads, resulting in over 500,000 units being delivered within the first week and receiving numerous pre-orders.[22] It is important to mention that Apple's primary customer base is situated in the

United States.

In spite of the delay, Apple's end product is primarily focused on international markets, which contributed to 58% of the company's gross in the December quarter, an increase from 46% the previous year. [23] Nonetheless, investors were not influenced by the delay and Apple's shares climbed over 1%, reaching a new record high. [24] This marks the second time that Apple has postponed iPad shipments, attributing it to supply-chain difficulties and marketing strategy. [25] Furthermore, resolving issues with display production quality is crucial for Apple engineers to eliminate any defects.

According to Jacobs, these problems can be resolved within approximately one month. To effectively manage supply chain risks, Apple should implement the four-phase strategy outlined. Initially, it is crucial to identify the risk and also acknowledge other potential risks in the supply chain. As demonstrated in the example, Apple Inc.

Apple Inc. should have been prepared for the unexpected popularity of the iPad in the US to avoid delays in international shipping. They need to maintain a balance between production capacity and inventory levels, considering product costs. It is crucial during the second phase to evaluate potential risks such as financial and media coverage and determine their significance. One advantage Apple Inc. has is its monopoly with the iPad being the sole product of its kind in the market. Therefore, a one-month delay is not overly concerning as they can still promptly fulfill international orders. Analyst Brian Marshall from Broadpoint AmTech reassured that there is no danger of falling short on sales estimates for iPads in the June quarter; analysts anticipate selling at least 1 million devices during this period.

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In the third and fourth phases, an action program that includes hazard prevention and protection measures is necessary. It is also important to control hazard return. In the case of Apple, an action program would be useful in preventing forecasted risks and managing existing risks.

Inventory risk

Inventory can be defined as "The sum of raw materials, work in process, and finished goods being held for sale at a given time".

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Managing inventory efficiently is becoming increasingly important to improve the supply chain and generate competitive advantages due to the significant costs associated with keeping inventory.

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The main reasons for a company to maintain (extra) inventory are to reduce costs and meet consumer demands promptly.

The main task is to find the right balance between maintaining an excessive amount of inventory and having an insufficient amount. Having too much inventory can lead to high warehouse costs and negatively impact the company's financial performance [30], while having too little can result in lower sales [31]. Most companies maintain additional capacity to reduce uncertainty about future events, treating inventory as insurance for providing customer services when issues arise with upstream production processes. This raises the question of how much inventory a company should keep at any given time and when to order more. The optimal level of inventory is the minimum amount needed to meet consumer demand, considering factors such as obsolescence, product value, inventory holding costs, and demand and supply uncertainty. To achieve an efficient supply chain, a company must analyze these risk factors and implement strategies to

mitigate them. Toyota, for instance, utilizes lean manufacturing which includes just-in-time production. This approach aims to eliminate waste and enhance business processes by producing and delivering goods only when they are required, resulting in minimal inventory holding.

To maintain production working, good relationships/partnerships with providers are necessary in this type of scheme.

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Not maintaining a stock list carries multiple risks, leaving no buffer if any link in the supply chain fails. Due to uncertainties in customer demand or issues with suppliers, Toyota may not be able to produce as much as desired, resulting in decreased sales. While inventory costs are reduced with this strategy, it comes with numerous dangers.

There are different theoretical schemes to minimize the stock list hazard. One of them, used by the online bookseller Amazon.com, is pooling inventory. This involves placing a few warehouses throughout the United States, with each warehouse responsible for a specific geographic area. This helps reduce overall inventory and lower inventory costs. Another strategy is creating a common product component, commonly seen in the paint industry. Instead of holding a variety of colors in stock, it is more efficient to only maintain a common base and mix the desired color after receiving specific customer orders.

Finally, another option could be to hold back the final production step until all orders are received.24 All of these approaches allow a company to efficiently manage their inventory and improve the supply chain. In the case of Toyota, establishing strong partnerships with their suppliers would be crucial. This ensures that all product components are delivered when needed. If there are delays in delivering these components, it

could halt production and result in fewer sales. Therefore, partnerships can be seen as a strategy for minimizing risks.

Forecasting risk

Forecasting is a necessary and important process in supply chain management for companies that produce products for inventory, but is not as critical for products made to order.

The concept of prediction in supply chain management is that manufacturers will use material prediction to ensure they produce the desired amount of materials for their customers without creating an excessive inventory situation. This helps reduce costs and maintain inventory levels at a reasonable level to avoid price markdowns. However, predicting the demand for a product can be challenging and may result in a mismatch between projections and actual demand. This can lead to high storage costs and markdowns if too much inventory is produced, or loss of sales and customers if too little is produced.

The fluctuations in the market are a significant factor in determining what customers want and need, due to the constant changes in demand. Overestimating or underestimating the market can have severe financial consequences for a business. Forecasting inaccuracies can occur due to factors such as long lead times, seasonality, product variety, short product life cycles, and a small customer base (Copra and Sodhi, 2004). The market's uncertainty, as previously mentioned, is a crucial element of the prediction risk, along with other data distortions.

The text discusses examples of information deformations, such as publicities and inducements that lead to increased purchasing. It also mentions the batching of purchases, which causes higher volatility in orders. These deformations were mentioned by Copra and Sodhi (2004). They also point out that the degree of knowledge of the

end consumer decreases as the supply chain consists of more stages, which is known as the "bullwhip effect". The bullwhip effect refers to the increasing variability of order rates as they pass through different levels of the supply chain towards manufacturers and raw material providers, according to Disney (2009). One possible solution to counteract the bullwhip effect is to increase visibility and control. The text suggests that the theory of the risk spiral can be used to address this issue. The example of calculating risk in the pharmaceutical industry and the production of acetonitrile is provided as an illustration.

Acetonitrile is a low-cost chemical commonly used to measure impurities in drugs (Bolgar, 2010). It is a byproduct of propenonitrile, which is utilized in the manufacturing of plastics for auto parts and rugs. The issues arose when the Chinese government decided to cease production at a chemical plant in August 2008. Shortly after, a hurricane destroyed a similar chemical facility in Texas. Concurrently, the financial crisis struck, leading to a decrease in car and rug sales.

The decrease in the production of acetonitrile caused a deficit for pharmaceutical companies since it was a byproduct of propenonitrile. Consequently, these companies faced a shortage of acetonitrile, which was necessary for drug testing and production. As a result, the byproduct, acetonitrile, became highly sought after and was sold at a higher price. Some pharmaceutical companies had previously anticipated this shortage and were prepared for it. They had identified the potential risk in their supply chain management, recognizing the possibility of a shortage of a seemingly insignificant product used in small quantities. This risk was identified early on during the decline in

the production of cars and rugs.

The probability of a deficit happening was evaluated by closely monitoring the decrease in automobile and rug production. The goal was to accurately determine the likelihood of a deficit occurring. In order to assess the potential impact, the business would analyze the consequences of a deficit for their operations. In this particular case, a deficit would be extremely detrimental as it would force the business to delay both its production and further research on pharmaceutical drugs. Setting up risk prevention measures and protective actions is the focus of phase three in Supply Chain Risk Management.

Pharmaceutical companies addressed the hazard by proactively purchasing extra acetonitrile supply in advance. This ensured they had enough stock to continue production for a longer period. They also established agreements with chemical suppliers to secure a higher level of solvent supply than other companies.

The final step of the Supply Chain Risk Management model is called 'Monitoring and Control'. During this step, we determine what is required for the future path and how to improve predictions and outcomes. It is important to identify sensitive grades and suppliers, particularly the reliance on a specific chemical for production. The pharmaceutical company could benefit from exploring the option of additional chemical suppliers or alternative drug testing methods (or both) to minimize potential future incidents. This is done to enhance agility and efficiency throughout the supply chain.

Disruption hazard

By definition, disruption hazards are operational hazards such as proficient malfunctions, discontinuance of stuffs and merchandise supply, work stoppages, etc. These hazards can be caused by economic upset, hooliganism, natural jeopardies, terrorism, political instability, etc. In recent times, there has been increased attention on

these types of hazards due to high globalization and lead times, which allow for more opportunities for disruptions and less margin for error if a disruption occurs. Many researches refer to this type of hazard as "Environmental Risk" [ 36 ] and therefore they are considered unmanageable or external hazards.

From the account, it is evident that environmental hazards can cause disturbances on both the supply and demand side. Some notable examples [37] include the terrorist attacks on the World Trade Center on September 11, 2001, and the blackout in the North-eastern U.S. on August 14, 2003. According to Hendricks and Singhal's survey [38], companies experiencing such disruptions tend to underperform compared to their counterparts in terms of stock performance and operational efficiency, leading to negative impacts on costs, sales, and profits. An illustrative instance of such a hazard is the recent floods in Pakistan, South Asia.

The inundations in Pakistan have been rated by the United Nations as the most significant crisis in recent history in terms of its impact on humans. The number of people affected in Pakistan surpasses the combined number of people affected by the 2004 South-East Asian tsunami, as well as the recent earthquakes in Kashmir and Haiti.

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. It is estimated that approximately 20 million Pakistanis have been forced to leave their homes and are at risk of diseases. The consequences of the floods are wide-ranging, including humanitarian problems, economic downturn, and damage to infrastructure. The displacement of millions of people is only one aspect of this disaster; it has also had a significant impact on both national and international trade for Pakistan. Reports indicate that the

floods have destroyed around 30% of the country's cotton crop, affecting approximately 700,000 acres of cultivated land that is now underwater.

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. Pakistan is currently ranked as the fourth-largest producer of cotton globally, following China, India, and the USA.

According to John Flanagan, the head of Flanagan Trading Corp, a North Carolina-based company specializing in cotton futures and options, if Pakistan's harvest is delayed, the global stock-to-use ratio could drop to 33%. This could lead to a rise in cotton prices and, consequently, an increase in retail prices, despite cotton accounting for only a small portion of the product's overall cost. Pakistan, being an agricultural country, has experienced numerous incidents related to monsoon rains in the past. The Pakistan Meteorological Department had previously warned the government about the possibility and impact of heavy rains. In previous years, several crops were destroyed due to early, heavy, or no rainfall. Therefore, the consequences of such an event are well known.

The primary reason for this massive catastrophe is the failure to implement the third phase, which is hazard intervention. Although the potential risk was acknowledged and impact assessment was conducted beforehand, the government did not implement any safeguards to prevent such an event. The government lacked preventative and protective measures, resulting in the country experiencing the worst catastrophe in 80 years. As previously mentioned, the floods caused economic and infrastructure disasters. Currently, Pakistan is suffering significant losses in exports, a steep increase in imports, and severe damage to roads and transportation lines.

According to estimates, the cost of reconstructing the flood-hit countries could reach as high as USD 15 billion

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. The impacts of the floods in Pakistan

have also been observed in other parts of the world. For certain countries such as China, India, and USA, it presented an opportunity to increase their market share.

However, there have been negative impacts on both the local and global economy. According to a study by the Economic division in Pakistan, the GDP may experience a negative growth rate ranging from -2% to -5% [42]. This could also potentially affect the fabric market, causing prices to increase. Additionally, the European Union may face significant consequences as well [43]. The EU trade granted g.