Increased globalisation is contributing enormously to changes in the environment of production and supply chain operations in recent years. Natural disasters, accidents, and volatility of the financial markets have caused disruption and even tremendous losses in supply chains. As a result, supply chain management is tasked with new challenges of maintaining expected yields of supply chains in facing risks. Attempts to manage risks in supply chains bring to fore the value of supply chain risk management (SCRM) as both a field of study and practice.
But what are supply chains, supply chain management (SCM) and SCRM?
Supply chain, SCM and SCRM do not have generally accepted definitions. Several scholars define it in different ways. However, they are closely related, and one cannot be studied in isolation from the other. For instance, ManMohan S. Sodhi & Christopher S. Tang (2012, p. 6) argue that supply chains symbolise networks of organisations amongst which are suppliers, manufacturers, logistics providers, wholesalers/distributors, and retailers who aim to produce and deliver products or services for the end customer whereas supply chain management involves the management of material, information and financial flows through the supply chain.
In the words of W. Ho et al. (2015) SCM is:
“the likelihood and impact of unexpected macro and/or micro level events or conditions that adversely influence any part of a supply chain leading to operational, tactical, or strategic level failures or irregularities”. (p. 5035)
Jüttner, Peck, & Christopher (2003) and Jüttner (2005, 124) define SCRM as the identification and management of risks for the supply chain, through a coordinated approach amongst supply chain members, to reduce supply chain vulnerability as a whole.
Risks to supply chains is anything that might interrupt the smooth flow of material, finance and information (Mahai & Albastroiu, Irina, 2013). These risks are mostly observed in the form of material flow risks, financial flow risks, information flow risks (Waters, 2007).
According to Trkman, P., de Oliveira, M.P.V. and McCormack, K., (2016), SCRM is an issue of critical importance for today’s globalised supply chains and supply chain management because of vulnerabilities resulting from outsourcing, transitioning to lean and agile operations, short product lifecycle, unpredictable demand, natural disasters, transport disruptons and increased terrorist threats (Chung et al., 2015; Colicchia and Strozzi, 2012; Lavastre et al., 2014; Lockamy, 2014).
Historical examples of both natural and manmade supply chain disasters include: the foot-and-mouth disease in the UK in 2001 which affected the agriculture industry, extending to other industries like luxury car manufacturers Volvo and Jaguar which had to stop deliveries due to lack of quality leather supply. In February 1997, Toyota was forced to shut down 18 plants for almost two weeks following a fire at its brake-fluid proportioning valve supplier. In 2001, the rapidly weakening demand coupled with locked-in supply agreements made Cisco take a $2.5 billion inventory write-off in Q2. Inaccurate supply planning led Nike to an inventory shortage of “hot” footwear models and the sales for Q3 2001 were $100 million off target. (Norman & Jansson, 2004, p. 435).
Supply chain management have become more popular. Consequently, more companies are handing over their manufacturing processes to external supply chains that operate on a national or global basis. However, the supply chain management environment is turbulent with all kinds of risks which is the reason why supply chain risk management is important (Lean Supply Solutions, 2018). SCRM is beneficial to the supply chain and supply chain management in the following ways: ensures production and deliveries are functioning optimally, avoids profit losses by detecting risks early, quick ability to respond to unexpected events, stimulates many SCM best practices, maintaining business operations, safeguards the image of corporations, provides useful technology that enables live updates, meets and exceeds rules and regulations, and safety standards.
With SCRM, more businesses are realising that risk management creates a strategic competitive advantage and promotes an agile supply chain that works better than ever before. With supply chain risk management, there is the possibility not only to produce, delivery and function at optimum but also enable businesses to stand out and boost market share when common risks occur. It equally reduces uncertainty and strengthen relationships and trustworthiness with business prospects. Risk management also continuously detects, optimizes, and reduces risk exposure and cost. D.J. Ketchen Jr., G.T.M. Hult (2007, P. 574) outline these capabilities in the form of agility, adaptability, and alignment define as the effectiveness of strategic supply chain management. Agility refers to the ability of a supply chain to react quickly to unexpected or rapid shifts in supply and demand, adaptability connotes willingness to reshape supply chains when necessary, without ties to legacy issues or the way the chain has been operated previously and alignment is ensuring that the interests of all participants in a supply chain are consistent (Lee, 2004).
SCRM is important because it is essential for early detection of risks through fluid communication. Preventing a crisis can be done through proper communication. Its provision of integrated technology and management software enhances visibility and communication to keep supply chains aware of the flow of materials and products. Worth noting is the fact that risks vary from business to business but by considering the worst-case scenario for each situation, solutions can be brought to light in the event they should occur. That way, when risks present themselves, operations can continue to be runned smoothly, without going into panic mode.
SCRM is important because it can help you reduce the complexity of a problem and prevent problems altogether. For example, it begins by identifying what risks might prevent you from getting your products to customers on time, understanding how badly each risk would hurt operations, and finding quick solutions to manage the situation.
An example is the current COVID-19 global pandemic which took the world by complete surprise. First seen in Wuhan, the capital of central China’s Hubei province, on December 31, 2019. As of 13th April 2020, more than 1.8 million people have been infected by the virus, leading to over 115, 000 deaths. Companies that operate on a global scale with business relationships in highly-impacted regions are enhancing focus on workforce/labor planning, illuminating the extended supply network, activating alternate sources of supply, updating inventory policy and planning parameters, enhancing inbound materials visibility, preparing for plant closures, focusing on production scheduling agility, evaluate alternative outbound logistics options and secure capacity, conducting lobal scenario planning (Deloitte, 2020). However, the extent of success of these measures cannot be overrated given that Covid-19 is yet to disappear and the damage it can cause unpredictable.
Supply Chain Risk Management is key in eliminating waste and stimulating best practices within the supply chain. Wasting resources can add risk to organisations and their supply chain, so by planning ahead with a good risk management system, materials can be repurposed to avoid waste. Stimulating supply chain management best practices require companies to make a long-term view, focusing on all processes involved in the transformation from raw materials to finished goods. for example,
Hewlett-Packard (HP)… faced mounting inventories and plummeting customer satisfaction…the company began targeting and analyzing the procurement, manufacturing and distribution aspects of the supply chain. Subsequent decision modeling and analysis lead to the establishment of a Worldwide Inventory Network Optimizer (WINO) that was able to track material flow and other performance indicators to reduce system wide variabilities and uncertainties. (Tummala, V.M. Rao, and Tobias Schoenherr, 2008, pp. 391-410).
Tummala, V.M. Rao, & Tobias Schoenherr (2008) classify supply chain management activities into management of inventory, management of sources of supply, demand planning and forecasting, logistics and distribution planning, product and process flexibility, design for quality, and production and capacity planning. These company practices can help companies in lowering costs and increasing profits, which is especially true for companies producing price-sensitive products. Examples of organisations having implemented their own unique supply chain management systems, enabling them to become the market leaders in their respective industries include Wal-Mart, Costco, Amazon.com and Dell.
The complexities of supply chains today, vulnerabilities in its management emanating from natural disasters, accidents, and volatility of the financial markets have caused disruptions and losses in supply chains. This has contributed tremendously to the importance of SCRM in ensuring that production and deliveries in supply chains function optimally, avoidance of profit losses by detecting risks early, quickening the ability to respond to unexpected events, stimulating many SCM best practices etc. Seemingly, the importance of SCRM can be said to rely on international cooperation and rapid globalisation of economic and financial markets that the world is experiencing. SCRM is important as a field of research study as it is as a field of practice.