Supply Chain Risk Management by Dr. Mahesh Srinivasan and Dr. Debmalya Mukherjee Department of Management, College of Business Administration The University of Akron
The faculty in the Department of Management at the College of Business Administration at the University of Akron is conducting a research study on Supply Chain Risk Management. The objectives of this research are to study the effect of supply chain risk on supply chain performance and also to study some of the risk mitigation strategies adopted by firms. The principal investigators of this study are Dr. Mahesh Srinivasan – Assistant Professor of Supply Chain Management and Dr. Debmalya Mukherjee – Assistant Professor of Management. A survey was distributed during the 3rd Supply Chain Forum held at the University of Akron on 20th February 2009. There were total of 21 survey responses. The investigators are thankful to all the respondents to this survey and are happy to share the preliminary results of the survey below. Profile of respondents: One-third of the survey respondents were upper management executives, a little less than half were middle level management executives and the rest were front line management. 9 of the respondents worked for part manufacturers, 5 worked in the consumer products industry, 3 in industrial manufacturing, 2 in finance/ insurance and 2 in the supply chain/ logistics industry. 4 of the responses were from executives who worked for very large companies employing more than 20,000 employees; 1 response was from an executive working for a company employing between 10,000 to 20,000 employees and the rest of responses was evenly divided between executives of companies employing between 1,000 to 10,000 employees and below 1,000 employees – with each accounting for 6 responses.
The risks faced by firms were divided into three major categories: supply-side risks, demand-side risks and external risks. On the supply-side, the most significant risk was price fluctuation of materials or services being procured, with 5 respondents saying that the risk they faced on this account was “very high” and 9 respondents saying that the risk on account of supply price fluctuations was “high”. The second significant supply-side risk was on account of delivery delays from suppliers with one respondent each facing a “very high” and “high” frequency of this risk and 8 respondents facing a “moderate” frequency of supplier delay risks. The other significant supply-side risks faced by firms were on account of supplier quality problems (4 with moderate frequency and 11 with low frequency), disruption of supplies on account of loss of production capacity or downtime at supplier’s end (4 with moderate frequency and 13 with low frequency) and disruption of supplies due to constrained sources of supply on account of high overall industry demand for a particular material or component (1 respondent with a high frequency, 7 with a moderate frequency and 11 with a low frequency). On the demand-side, the number one risk was customer requests to expedite orders. About 50% of respondents reported that the frequency of this being as “very high” or “high” and 7 respondents reported the frequency of this occurring as “moderate”. The other significant demand-side risks were unwillingness of the customer to share their demand and/ or stock level information (6 respondents reported this as either “very high” or “high” and 6 respondents reported this as of ‘moderate” frequency), followed by payment delays from the customer (with 12 out of the 21 respondents reporting this as occurring with either “high” or “moderate” frequency).
The results of the survey indicated that respondents faced no significant external risks. Some of these external risks could be labor disputes, disruption in operations due to natural disasters or epidemics, product recalls, threat of leakage of Intellectual Property information, non-compliance with government laws and regulations, industrial accidents and IT infrastructure failure. This is a significant finding as there is a lot of focus in the media on disruptions and failures due to these risks. This potentially leads to the conclusion that the most significant risks faced by the respondent firms were on account of operational or tactical planning issues. Effect of risk on supply chain performance: From the limited number of (21) responses, it was seen that although no inferences can be drawn on the relationship between supply chain risk and supply chain performance, adoption of good supply chain risk mitigation strategies had a positive effect on supply chain performance as measured by supplier delivery performance, customer’s order cycle time, customer’s order fill rate, customer’s on-time delivery frequency, inventory turnover ratio and supply chain/ logistics costs as a % of sales. Risk mitigation strategies: Firms employed a variety of risk mitigation strategies, with a majority of those being ones that deal with external risks. The number one external risk mitigation strategy was increased attention and efforts to comply with government laws and regulations (with 13 of the 21 respondents reporting a ‘very high” or “high” level of adoption of this strategy), followed by taking steps to improve reliability of IT systems (reported as “very high” or “high” by more than 50% of the respondents). Other external risk mitigation strategies being adopted by firms involve insurance for natural disasters and building redundant capacity (capacity cushions). This high level of adoption of external risk mitigation tactics by firms could possibly explain the fact that firms reported facing very few external risks. This also indicates that such risk mitigation tactics are effective in dealing with some of the external risks. Firms did not report adopting any significant supply-side or demand-side risk mitigation tactics. The only notable mention in these categories is of firms reporting introducing legal clause(s) in their supply contracts to protect their intellectual property rights (3 respondents saying that they have a “very high” level of adoption and 8 respondents saying that they have a ‘high” level of adoption of this strategy). Some firms reported increased 2-way sharing of information with their customers and/ or suppliers through programs like collaborative forecasting in order to achieve supply chain visibility.
Another reason for the increased focus of firms on dealing with external risks could be the increased media focus on such risks and the significant negative effects such risks can have on the operations of a firm (as compared to supply-side or demand-side risks). This survey is being rolled out on a national basis over the next couple of months and the researchers hope to have additional insights after getting additional responses. If you are interested in getting those results, please contact one of the investigators of this study at the address below: Dr. Mahesh Srinivasan (email: firstname.lastname@example.org) or Dr. Debmalya Mukherjee (email: email@example.com), Department of Management, The University of Akron, Akron, OH, USA. Phone: 330-972-5440