A study on the SCOR model for assessing risks in a supply chain

Investigating relevant attributes for SCOR model using a case of Toyota Kirloskar Motor Corporation


Master's Thesis, 2014
88 Pages, Grade: 64

Excerpt

Table of Contents

1. Introduction
1.2. Background Value
1.3. Research Problem
1.4. Research Contributions

2. Company Background
2.1. The Kanban System
2.2. Production sites of Toyota outside Japan

3. Literature Review
3.1. Supply Chain Management
3.2. Supply Chain Risk
3.3. Supply Chain Risk Management
3.4. Risk and Supply Chain
3.5. The Supply Chain Operations Reference Model (SCOR)
3.6. Supply Chain Risk and SCOR
3.7. Plan-Source-Make-Deliver-Return- Level I
3.8. Planning-Execution-Enable-Level II
3.9. Process-Element-Level-III
3.10. Performance Attributes and Metrics
3.11. Value at Risk
3.12. Supply Chain Risk Identification & Assessment- SCOR Model
3.13. Employees and their Importance in supply chains
3.14. Supply Chain Vulnerability

4. Research Design
4.1. Exploratory Research
4.2. Literature Search
4.3. Qualitative Research
4.4. Quantitative Research
4.5. Data Collection
4.6. Primary Data
4.7. Secondary Data
4.8. Case Analysis

5. Analysis
5.1. Risk Management-A Philosophy by Toyota itself
5.2. SCOR Implementation-Risk Assessment Technique
5.3. Key Internal Risks at TKM
5.4. Historical Analysis
5.5. Risk Assessment
5.6. Impacts of Internal Risks
5.7. Risk Mitigation Plan

6. Findings and Discussions
6.1. Vulnerability
6.2. Importance of Stakeholders around the supply chain
6.3. Performance metrics

7. Contributions

8. Limitations

Bibliography

Abstract

In a complex dynamic business environment, supply chains have become the most integral part of the organization. They now, are the tools of reducing costs and adding value (additional) to a product or service. Henceforth, they can be regarded as the crucial part of an organization. However, the quest of organizations and globalization with aim of constructing an effective means of supply and supply chain has increased the complexity of the supply chain which can often reduce the knowledge and understanding the of the exposure to risk.

List of Figures and Tables

Figure 1: The Kanban Concept, TPS 2006.

Figure 2: Production sites of Toyota, Toyota in the World. 2012 (p.3-8)

Figure 3: Source: (Beamon 1998, p. 3.) The Supply Chain Process

Figure 4: Risk Analysis, Navigant. 2012. P.4

Figure 5: Source U. Juttner, H. Peck, M. Christopher, 2003. International Journal of Logistics 6, 197-210

Figure 6:Source Manuj & Mentzer (2008a), Pobathi, S 2013. Self Portrait [Supply Chain Risk Management]

Figure 7: Source Manuj and Mentzer., Journal of Business Logistics, p.136

Figure 8: Risk Managment Strategy, Hennet, Mercantini & Demongodin, 2000

Figure 9: Supply Chain Perspective, SCC 2008

Figure 10: Process Reference model, SCC.

Figure 11: Five Distinct Elements of SCOR, SCC. 2010

Figure 12: Golparvar & Seifbarghy., 2009 Geographical Representation of XYZ Oil Company.

Figure 13: SCOR Tool Kit, Level-2. SCC 2010

Figure 14: Risk Enabler Flow, SCC 2008. p.15

Figure 15: Risk Measures Hierarchy. SCC, 2008.

Figure 16: Stakeholder Analysis, Bryson (2004)

Figure 17: SCOR Implementation at Ford, SCC 2009

Figure 18: Exploratory Research Types, Ceneage Learning (2010).

Figure 19: Toyota Kirloskar Motor Corporation Supply Chain

Figure 20: Suppliers Location Mapping

Figure 21: Inbound Cross Docking Strategy. Varghesse (2009)

Figure 22: Raw Materials Supplies Logistics

Figure 23: SCOR based thread diagram of Supply Chain of TKM facility

Figure 24: The SCOR Level 2 Configuration (to be)

Figure 25: SCOR based thread diagram of Supply Chain of TKM facility

Figure 26: Framework Involving Stakeholders for Supply Chain Risk Assessment, Eaglin & Rabelo (2008)

Table 1: Toyota Expansions, Jr. Austenfeld. 2006 (p.5-18)

Table 2: Supply Chain Risk Categories (Olson 2012) P.7 Supply Chain Risk Categories

Table 3: Supply Chain Risk Management Strategies. Pobathi, S 2013 [Self Potrait]

Table 4:Source Manuj and Mentzer., Journal of Business Logistics, p.143

Table 5: Five Core Management Process of SCOR level 1, SCC, 2008

Table 6: SCOR process type, SCC 2010

Table 7: Performance Indicators SCOR. SCC, 2010

Table 8: SCOR Process Type, SCC. 2008; Pobbati, S 2013 [Self Potrait]

Table 9: SCOR Risk Categories, Ziegenbein & Baumgart, (no date)

Table 10: Risk Assessment VaR Shaw, 2009; SCC 2008.

Table 11: VaR after Risk Mitigation Plans. SCC. 2008

Table 12: Risk Assessment using VaR, SCC (2008)

Table 13: Risk Mitigation Plan, SCC (2008)

Graph 1: Long Tail Distribution of Supply Chain Process. Shaw 2009, p.3

Graph 2: Risk Prioritization Matrix

Chart 1: Toyota Sales by Segment, Toyota Annual Report, 2013

Abstract

In a complex dynamic business environment, supply chains have become the most integral part of the organization. They now, are the tools of reducing costs and adding value (additional) to a product or service. Henceforth, they can be regarded as the crucial part of an organization. However, the quest of organizations and globalization with aim of constructing an effective means of supply and supply chain has increased the complexity of the supply chain which can often reduce the knowledge and understanding the of the exposure to risk.

The risks can arrive from anywhere or from any source. For instance, imagine port and the harbor industry which was wrecked by Tsunami which erupted in Indian Ocean 2004. This was an unanticipated risk which can be categorized as natural risk (natural disaster). Risks from suppliers can be untimely delivery, increased in costs than agreed or labor strikes and external risks can change government economic policies (changing tax rates and subsidies etc.).While few risks can be anticipated, whilst majority of risks cannot be forecasted (decease of factory worker due to unhealthy conditions or heart stroke), this demands the ongoing need for an effective risk management frame work for assessing risks in the supply chain management.

The incorporation of Supply chain operations model for assessing and evaluating risks have benefitted many supply chains and organizations. Yet, there certain limitation of the model that fails to address risks in supply chain.

The SCOR model of assessing risks becomes more complex when it’s applied to complex supply chains. The five attributes on which the SCOR model is built has to be tested to determine if there is a need for any other variants or additional attributes that has to be incorporated into the model. This paper discusses the importance of SCOR model in assessing risks within the supply chains and makes an attempt to determine how the model applies its scope in addressing risks from internal employees. The application of the SCOR model is only limited to study and to analyze the concepts of supply chain vulnerability and stakeholder’s interest and doesn’t extend beyond that. The model is applied to Toyota Kirloskar Motor Corporation, by configuring its existing supply chain and identifying the potential internal risks. Based on the analysis, recommendation and suggestions are submitted for variant of attributes to the SCOR model.

Motivation

According to Kolb (1984), learning is the process whereby knowledge is created through the transformation of experience. Learning is cyclical and it involves four stages namely, concrete experience, reflective observation, abstract conceptualization and active experimentation which follows in a sequence of stages.

The reason I wanted to outline the above definition is to indicate my motivational factor performing this investigation which is presented in the thesis or research paper. Down the lane or apparently a few months ago, I had to infer with one of my colleague which likely was an argument about the dangers or risks which are to happen by natural disasters. We were typically having an argument about what happens to the public or citizens of any nation across the globe. Well, at that point of time, it happen to catch my mind about what happen to companies who are into mass production of any sorts, what if they didn’t see it coming!

I had to put up myself with some questions like;

1. Do they have any sources of information about risks from unknown sources?
2. How would they deal or react to such consequences?
3. What would be the impact?
4. How would they overcome such an impact, if it has high financial value tied with it?
5. What would happen if employees, all together quit or conduct a strike for one or more days and what if the company never seen it coming?
6. Can be there something which takes all the major risk sources into consideration and provide companies a valuable support which might reduce the impact?

Well, this was my initial stage and we were busy in selecting our topics for final dissertation. After discussion with my tutor and other colleagues, I had selected supply chain risk assessment as my research topic and I had to return to India on a purpose.

I was performing all sorts of research work about supply chains and risks, when a daily newspaper caught my eye. The issue was about one of the renowned motor production company, Toyota. The issue outlined that there was a labor strike happening in one of their production facility in Bangalore. And I was completely shocked to how the company never saw that coming. With more research I was able to gather more information about the issue, at the same time my professor gave me a research paper which was prepared by SCC council on the SCOR methodology which addressed major supply chain risks and was widely practiced.

In a brink of time, after reading the paper of SCC council, I just taught would the methodology work from the geographical context or within a country like India. Well, it was not about the nation or country it was about the applicability of the SCOR model.

With additional data sources and information, I was able to understand the SCOR model up-to my knowledge and I felt the applicability of the model was very limited and also the model demands for changes or additional attributes.

This motivated me to design the study across the Toyota Motor Production Facility on the basis of SCOR methodology. The major aim at this point of time was to determine, if SCOR was implemented with the TKM facility, was it possible to deviate or assert the risks.

The application of this particular study extended its scope and explored further more complicated areas and also offered solutions, which has descriptively presented in this research paper.

1. Introduction

Supply Chains have created and connected different sources of goods to customers for as long as humans have done the business (Olson, 2012). Supply chain is a series of process that adds value to products/services which is one of the major operational activities performed by the firms. It is an activity increasing the quality and efficiency of converting operations. The basic essence of supply chain is: converting inputs into desired outputs in an efficient and cost effective manner. However, there is a constant pressure on managers to improve the efficiency of their supply chains. It is an underlying statement; a supply chain which does not benefit an organization in terms of costs and effectiveness isn’t an effective supply chain.

As the need for increasing effectiveness of supply chains rose (in terms of quality, safety, low cost and flexibility), the new initiatives and methods were developed to increase the effectiveness of supply chain. However, these new models and frameworks not only increased the efficiency of operations; but also gave rise to an array of unforeseen problems and risks in the supply chain.

In a complex dynamic business environment, supply chains have become the most integral part of the organization. They now, are the tools of reducing costs and adding value (additional) to a product or service. Henceforth, they can be regarded as the crucial part of an organization. However, the quest of organizations and globalization with aim of constructing an effective means of supply and supply chain has increased the complexity of the supply chain which can often reduce the knowledge and understanding the of the exposure to risk (The Chartered Quality Institute, 2010).

Globalization in terms refers to expansion of the business operations; when the business expands its density of operations or globalizes to different geographical locations, the supply chains of the organization has an considerable influence and risks evolving out of the expansion strategies. This questions the flexibility of the adopted supply chain methodologies. In terms of business, a risk could be anything arriving from a particular operation (before or after) or the occurrences that has a likelihood of impact on the organization or the supply chain process or in the converting process.

In the present macro-micro environment, supply chains are vulnerable disruptions with unforeseen large consequences of seeming events (Craighead et al., 2007); while author also claims that it is due to lack of visibility of the supply the risks are unanticipated.

1.2. Background Value

The risks can arrive from anywhere or from any source. For instance, imagine port and the harbor industry which was wrecked by Tsunami which erupted in Indian Ocean 2004. This was an unanticipated risk which can be categorized as natural risk (natural disaster). Risks from suppliers can be untimely delivery, increased in costs than agreed or labor strikes and external risks can change government economic policies (changing tax rates and subsidies etc.).While few risks can be anticipated, whilst majority of risks cannot be forecasted (decease of factory worker due to unhealthy conditions or heart stroke), this demands the ongoing need for an effective risk management frame work for assessing risks in the supply chain management.

The implementation of supply chain management dates back to history, 1000 years ago. During the reign of Vikings, a trade was developed between the North and Baltic with an interesting supply chain during 10th century. However, this particular chain was disrupted by robbers and Viking who use to steal the products and threaten the lives of individuals. With view of protecting and safeguarding the traders, merchandisers and workers; the Haneseatic League was formed, which applauded by many authors and researchers as an early form of supply chain risk management. However, the risks in the pre-civilization periods were limited; but in the present dynamic environment, there are numerous of risks arising from unanticipated sources. This argues the obligatory requirement of supply chain risk management with a wider scope assessing majority of risks.

The research paper presented by the supply chain council (2008) has spilled the supportive light in assessing risks and managing them within the supply chains with the help of practical models. The incorporation of SCRM into to the process reference models has offered a conceptualized framework for assessing and managing risks in the supply chains. This particular framework has been widely practiced in irrespective of industry sectors around the globe.

An exploratory study by Lockamy and McCormack (2004) presented empirical evidences about how the supply chain operations model improves the supply chain performance within the organization. The study by Georgise, Thoben and Seifert (2011), outlined the fact the SCOR model can be implemented to suit different scenarios which proves the flexibility of the SCOR model in process re-modeling.

The SCOR model not only supports domestic supply chains; but also can be implemented around global supply chains (Wang, Chan & Pauleen, 2010). However, Adetunji (2014) stressed the importance of constant development of SCOR models. As business operates in a complex and dynamic environment, the frameworks must be recycled or updates to match the ongoing trends and changes. The author argued that vulnerability should also be one of the relevant attribute of SCOR with the help empirical evidences as supportive argument.

This research paper discusses the importance of supply chain risk management and its principles in the light of theoretical and practical literature. For the purpose of concrete analysis, a specific business case will be built of a particular industry and risk management framework shall be assessed by incorporating SCOR and VaR model.

This particular research aims at constructing a variant model by incorporating SCOR and VaR models. The approach adopted in this particular research is exploratory study that aims at explaining all the problems related with area of the study (Why, What and How )

1.3. Research Problem

The research problem is a general statement most often short and precise that defines the concern areas of the investigation, nature of appropriate forms in the investigation involved meriting the research. The research problem ideally consists of three parts which are referred as idea, the reality and the consequences of the investigation which are presented to the readers.

Research Problem

“The investigation proposes to study different supply chain risk management models and examine the attributes of SCOR methodology of supply risk management using a case of study Toyota Kirloskar Motor production facility, to assess and present new attributes for the SCOR methodology

What Problems

- What are supply chain risks and different sources of risks from a global perspective?
- What is supply chain risk management and different frameworks for assessing risk management in the supply chains?
- What are Process Reference Model and its application in configuring supply chain?
- What is VaR and its application as metric is supply chain risk assessment?

Why Problems

- Why Supply chain risk management is important for organizations?
- Why SCOR is important in supply chain risk management?
- Why supply chain vulnerability is an important attribute for SCOR?
- Why there is a need for continual development risk assessment frameworks and models?

How Problems

- How organization can assess and evaluate risks within the supply chains?
- How SCOR model helps in assessing and evaluating risks in the supply chain?
- How SCOR model can be further developed in terms of new attributes and variants in metrics?
- How internal stakeholders (employees) may cause supply chain disruptions?

1.4. Research Contributions

Many scholars and authors have done certain number of research studies focused on the integration of SCOR model into their supply chains to match business processes. Manju and Mebtzer (2008a), presented the journal paper that defined risks from global context and offered a conceptual supply chain risks management framework that involves five stages in assessing and managing risks within the supply chains. Their model of risk management are widely practiced by many firms and business organizations. Few studies focused on the review and development SCOR models to ensure business continuity.

An explanatory study by Adetunji (2014) aimed at developing new frameworks of attributes that are too integrated into the existing SCOR model for effective supply risk management. Wang, Chan & Pauleen (2009), aligned business process reengineering in implementing global supply chain systems using SCOR model.

This particular research paper focuses on studying the SCOR models and their application in supply chain risk management. A case of Toyota Kirloskar Company is used as a methodology to offer suggestions for the continual development SCOR model and to attain the intended research objectives.

2. Company Background

The term Toyota is familiarized in major nations across the globe; as a car manufacturing company, which is because of their brand and the given importance to quality and service. Toyota Motor Corporation is a Japan based manufacturing firm which is mainly engaged in the automobile business and even has identified business in financial services domain. The history of Toyota dates back to 1933, when it was established as a division within the Toyoda Automatic Loom Works, Ltd.

The pioneer who set up Toyota was Mr Kiichiro Toyoda, son of the founder of Toyoda Automatic Loom Works, Ltd Sakichi Toyoda. In the early 1930’s Toyota suffered and struggled to compete in the Automobile market. The manufacturing of poor quality vehicles with primitive technology was not so much incumbent in the automobile market. However, the firm had little success at early stages of production (Liker, 2004).

Despite of the competitive market and primitive technology, Toyota Motor Company was formed in 1937; later in the preceding year Just-in-Time (JIT) system was launched in the plant on a full scale basis and the customers’ were evaluated carefully to maintain the demand and production effectively.

The developments grew immensely by the support of the key players like Eiji Toyoda, Taaichi Ohno and the founder Kicchiro Toyoda and the stakeholders of the company. The implementation of “pull system”, Toyota Production system and perfecting the Just-in-Time systems, rather than focusing towards batch and queue system much befitted the Toyota’s supply chain’s; this evaded costs and costs for huge inventories which was practiced by American firms like Ford and General Motors.

From 1950’s the firm started to manufacture and sell cars which inevitable tapped the automobile markets. Motor cars like Corolla that competed against Volkswagen, Celica, The Sports 800, and The 200 GT competing with U.S automobile market. The 2000’s was known to be one of the favorable years for Toyota, as the firm was exposed to global opportunities.

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Table 1: Toyota Expansions, Jr. Austenfeld. 2006 (p.5-18)

2.1. The Kanban System

Toyota’s Production System can be referred as the pioneer criteria for the success of Toyota in the automobile market. The implementation of TPS’s within the production of Toyota has its own story and motivation. When Taiichi visited the United States in 1950’s he was moved and fascinated by the operations of the super markets (retail stores/ outlets).

These supermarkets, instead of having lot of inventory held in the stores, the customer was signaling what should be bought from the wholesalers and when it should be bought. The signal was simply to let know how much should be bought and how should be replenished. The same concept was conceptualized and implemented within the TPS which gave rise to the Kanban System. A Kanban is simply signal sent by some device to the next upstream supply source that more of whatever supplies are needed (Liker 2004; Jr. Austenfeld. 2006)

An operator uses the parts from a standardized container and once the container is empty, the empty container along with the parts retrieval Kanban is sent back to nearby replenishment section for refilling and then returned to the operator. During the replenishment process, another container in the system allows the operation to continue further. This process will be practiced in a continuous process and once the replenishment sections’ stock goes down or reaches a certain standardized level “production instruction Kanban” is alarmed and sent back to producer for producing certain amount to the replenishment centre (Liker 2004, p.108).

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Figure 1: The Kanban Concept, TPS 2006.

Sales and Production Stats of Toyota

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Chart 1: Toyota Sales by Segment, Toyota Annual Report, 2013

2.2. Production sites of Toyota outside Japan

Figure has been removed for publication.

Figure 2: Production sites of Toyota, Toyota in the World. 2012 (p.3-8)

The further information regarding the TMC’s operations and production facilities are presented in the analysis chapter. TKM is a subsidiary of TMC. The internal risks exposed in TKM facility is assessed and evaluated in the analysis chapter of this study.

3. Literature Review

The literature review chapter explains the main theory and frameworks developed and presented by academic authors, researchers and business practitioners. The chapter explains risks and different sources of risks, risk management frameworks & methodologies and critically reflected in the light of empirical evidences to gain clarity and knowledge about the outlined concepts

3.1. Supply Chain Management

Operations management is the process of planning, scheduling and controlling of the activities that transform inputs into finished goods and services. An operations management is a collection of process, which further includes sub-processes. Operations management is also a collection of people, technology, and systems within a company, which has a primary obligation of providing organization’s products/services. During this conversion of inputs to products/services, there exist a sequence of processes, which is involved in the production, and distribution of a commodity known as supply chain; management of the sequence can be referred as supply chain management.

Supply chains are a series of value creating processes spanning over company boundaries in order to provide value to the end consumer (Chinkan, 2008). Supply chain management is an oldest existing concept of management, which has been researched long down the history (Mentzer et al, 2001; Lamming et al., 2001; LaLonde & Masters, 1994).

Historically the evolution of supply chain management dates back to 90’s: where in pre-globalized world, there existed a poor transportation technology due to which each community produced most of what it consumed. Later, the development of steam powered the railways to transport goods; which reduced trade costs dramatically making it to spatially separate production and consumption (Bairoch 1990)

According to (Jacobs, 2010), “supply chain management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, factures, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and the right time, in order to minimized system wide costs while satisfying service level requirements”.

“Supply chain management is defined as the systematic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain, for the purpose of improving the long-term performance of the individual companies and the supply chain ass a whole “

(Mentzer et al., 2001, p. 18)

“Supply chain management is the conscious management of supply chain processes in order to make supply chain participants achieve a higher competitiveness”

(Gelei, 2003)

The supply chain consists of all stages that are involve directly or indirectly in fulfilling a consumer request. The supply chain not only includes the manufacturer and suppliers, but also technical persons, transporters, retailers, warehouses and even customers themselves (Chopra & Meindl, 2001); as an operations theory states that the customers himself will be an input to the process. In simpler words, a supply chain is an integrated manufacturing process where, raw materials are converted into final products, and then delivered to customers. These chain is mainly comprised of two basic integrated processes; 1) Production planning & Inventory control process and 2) Distribution & logistic process (Beamon B.M., 1998)

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Figure 3: Source: (Beamon 1998, p. 3.) The Supply Chain Process

(Mentzer et al. 2001) perspective on supply chain management is more likely to create complications & confusions, as the scope of supply chain is described wide in term of profit and long-term performance of the company.

(Mentzer et al., 2001) perspectives of supply chain management was criticized by various authors as it was not confined to specific department of supply chain and stated that it was poorly defined and certain nuances were exposed in the definition ( Burgess et al., 2006).

The primary and main objective of supply chain management is to “add to value” (Zigiaris 2000., p 6). Supply chain management also becomes a tool in the process of accomplishing corporate strategic objectives: a) reduced working capital, b) taking assets off the balance sheet, c) accelerating cash-to-cash cycles and d) increasing inventory turns, and so on. To become more successful, an effective and efficient supply chain management should have certain principles so that the adhered objectives are accomplished effectively. (Andersen Consulting, cited in SCH, Zigiaris 2000., p. 11) offered seven principles for designing supply chain management more effectively; which are mentioned below.

1. Segment customers based on service needs: Firms have grouped their customers by industry product or distribution channel and makes attempt to provide the same service level to each customers. The effective supply chain management should segment the customers based on their needs regardless of other criteria’s like industry or product.
2. Customizing the supply chain network: The designed supply chain network must more feasible. Firms must intensely focus on the services requirements and profitability of the segmented customer groups; creating a monolithic supply chain management network.
3. Listen to signals of market demand & plan accordingly. The operation and product department should be capable of forecasting early market signals to embrace the competition in the market; which leads to more consistent forecast and optimal resource allocation.
4. Differentiate product closer to the customer: The manufacturing process should be closer to the customer, which means the product manufactured should meet the actual needs of the customer. To satisfy the product demand, at times differentiation should at the lesser proportions, so that the needs of the customer are not distorted.
5. Strategically manage the sources of supply: Firms should work closely with their suppliers, so that the cost of owning materials and services can be reduced. This can also boost the margins for supply chain leaders and for the suppliers.
6. Develop a supply chain wide technology strategy: Information is highly important in the supply chain; it can be technical and non-technical. Nevertheless, gaining a technical advantage in supply is more like to be a competitive advantage. Information technology must support multiple decision making process and should provide a clear view of flow of products, services and information.
7. Adapt channel-spanning performance measures: Effective supply chain managements not only monitor internal functions, but also adopts different approaches to think every chain in the system strategically embracing both financial and service metrics in the organization.

The contradiction is that adopting the above principles in the organization is not as simple as stated. There might or will arise a significant amount of risks before or during the implementation process. These principles might counter to ingrained functionality oriented thinking and it is all about how companies organize, operate and serve customers.

3.2. Supply Chain Risk

Today, firms and corporations are restructuring themselves due to changing customer demands and competitive pressure in the market. Such a restructuring would enable firms to operate on a global basis to take advantage of international product, factor and capital markets. Firms have been aware of the need of the contingency planning and risk management. Whilst, before descripting supply chain risk management; there is a conceptual need of understanding what risk is are from a varied perspective.

As outlined by (Dr. McComack, Wilkerson et al. 2008), risk is a concept that has applications in everything we do. According to International Organization for Standardization (ISO, 2002) the concept risk deals with two components, Losses (along with related amounts) and uncertainty of their occurrence. Culp (2001) states that risk can be defined as “any source of randomness that may have any adverse impact on a person or corporation”.

Supply chains is interrelated with the creation of goods & services and are integral part of any organizations as they serve for a specific purpose. Supply chains are attractive because they allow for customization and are cost effective sources for an organization.

The advent of globalization has created further opportunities for many organizations, retailers and manufacturers; but along with increased risks or unexpected consequences in the supply chains which would likely to wreck the system when not addressed in time.

Firms have to expand their capabilities beyond their traditional boundaries to rely on extended networks in order to capture new markets; which has resulted in much more intensive competition between the teams rather than individual corporations. To some extent the risks that were considered ignorable or manageable have now to at a significance stage demanding consideration due to the exposure (Faisal, Banwet, & Shankar 2006)

The below Fig.(2) represents the pictorial representation of arrival of disruptions and the time frame taken by firms to address such disruptions within the supply chains. According to (Navigant, p3), the supply issues or risks should be addressed immediately to avoid further damage to supply chain processes. Rapid responding or mitigation strategies used at the early level (when the event started), is likely to evaluate such risks at initial. If unattended or responded lately, would result in worst damage to the organizations which would impact the management processes and practices.

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Figure 4: Risk Analysis, Navigant. 2012. P.4

Modern supply chains are exposed to numerous kinds of events, which may disrupt the course of the business operations. They might have risks internally and externally, but risks involved in their supply chain management would result in problems that are more complex for the corporations. Firms supply chains require highly coordinated flow of goods, services, information and financial inputs within the process (Mentzer 2001). Supply chain risk management is an iterative process that ensures the profitability and continuity of business by identifying and eliminating risks in the supply chains.

It entails decisions and actions to reduce the exposure of risks, mitigate the consequences of risks and to counter balance the impacts. From a strategic point of view, supply chain management can be viewed as the process of managing risks in the supply chain. This is the common understanding of supply chain risks; managing such risks can be referred as Supply Chain Risk Management.

The below table.1 provides the basic understanding of risks that are arising internally & externally and their impacts on the person or organization. The organization with supply chain should worry about risks from every direction. For instance, the flood in Japan was not forecasted by any source of means; however due to the Tsunami the nation crumbled and the organization with huge supply chains suffered more inferring high costs of re-structuring.

However, managing internal risk is likely to become more crucial for the organizations. Firms are responsible to manage their suppliers, financials, worker safety precautions, production and structural capacities. Information systems should be well versed and managed effectively to ensure timely information and these internal consequences or risks are not very easily traced (Olson, 2012). To address this consequences effective risk management techniques and tools are required; henceforth supply chain risk management becomes a crucial part of any organization.

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Table 2: Supply Chain Risk Categories (Olson 2012) P.7 Supply Chain Risk Categories

3.3. Supply Chain Risk Management

Supply chain risk management confines the process of identifying risks, assessing them and choosing them from range of approaches to mitigate them (Nieger, Rotaru, and Churilov 2009; Manuj and Metzer 2008a, 2008b; Khan and Burnes 2007; Gaonkar and Viswanadhan 2007; Juttner, Peck and Christopher 2003). Manuj & Mentzer (2008a) offered a basic framework for supply chain risks management. Supply chain management is the intersection of supply chain management and risk management.

However, the definition of the supply chain management cannot be presented without conceptualizing the basic constructs of supply chain risk management as outlined by Juttner, Peck and Christopher, 2003.

The term risk cannot defined easily as it offers different meaning to different sectors, and the term risk relativley confusing as because of its multi-dimensional meaning. (Goldberg et al., 1999; Zsidisin). Nevertheless, risk refers to undertainity thers arise an obligation for defining the sources of risk for defining supply chain risk management; as the risk on a wider scope should and will comprise of external, internal and environmental variables.

However, (Juttner, Peck & Christopher, 2003) in their international journal defined risks in simpler with respect to supply chains. “Supply chain risks refer to the possibility and effect of a mismatch between supply and demand” and the risk sources “the environmental, organizational or supply chain related variables which cannot be predicted with uncertainity and which impact on the supply chain outcome variables”.

The below potrait defines all the three variable, Supply chain risk, supply chain risk sources and supply chain risk management. Supply chain risk management can be defined as the process of identifying risk sources and risks, analysing their impact on the supply chain and designing risk mitigation stratgeies to tackle such risks in the supply chain.

According to (Svensson, 2002) “Supply chain risk management aims to identify the potenial sources of risk and implement appropriate actions to avoid or contain supply chain vulnerabiltiy”. From the border perspective, (Svensson, 2002) and (Junttner et al, 2003) defintions of supply chain seems to be identifical, however (Svensson, 2002) additionally provides risk mitigation actions in his definition “Avoid or Contain” which reflects the wider scope of the definition.

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Figure 5: Source U. Juttner, H. Peck, M. Christopher, 2003. International Journal of Logistics 6, 197-210

However, the supply chain management council (2008) stresses on the importance of risks management and defines risks from the organization and supply chain perspective.

BCI (2005) refers risks management to Business Continuity Management and defines it as “a holistic management process that identifies potential impacts that threaten an organization and provides a framework for building resilience and the capability for an effective response that safeguards the interests of its key stakeholders, reputation, brand and value creating activities”.

Business vulnerability can be referred as the increasing level of exposure of a business to potential impacts. Christopher (2003) defines business vulnerability as an to exposure to serious disturbances, arising from risks within the supply chain as well as risks external to supply chain, which is result of any weakness within a complex system than can seriously jeopardize its activities (Ayyub, 2003)

Enterprise Risk Management (ERM) as a set of coordinated actions about protecting and enhancing share value to satisfy the primary business objective of shareholder wealth maximization (Chapman, 2006).

Resilient enterprise meaning the ability of the company to recover quickly from a disruption (Sheffi, 2005)

Based on the above concept that defines supply chain risk management, the supply chain council has developed a concrete and conceptual definition that would clearly define supply chain risk management in precise words;

According to SCC (2008), “Supply chain risk management is the systematic identification, assessment, and quantification of potential supply chain disruptions with the objective to control exposure to risk or reduce its negative impact on supply chain performance. Potential disruptions can either occur within the supply chain (e.g. insufficient quality, unreliable suppliers, machine break-down, uncertain demand, etc.) or outside the supply chain (e.g. flooding, terrorism, labor strikes, natural disasters, large variability in demand, etc.). Management of risk includes the development of continuous strategies designed to control, mitigate, reduce, or eliminate risk”.

Supply Chain Risk Management Techniques

(Manuj & Mentzer, 2008a), offers a more conceptual framework in defining supply chain risk management as stage by stage process; which can also be proclaimed as one of the widely practiced framework in the field of supply chain and logistics.

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Figure 6:Source Manuj & Mentzer (2008a), Pobathi, S 2013. Self Portrait [Supply Chain Risk Management]

Risk identification is the primary stage in the conceptual framework provided above. The stage involves identifying risks from different perspectives.

Generally, there are four areas where risks are likely to occur, whilst the first three areas are considered more important and crucial: operation risks, supply risks, demand risks and environmental risks as stated by Bogataj & Bogataj (2007), Christopher & Peck (2004), Harland, Brenchley, & Walker (2003), Juttner (2005), Sodhi & Tang (2012) and Manuj & Mentzer (2008a, 2008b).

Operational risks are the risks arriving from the operations of the firm and are subdivided into process risks and control risks. Risks that arise from the disruptions in the process mechanism of conversion such as design, manufacturing and distribution. On the other hand, control risks refer to the controls used to govern processes.

Supply chain risks focuses more in operational risks associated with external stakeholders-suppliers and buyers. Supply chain risks often effect the timing, cost and or specifications of all the inputs required by the firm. (Liu, Lin & Hayes 2010). Supply chain risks would affect all the people who are involved in one product’s life cycle and the existence of such risks would be devastating as it creates ruckus in the supply chain.

Demand risks are external risks that arises from the consumers when there is a mismatch between the consumer expectations and the actual product provided.

The effective way of eliminating demand risks is by making extensive demand forecasts; so that customer preferences are predicted accurately. The first four category risks in the below figure 3 is considered to be risks sources associated with the supply chains.

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Figure 7: Source Manuj and Mentzer., Journal of Business Logistics, p.136

To evaluate and address the above risks, supply chain should be improved by thinking strategically by broadening the cooperation, considering trade-offs and acknowledging even the small risks in the supply chain (Stauffer, 2003) and also by making the supply chain more feasible and flexible, such risks can be addressed effectively.

Risk Assessment is the secondary stage in the framework. It is the process of assessing the risks identified in preliminary stage; it is the stage of enrooting the suitable risk mitigation strategy.

At the basic level, risk assessment centers round two questions; a) what are the likelihood of a risk event occurring and b) what is the significance or impact of that risk (Harland, Brenchley & Walker 2003: Khan and Burners 2007: Zsidisin et al. 2004). Risk assessment is one of the crucial roles in managing risks in supply chains. However, defining what risks to assess is difficult as there is no universal accepted risk managing tools. But Manuj and Mentzer (2008) suggest that to define what risks, one has o “right questions” which they term as “heart of risk assessment”. Risk assessment is a critical process for helping top management to make informed prioritization and resource allocation decisions. The objective of the risk assessment is to provide a shared sense of urgency about a subset of identified risks and to develop mitigation plans & for related purposes (Sodhi & Tang, 2012). The risk assessment and evaluation is based on decision analysis, with the help of case studies and perception-based assessments (Manuj and Mentzer 2008, p.137).

It certainly becomes important to understand the nature of probability distributions of risks. In defining the risks and to understand the behavior of risk, historical data analysis can be adopted to depict the probability of distributions.

Selection of appropriate risk management is the next step in supply chain risk management. Having identified the risk, the next stage is to adopt strategies to address the risks in the supply chains. The preliminary objective is to avoid (avoidance) of the possible risks within the supply chain. For instance, the oldest form of risk avoidance is insurance, purchasing some level of financial of financial security from an underwriter; because insurance sectors emphasize the financial aspects of risks and are reactive, providing some recovery after a negative experience with the aim of avoiding disruptions or risks in future. This can also referred as the strategic level of risk management which is focused on identifying and assessing the likelihood and consequences of risks and selecting appropriate risk strategies to reduce such likelihood within the supply chains. The below table represent the debriefed facets of risk management strategies that are outlined by various authors in Table.2

There are certain more risk management tools and methodologies to mitigate risks within the organization; Track and trace tools, Risk mapping or prioritization, Business continuity planning, Scenario planning, Centralized supplier assessments, Supplier codes of conduct, Supply chain mapping, Supply chain council and SCOR model, ISO28000 and many frameworks to assess and evaluate risks in the organization (World Economic Forum 2012. p. 16).

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Table 3: Supply Chain Risk Management Strategies. Pobathi, S 2013 [Self Potrait]

(Hennet, Mercantini & Demongodin, 2000) offers a more concise and conceptualized risk management strategies in their study of integrating risk analysis in supply chain assessment. This model focuses on assessing both internal and external risks, presenting certain alternative solutions to evaluate the risks of disruption of a supply chain and bankruptcy of one or its several member enterprises.

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Figure 8: Risk Managment Strategy, Hennet, Mercantini & Demongodin, 2000

Implementation of SCRM revolves around executing the planned risk management strategies and frameworks. Usability which is a factor for implementing a risk analysis and evaluation system; it refers to the functionality of the application, as to whether it can be used for sourcing decisions or only for strengthening existing supply base or both. (Blackhurst, Wu, & Chidambaram, 2006)

Implementation requires a standard set of procedures or structures to carry out the execution of planned strategies effectively. Freedman (2003) suggests that supply chain strategy implementation requires discipline, commitment, creativity, leadership and superior execution skills as because the implementation plays one of the pivotal roles in evaluating risks and the execution should be impeccable to avoid any further damages or disruptions.

In order to reduce complexity and redundancy in supply chains, the supply chains should be made more flexible; which increases the ability of supply chains to adapt or react to the uncertainties/complexities with little penalty of time, effort, cost or performance (Upton, 1994). The more flexible the supply chains, the more effective they are when addressing risks within them. Flexibility becomes important in any supply chains because it plays a facilitating role in the coordination process and operating uncertainty inherent in international operations (Hise 1956; Fawcett, Calantone, and Sheldon 1996). Mentzer & Manuj (2008a), offers additional factors affecting the strategy implementation which they outline as organizational learning, information systems, and performance metrics.

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Table 4:Source Manuj and Mentzer., Journal of Business Logistics, p.143

3.4. Risk and Supply Chain

The above literature discussed the various risks and their impacts on organization from the supply chain perspective as presented by different scholars and authors. However, the SCC council offered a conceptual framework that defines internal and external risks specifically present or occur (likelihood) within the supply chains of the organization.

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Figure 9: Supply Chain Perspective, SCC 2008

The above Fig.6 has been incorporated from the report that was presented by SCC council in 2008. In prior studies, the researchers and authors were focusing on different types of risks and its sources that disrupt the supply chain processes.

The SCC council offered a clear picture of risk from different perspectives Suppliers, Company and Customers. The model outlines the risks and different types of risks from both internal and external faced by all the three elements that are associated with the supply chain (supplier, customer & company).

From the perspective of supply chain operations, the risk sources have been classified into three different segments namely Supplier facing, Internal facing and customer facing which has an considerable impact on the supply chain. Supplier facing encompasses the network of suppliers, their market and their relationship either directly or indirectly with the company (for instance, a supplier of a company would have outsourced his functions to another vendor, who becomes a direct supplier to the supplier and indirect supplier to the company).

[...]

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Details

Title
A study on the SCOR model for assessing risks in a supply chain
Subtitle
Investigating relevant attributes for SCOR model using a case of Toyota Kirloskar Motor Corporation
College
University of Lincoln  (PG Business School)
Course
MSc in Supply Chain and Logistics Management
Grade
64
Author
Year
2014
Pages
88
Catalog Number
V280991
ISBN (eBook)
9783668420595
ISBN (Book)
9783668420601
File size
2632 KB
Language
English
Tags
supply chain management, scor, logistics, supply chain assessment, supply chain risks, risk management, supply chain risk management
Quote paper
Murali Mg (Author), 2014, A study on the SCOR model for assessing risks in a supply chain, Munich, GRIN Verlag, https://www.grin.com/document/280991

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