Mgt 650 - Risks Associated with Supply Chain Management

MGT 650

Term Paper

Risks Associated with Supply Chain Management

I. Introduction

Companies face a myriad of risks throughout their supply chain. To properly manage these risks, companies must be able to clearly identify them in order to accurately manage and mitigate their impact. Broadly defined, risks can be divided into two general categories: general risks, which are faced by most companies regardless

of the nature of the industry in which they operate or the nature of the goods or products they offer on the market, and industry-specific risks, which vary according to the industry in which a company operates. The following is a survey of the types of risks that can be classified within these two broad categories and some methods by which companies can help mitigate or avoid such risks. Lastly, an analysis of both types of risks will be applied to a real-world case scenario.

II. General Risks

The general risk category can further sub-divided into several sub-categories. There are operational risks, risks associated with balancing supply with demand, transportation risks, communication and information risks, supply chain integration risks, and external risks.

A. Operational Risks

One of the primary operational risks is the degree of contingency planning exposure. An essential part of operations management is the existence of contingency plans, well-developed strategies and initiatives that are in place to handle disruptions in the supply chain. Such plans must adequately identify the risks and have proper measures in place to mitigate and manage the impact of such risks. One excellent strategy that is often used is to maintain relationships with a plethora of alternate suppliers - suppliers that can be contacted in case the original suppliers cannot meet its obligations. Also, maintaining a small, reserve inventory on hand can help alleviate disruptions in the supply chain. Maintaining such an inventory can be used as an alternative to alternate suppliers or it can also be used to compliment such a strategy. Likewise, if possible, the company could also maintain viable options for using alternate products or raw materials, although this option may be cost prohibitive.

Another important operational risk to consider is supplier viability. One must ensure the chosen supplier is financially viable - economically capable of fulfilling the goals and demands of the contract. In addition, one must ensure the supplier actually possesses the resources, capabilities, and skills necessary to complete the desired tasks. Moreover, should a supplier meet these requirements, the supplier must also be capable of producing goods or products that meet relevant industry, legal, or government standards or regulations for safety and quality. One common method of ensuring supplier viability is to establish long-term stable relationships with dependable suppliers.

Yet another important operational risk to consider is potential contractual liability for failures in the supply. If a disruption in the company's supply chain occurs, the company must have adequate means of rectifying the situation or mitigating its impact to avoid any potential legal repercussions. As such, supplier contracts should be carefully drafted and reviewed, whereby all the key demands of the agreement are clearly outlined and defined. By doing so, any failures on behalf of the supplier can be legally separated from any contractual obligations on the company. Moreover, these potential legal ramifications highlight the need to have contingency plans in place and to ensure that the company has formed relationships with viable suppliers.

B. Balancing Supply and Demand

A company must ensure that it is correctly aligning its supply chain to the end customer by synchronizing supply needs with actual demand figures. By doing so, a company can help mitigate the impact of the bullwhip effect, whereby the inaccuracies of demand forecasting are multiplied as one moves along the supply chain. As such, the company can reduce the need to overwhelmingly depend on past trends and future demand forecasts, which are both often inaccurate and unrepresentative of current market trends. This is especially true in today's marketplace where the increased use and power of information technology in particular has helped reduce process cycle times and increase the demands end consumers are placing on the products they purchase.

In order to better synchronize supply and demand, a company must have excellent visibility along the entire supply chain. Visibility means the company can accurately diagnose the current demand expressed by all constituents along the supply chain, especially that of the end consumer. To compliment this, information must be able to flow effectively, rapidly, and freely along the length of the chain, both upwards and downwards, in order to determine current actual demand. Moreover, the supply chain should incorporate triggers or responses that in place, automatically engaging whenever the supply chain becomes disrupted. This lends itself to the need for contingency planning expressed above under operational risks.

Additionally, to better balance supply and demand, a company must coordinate its supply chain management (SCM) strategies with its customer-relations management (CRM) strategies. This is essential because SCM strategies often focus on economic metrics while CRM strategies often focus on customer feedback. Thus, if both strategies can be integrated to work in unison, the company should be able to develop a clearer picture of what supply is needed to meet current customer demand.

Another effective strategy that can be used is known as 'push-pull'. By avoiding a complete push strategy, the company avoids depending on forecasting and past trends and minimizes the bullwhip effect. Similarly, by avoiding a complete pull strategy, the company avoids the risks of a sudden disruption of change in the supply chain. Thus, the company should maintain a stringent balance between push and pull, a strategy used very effectively by Dell, whereby its products are produced with a modular design.

Lastly, in order to truly be successful in balancing supply with demand, the company must have agility and responsiveness. This can include a number of functions, such as a nimble manufacturing base, an agile procurement plan, or designing flexibility