Global Supply Chain Complexity and Risk Management 

Table of Contents

Introduction.

Impact measurement

The areas of risk.

Relationship with suppliers.

Product category of purchase.

Area of origin of the supply.

Management Supply Chain.

Management of Suppliers.

IT tools for risk management

Conclusion.

Reference.

Introduction to Disaster Management

Monitoring and control of the risks identified such as disasters or socio-political unrest, or the occurrence of unforeseen events affecting suppliers, carriers or distributors, can damage the overall level of service offered to the market, often with considerable repercussions. Furthermore, the trend towards evolution of supply chains and supply chains towards "market- and demand-oriented" models would seem to lead to greater risk of the chains themselves, as well as particular strategic choices can lead to a high level of risk along the entire chain of supply.

The factors just described should therefore push companies to integrate the management of activities and flows from an internal perspective with a management of supply chain relations. The focus by a company only on its internal performance therefore appears not sufficient to ensure a high level of service down the chain and, therefore, the actual creation of value.

In the presence of a high level of risk in the reference environment, it seems that companies tend to try to protect themselves with defensive actions. However, these choices do not always prove to be efficient. The conservation of high levels of safety stock, for example, generates direct consequences on the overall costs and flexibility of processes along the entire supply chain.

The management of risks related to the purchase of products and services is a priority of the managers of the corporate Purchasing Offices, together with the reduction of costs and the management of relations with suppliers. Anticipating with simulations of future scenarios, generally available from specialized Information Providers

Their management is positioned in the "Strategic Sourcing" area: from the systematic analysis to identify the needs of new Suppliers

The official company rating issued by ESMA certified rating agencies can be used directly. For a more detailed and personalized assessment of the financial risk of a company, which is called upon to carry out supplies of high economic value or critical to the Customer's business. Reputational risk is generated by the violation or negative perception of some of these qualities.

The regulations have led to significant progress in the purchase of direct materials; in the area of indirect purchases, the problems appear more complex: the codes of conduct are difficult to apply in practice in the supply chain. As they are generally recorded with a frequency more compatible with the speed of business dynamics, they can, in the face of positive financial ratings, report potential bad situations in advance before obtaining financial confirmation.

The aim of the research is to build a method of investigating the risks that weigh on the supply chain and that threaten. Technology still needs to leave ample room for experience, organization and expertise to intercept and track valuable information. The indicators, appropriately identified in the “areas” of the supply chain and with respect to the objectives, must be appropriately selected, evaluated and interpreted, through qualitative analysis, by the managers involved in the processes and activities subject to measurement. The risk management process, developed in the context of Procurement, can be structured in the following phases:

Impact Measurement

Process planning, in terms of people, roles, responsibilities, procedures and actions, for contrasting, mitigating and protecting with insurance coverage; Implementation of enforcement actions when the risks exceed the alert thresholds, to reduce their negative effects, transfer them to third parties, consciously accept at least part of the effects. Furthermore, a possible reaction to uncertainty may be represented by the choice of a transactional rather than a cooperative relationship with other companies, giving up collaboration with them Logistics, Operations, and Supply Chain Management. (2011), the resulting lack of information visibility along the chain makes it more difficult to react effectively to market changes and forecast demand.

An efficient and effective management of relations along the chain should therefore aim at the systematic management of the risk component, capable of compromising the pursuit of management objectives along the chain. Risk management, therefore, should be conducted according to the following perspectives, to be integrated with each other:

In the past, risk management has been underestimated, especially with regard to the reliability of the Supplier and the volatility of prices Liotine, M., & Ginocchio, D. (2020). The economic crisis has led to address the issue in a more systematic way. It was understood the importance of sharing risk analyzes with other corporate functions to discover interdependencies. The need to have the necessary data to develop effective management strategies based on potential future scenarios has become evident, also relying on Information Providers capable of providing adequate analytical data and aggregating them into effective reports. The focus has been shifted to new supplier management models: short chains to improve control and medium-long term relationships to consolidate their reliability.

The Areas of Risk

The sources of risk must not be limited, as often in the past, to financial factors and macro causes such as natural disasters, fires, accidents, criminal trials, but must be sought in all areas where the entire procurement process takes place, to example in the following areas Makan, H., & Heyns, G. J. (2018), risk areas in Procurement Risk in Procurement: areas and management

  • Product category of goods and services to be purchased
  • Geographical area and policy of origin of the supply
  • Management of the company Supply Chain

Relationship with Suppliers

These are areas with overlaps that sometimes function in resonance. The analysis of these areas makes it possible to obtain a set of information with which to build indicators to support decisions on the actions to be taken to counter an imminent or already underway risk.

Product Category of Purchase

The company must systematically analyze the positioning in the supply market of its product categories and identify the most critical ones, in particular to estimate the difficulty of adequate procurement on the market (Kraljic Matrix) and define alert thresholds Schönsleben, P. (2018). The most relevant aspects, the availability of goods and the volatility of their prices, are often influenced by geographical, political factors, the availability of raw materials, market trends and so on, which insist on other areas of risk, where they must be carefully monitored. Anticipating with simulations of future scenarios, generally available from specialized Information Providers, avoiding or reducing the costs to be absorbed due to any otherwise unexpected price increases, in many cases turns out to be a more effective strategy than that purely aimed at finding the best price.

Area of Origin of The Supply

For the procurement of critical goods for the company, the risk associated with the geographical area of origin must include both the physical causes Supply Chain Design. (2011), such as natural disasters, and those related to the "country system": instability, conflicts, political actions that impose rules which hinder compliance with the agreed contractual conditions and which may cause breach of contract and insolvency regardless of the Supplier's will. It is necessary to monitor, through the Information Provider, some indicators relating to the country, for example: public debt, level of taxation, competitiveness of the economy, GDP, interest on loans, volumes of bad loans, country rating and so on, which can also affect exchange rates and their volatility.

Management Supply Chain

The risk in the corporate supply chain lies in the policies and procedures used for its management. Characteristic parameters are the quantity and frequency of orders, the size of the lots, the safety stocks, the variables of the logistics including shipping and transport, the fixed capital. Resorting to supply chain management strategies based on "Vendor management inventory", "Consignement stock", "Inventory financing" can serve to mitigate risks; adopting methodologies such as "Collaborative planning, forecasting and replenishment" also helps to optimize performance and minimize working capital. Correctness or defects in deliveries, reactivity to emergency situations; their behavior must be monitored in the context of risk associated with Suppliers.

Management of Suppliers

Particular attention deserves the risk area of Suppliers, who represent the front-end for each Buyer of a Purchasing Office and with whom it is necessary to collaborate closely to promptly detect risks before they turn into accidents. Their management is positioned in the "Strategic Sourcing" area: from the systematic analysis to identify the needs of new Suppliers, to the scouting of candidates, to the accreditation process as a potentially adequate Supplier, to the systematic monitoring of the behaviors and performances carried out with the attribution of a multi-dimensional rating that provides risk indicators.

Financial rating - The official company rating issued by ESMA certified rating agencies can be used directly. For a more detailed and personalized assessment of the financial risk of a company, which is called upon to carry out supplies of high economic value or critical to the Customer's business, proprietary and complementary models can also be built based on some parameters, to be used as risk indicators, such as the level of indebtedness of the subject, the ratio between income flows and the volume of debt, operating margins, the probability of maintaining income flows, the extent and frequency of previous unpaid, the availability of alternative financial or capital resources, etc.

These parameters must therefore be ascertained when the company is credited as a Supplier and must subsequently be monitored during the execution of supplies to intercept any changes that may involve a default risk. Reputational rating - Reputation is a set of qualities, for example credibility, commitment with respect to obligations undertaken, prestige, respectability, stability, reliability, correctness, competitiveness. Reputational risk is generated by the violation or negative perception of some of these qualities. Reputational risk can be estimated within the direct relationship between Customer and Supplier through the collection of data and documents on compliance with company codes of ethics, on punctuality in updating documentation certifying contributory regularity, on pending charges, on compliance with regulations safety and maintenance of the required technical and professional certifications.

The risk can also be detected by information available from Information Providers or accredited investigative agencies relating to lawsuits brought by customers, customer satisfaction indexes, percentages of withdrawal from contracts, inadequate corporate governance, insufficient transparency and attentionvb Tolmay, A. S. (2019), towards Customers, to other negative events. An underestimated reputational risk can have serious consequences for the client company: reduction of profits, reduction of market shares, deterioration of the brand value, up to a downgrade by the Rating Agencies. Sustainability rating - the observance of sustainability practices is linked to reputational risk. The regulations have led to significant progress in the purchase of direct materials; in the area of indirect purchases, the problems appear more complex: the codes of conduct are difficult to apply in practice in the supply chain.

Performance rating - It is the risk area with the greatest possibility of control by the Customer and with the largest impact on other risk areas. The Customer can express judgments of merit on its supplier companies by evaluating their "operational" performance in the execution of supplies: quality, punctuality, flexibility, reactivity, compliance with contractual clauses and supply requirements, innovation, etc. The individual can use these parameters to build indicators contextualized to your specific environment, such as the level of relevance and criticality for your business, the level of mutual dependence in terms of per percentages of turnover and spending, and the ability to bring essential innovation to its products Trollip, E. G. (2018).

Operational parameters, especially quality (compliance with requirements, punctuality, innovation), reactivity (ability to react quickly to changes and emergencies) and competence (experience, adaptability to work contexts, problem solving skills), can potentially complement financial data, in order to make the default risk assessment more accurate. As they are generally recorded with a frequency more compatible with the speed of business dynamics, they can, in the face of positive financial ratings, report potential bad situations in advance before obtaining financial confirmation. Conversely, in the face of a negative financial rating, positive performance parameters may suggest that the company has an industrial potential capable of continuing supplies and overcoming temporary situations of financial weakness.

 IT Tools for Risk Management

Procurement digital platforms are IT tools suitable for collecting data that are very heterogeneous both by nature and by origin, to define and manage effective risk indicators. In accordance with a "data driven" approach, today they allow to carry out both a descriptive analysis, capable of understanding what happened in the past to better address future choices, and a diagnostic analysis, aimed at identifying and preventing the causes of the factors that generate risks. The aim of the research is to build a method of investigating the risks that weigh on the supply chain and that threaten. The starting assumption in the definition of the method (research hypothesis), supported by appropriate findings in the literature, is the following: the risks within the supply chain can be detected through quantitative indicators, despite each chain having specific characteristics, and despite these measurements involve companies outside the one in which the surveys are carried out.

The data must come from innovative and certified sources, for example Information Providers able to operate in the areas of Big Data and Data Analysis Zacharia, Z. G., Sanders, N. R., & Fugate, B. S. (2014). The experience gained on hyper segmentation applied in the marketing field to track customer profiling may suggest a similar classification of Suppliers, even if the information available is less and must be correlated throughout the supply chain. Technology still needs to leave ample room for experience, organization and expertise to intercept and track valuable information. It is equally important to choose a Procurement platform solution that can be natively integrated with any data source (both internal and external to company systems) to avoid re-typing what has already been digitized.

Conclusion on Disaster Management

The research is therefore oriented towards the definition of a risk investigation method, based on the use of a dashboard of quantitative indicators, to be subjected to qualitative assessment and verification. These indicators, to be measured within a focus company, must also be detected with reference to companies external to it, the members of the supply chain, appropriately selected during the mapping phase.The survey focuses on the analysis of the risks that threaten the pursuit of one of the three objectives of Supply Chain Management (the creation of customer service), and the related sub-objectives (punctuality, completeness, correctness and absence of defects, which concurrently contribute to the creation of customer service). The indicators, appropriately identified in the “areas” of the supply chain and with respect to the objectives, must be appropriately selected, evaluated and interpreted, through qualitative analysis, by the managers involved in the processes and activities subject to measurement.

Reference for Disaster Management

Logistics, Operations, and Supply Chain Management. (2011). Integral Logistics Management, 33-98. doi:10.4324/9781439878248-7

Liotine, M., & Ginocchio, D. (2020). The supply blockchain: Integrating blockchain technology within supply chain operations. Technology in Supply Chain Management and Logistics, 57-89. doi:10.1016/b978-0-12-815956-9.00004-1

Makan, H., & Heyns, G. J. (2018). Sustainable supply chain initiatives in reducing greenhouse gas emission within the road freight industry. Journal of Transport and Supply Chain Management, 12. doi:10.4102/jtscm.v12i0.365

Schönsleben, P. (2018). Capacity Management. Integral Logistics Management, 569-608. doi:10.4324/9781315368320-17

Schönsleben, P. (2018). Logistics, Operations, and Supply Chain Management. Integral Logistics Management, 3-59. doi:10.4324/9781315368320-2

Supply Chain Design. (2011). Integral Logistics Management, 99-204. doi:10.4324/9781439878248-8

Schönsleben, P. (2018). Supply Chain Design: Business Relations and Risks. Integral Logistics Management, 61-115. doi:10.4324/9781315368320-3

Schönsleben, P. (2018). Supply Chain Design: Location Planning and Sustainability. Integral Logistics Management, 117-168. doi:10.4324/9781315368320-4

Schönsleben, P. (2018). Integral Logistics Management. doi:10.4324/9781315368320

Trollip, E. G. (2018). Investigating environmental management practices within the Northern Cape wine supply chain. Journal of Transport and Supply Chain Management, 12. doi:10.4102/jtscm.v12i0.404

Tolmay, A. S. (2019). Antecedents of trust among buyer and seller within the South African automotive supply chains. Journal of Transport and Supply Chain Management, 13. doi:10.4102/jtscm.v13i0.414

Zacharia, Z. G., Sanders, N. R., & Fugate, B. S. (2014). Evolving Functional Perspectives Within Supply Chain Management. Journal of Supply Chain Management, 50(1), 73-88. doi:10.1111/jscm.12022

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