Supply Chain Risks

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Global supply chains offer good opportunities to develop worldwide procurement and sales markets. However, they also involve risks. There is a larger focus on supply chain risks since they can cause chain reactions due to interdependences and reciprocal connections. Thus, even marginal risks can potentially have significant effects.

supplychain-risiko_1Supply chain risks are all risks that stem from disturbances and interruptions of flows of information and material within freight, information and finance networks, as well as social and institutional networks. Diametric opportunities are often overlooked. Generally, impediments on individual companies’ achievement of their goals or their whole supply chain are discussed in terms of end customer use, costs, time or quality. Risks are categorized according to their origin:
1. Risks within the company
2. Risks outside the company, within the supply chain
3. Risks outside the supply chain, that effect the company

supplychain-risiko_2Risks that occur within the company are divided into process and management risks. Process risks are disturbances of value-adding company activities (e.g. production delays or shortages of resources) that hinder seamless service. Management risks are caused by dysfunctional management systems or imprecise or faulty decision rules in the coordination of a company’s supplier and customer processes (e.g. poorly planned batch sizes or missing or impracticable operating instructions). Risks that occur outside the company but within the supply chain are divided according to the direction in which they act, into supply risks that result from a disturbance of the flows from the supplier side, and demand risks that are caused by disturbances on the customer side.

supplychain-risiko_3Environmental risks are risks that occur outside of the supply chain (e.g. natural disasters, terrorist attacks or changes of legal regulations). Due to the high relevance of supply chain risk management GEXSO asked the participants to list their top five risks. The answers were categorized according to the systematization explained above and depict a collective evaluation and an assessment according to industry sectors. Both evaluations clearly show that there is strong focus on supply risks (44 per cent total). Therefore, the assessment of this category is nearly as large as the sum of the remaining four categories – this is due to the impact of countless factors that affect the supply security of global supply chains, e.g. long, partly unsafe transport routes, long response time, political and social tensions in emergent countries, and environmental influences.

The significance of demand risks is comparably small, suggesting that, due to close cooperation with their suppliers, automotive suppliers do not have to expect too many variations or uncertainties. Demand risks for machinery and plant engineers, who mainly produce based on a make-to-order approach, are limited to insolvency risks among customers or market entries of competitors.

While supply risks dominate the risk assessment across all industries, there are significant differences regarding the assessment of risks within the company and environmental risks. The automotive supplier industry rates control risks (20 per cent) as being 2.5 times more significant than process risks (eight per cent). This suggests that respective processes are running stably with relatively high quantities, while the effort to manage internal processes is significantly higher. In this case, even a small mistake can affect production processes of customers as well as the entire supply chain. In the machinery and plant engineering sector, the emphasis on process risks (16 per cent) is nearly as high as on control risks (13 per cent). Here, process risks are rated twice as high as in the automotive supplier industry. This is probably due to much higher process heterogeneity – with sector specific regularity and (product) types – of the machinery and plant engineering sector. Management of complex processes also bears risks. However, mismanagement does not dominate malfunctioning processes as much as it does within the automotive supplier industry. Differences become much clearer when looking at environmental risks. These are rated at three per cent in the machinery and plant engineering sector but play a much more important role in the automotive supplier industry, where they are rated at 18 per cent. This is due to delays caused by close links between automobile suppliers and their customers, and can result in loss of production and penalties. Due to significantly longer processing times in the machinery and plant engineering sector, smaller deviations caused by force majeure or environmental risks can be tolerated more easily.

The generally higher significance of supply chain risk management also manifests in its rating as the top issue for 66 per cent of the participants of the study. However, on closer inspection, not even half of the companies (48 per cent) have structured risk management processes, and only 46 per cent have measures in place for risk management, e.g. emergency plans. Despite its declaredly great importance, the implementation of supply chain risk management (standardized and extensive processes, organizational forms, etc.) is often absent, for lack of know-how or due to inexperience regarding its organization. However, this also indicates that implementation of appropriate processes would enable these companies to exploit potential opportunities that are not yet capitalized upon due to uncertain risks.

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Successfully leading within a global production network – experiences of European industrial companies during the globalization of their supply chain.

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