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RISK MANAGEMENT IN SUPPLY CHAINS AND ITS EFFECT ON ORGANIZATIONAL EFFECTIVENESS

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RISK MANAGEMENT IN SUPPLY CHAINS AND ITS EFFECT ON ORGANIZATIONAL EFFECTIVENESS

 

CHAPTER ONE

INTRODUCTION

 

1.1    Back Ground of Study.

According to Chopra and Sondhi (2004) risk in the concept of supply chains maybe associated with the production/ procurement process, the transportation/shipment of goods, and or the demand markets. In today’s volatile era with businesses and, more specifically, supply chains becoming increasingly global, the industrial environment is heavily affected by uncertainty, which can potentially turn into unexpected disruptions. Economic and political turmoil, socio-cultural changes, highly fragmented and demanding behavior of consumers, rapid development and changeover of products, have seriously modified the economic and industrial environment in which companies act, bringing out new issues related to assuring the continuity of the business against potential disruptive events.

Moreover, one of the key factors contributing to disrupting supply chains is the focus on lean supply chains in academia and industry during the 90s. Zero-inventory and just-in-time movement of goods became the dominant model that increased the sensitivity of supply chains. Little issues quickly become big issues. In addition, supply chains have become more global, increasing the order to delivery cycle times by a factor of four or five. This acts to amplify the potential of a disruption and the impact. Outsourcing has also become the dominant model, increasing the forces driving disruptions such as other customers competing for volume and attention, information flow issues, mistrust, win-lose negotiations, financial stress, misalignment of interests and goals. These have increased the likelihood of a disruption exponentially.

As a common term to designate the likelihood of occurrence of such events we use the word risk: Risk is a concept that has applications in everything we do. It has several components, not the least of which is the lack of knowledge about the events that may impact us and our ability to manage them. In order to understand risk we first need to define and decompose it, specifically as it pertains to the supply chain. Under these statements, a common sense definition of risk – acknowledged by the International Organization for Standardization (ISO, 2002) – mainly deals with two of its essential components: losses (along with related amounts) and uncertainty of their occurrence. Another similar definition given by Culp (2001) states that risk can be defined as any source of

 

randomness that may have an adverse impact on a person or a corporation. In the financial industry, operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events (“New Basel Capital Accord”, 2006).

Although the concept of risk is multi-dimensional and not univocally defined, it is generally established the fact that it is linked to uncertainties associated with events.

Managing risk in the supply chain has never been as challenging as it is today. As more companies have outsourced production to overseas locations, supply chains have been extended, the number of nodes increased, and the complexity of the networks have moved exponentially. In the past, supply chain managers were mainly concerned with reducing cost, reducing purchase price variance, and managing inventory. Today, supply continuity is the single biggest business driver. Indeed, organizations now recognize that “preservation of shareholder value” is of paramount importance in supply chain management, and it has been assessed that disruptions can exert a tremendous impact on the company’s overall performance of supply chain operations, if there are not suitable mechanisms or tools able to prevent or smooth their negative effects, as many real cases have showed in the past few years Sheffi, (2005).

Such supply chain risks are directly reflected in firms’ financial performances, and priced in the financial market. For example, it has been estimated that the average stock price reaction to supply- demand mismatch announcements was approximately -6.8%. In addition, supply chain disruptions can cause firms’ equity risks to increase by 13.50% on average after the disruption announcements Once the importance of managing risk has been assessed, the further step is to define suitable models to analyze, assess, manage and communicate risk within a company as well as in a complex, geographically dispersed supply chain composed by several, legally independent entities There are many business benefits to be derived from an increased focus on managing procurement and supply chain risk. These include a higher profit margin through recognizing where risks can be reduced. Outcomes may include paying lower insurance costs; guaranteeing supply chain excellence and contract performance; managing intellectual property rights and dramatically enhancing the negotiation of contract terms and conditions. The reputational benefit from being able to demonstrate effective procurement and supply chain risk management will be a business differentiator when the organization is tendering for new contracts or retaining existing contracts.

 

Supply chain risk management is a high-level skill. Procurement leaders need to understand how they are key to improving the profitability and reputation of their companies by successfully managing these risks.

 

1.2 Statement of the problem

According to Sheffie (2005) supply continuity is the single biggest business driver. Indeed, organizations now recognize that “preservation of shareholder value” is of paramount importance in supply chain management, and it has been assessed that disruptions can exert a tremendous impact on the company’s overall performance of supply chain operations, if there are not suitable mechanisms or tools able to prevent or smooth their negative effects, as many real cases have showed in the past few years

 

However, different firms have different supply chain but what is similar in most organizations supply chain is the risk involved in achieving the desired organizations supply chain. As globalization increases and competition amongst different industries, so does the supply chain become more complex and largely affecting overall performance of an organization? A supply chain disruption due to foreseen and unforeseen events adversely affects the performance of any organization. Lee (2003) the risk of not meeting material requirements for production in any company will largely affect the customer order fulfillment which will lead to reduced sales thus affecting the organization profits. Johnson (2003)

 

However, despite the huge impact supply chain disruptions have on organization bottom line profits, many organizations still don’t have a supply chain risk management program where they identify the potential risk within their supply chains and come up with contingency plans and mitigations for the supply chain risks that may affect the organization performance. There is need therefore for organization to clearly identify the risks involved in the supply chains and all the uncertainties in delivering value to the customers and supply chain managers should come up with robust mitigation strategies to increase supply chain efficiencies and effectiveness.Kouvellis (2003) the researcher sought to investigate this scenario in Accelar Logistics Ltd

 

1.3    General Objective

 

The broad objective of this study was to assess the effects of supply chain risk management on organization’s performance.

 

1.3    pecific Objectives

 

1.3.1.          To assess the effect of supply chain risk identification process in Accelar Global Logistics

 

1.3.2.          To  find  out  the  main  supply chain  risk  sources  and  their  effect  on  organizations performance in Accelar Global Logistics

 

1.3.3.          To find out the mitigation strategies in place to contain the supply chain risk identified in Accelar Global Logistics

 

1.4    Significance of study

The results of this study were aimed at reviewing the importance of supply chain risk management in enhancing organization performance. The study also intended to provide a basic framework for which organization can identify supply chain risks and come up with contingent plans to mitigate the risk and improve the efficiency and effectiveness of the supply chains.

The study also aimed at benefiting the potential scholars of the social science in the research field as it would provide insights to the study and make reference. This study was conducted in order to investigate how supply chain disruptions affects organizations performance and how a sound risk management framework if implemented could positively contribute to organization performance. The research findings were also aimed at benefiting the following categories of persons in the manner suggested:

 

1.5.1 Research Institutions

The research institutions will benefit from this study by evaluating the findings. The recommendations will be evaluated by researchers to find out if there are meaningful improvements in the supply chain risk management. The areas of further research recommended will be followed by other research institutions as a means of increasing more knowledge on Supply Chain Management.

 

1.5.2 Policy Makers

This study will benefit policy makers both private and public entities that will use the findings and recommendations to enhance organization performance through sound supply chain risk management practices. The factors contributing to supply chain disruptions will be identified and mitigation strategies suggested could be used by both private and public entities to improve on their organization performance

 

1.6    Scope of Study

The scope of the study was mainly to determine and understand the effect of supply chain risk management on organization performance at Accelar logistics. This study sought to find out how organization performance is affected by having a robust supply chain risk management in place. Since supply chain risk management is broad with upstream supply chain process and the downstream process, the study mainly focused on the downstream supply chain process within Accelar Global logistics Ltd Kenya. The study was carried out within Accelar Logistics Ltd Kenya mainly due its complex supply chain. From 1st January to March 23rd   2017…

 

 

1.7    Definition of terms

The following terms were used in this document in the sense in which they are defined below:

1.7.1 Risk

According to Jutter (2006), It refers to the potential for loss or failure to meet business objective

1.7.2 Supply chain

According to Lyson (2006) It is a system of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer. Supply chain activities transform natural resources, raw materials, and components into a finished product that is delivered to the end customer.

 

1.7.3 Risk management

According to Sheffi (2005) refers to the identification, assessment, control and monitoring of any uncertainties in business that may cause failure or loss

 

1.7.4 Supply chain Risks

According to Kersten et al., (2006) Supply Chain Risk is defined as the damage assessed by its probability of occurrence that is caused by an event within a company, within its supply chain or its environment affecting the business processes of more than one company in the supply chain negatively

1.7.5 Risk register

According to Garvin and Levesque (2006), it is list of identified risks with their importance rating

 

1.7.5 Supply Chain Risk Management

According to Christopher and Peck, (2004), it is the identification and management of risks for the supply chain, through a co-ordinated approach amongst supply chain members, to reduce supply chain vulnerability as a whole.

 

1.7.6 Business Continuity

Hiles and Barnes, (2001) define it as the development of strategies, plans and actions which provide protection or alternative modes of operation for those activities or business processes which, if they were to be interrupted , might otherwise bring about a seriously damaging or potentially fatal loss to the enterprise.

 

1.8 Chapter Summary.

This chapter has looked at the background of the study which introduces the reader to the research issue and problem at hand. The chapter clearly provides a rationale for the proposed research as well as a justification about what the researcher did by logically leading into a statement of the problem, research objectives and finally establishing the three research questions that the researcher used in the study. The chapter clearly outlines what the researcher sought to achieve with the study and the gaps to be filled and the significance of undertaking the study.

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