How risk management in supply chains affects supply chain performance?

Judit Nagy
assistant professor
Corvinus University of Budapest

Lrnt Venter1
PhD student
Corvinus University of Budapest

Abstract
Supply chain management is a well-known and intensely studied field of management
science. Our aim is to construct and test a model which summarises that besides the tools
adapted to manage information flow, materials flow and costs and performance in supply
chains to achieve high overall performance, managing risks is also inevitable. Supply chain
management tools are to improve the efficiency of information sharing between supply chain
participants (e.g. EDI) and to smooth materials flow carried out by the parties in collaboration
(e.g. continuous replenishment, cross-docking). Cost management and performance
assessment tools aim to explore the costs and profit realised by the cooperating companies as
well as the entire supply chain. All the tools adapted either at a company or on supply chain
level, strive to enhance the overall performance of the supply chain. The performance of a
supply chain can be assessed by the value created for the end consumer and by the profit the
partners realise. However, companies and supply chains adopt tools to manage the different
flows, the way they face and handle risks coming either from the system or from the
surrounding environment has a key influence on the performance achieved.
When constructing the research model we try to find and verify the linkage between the tools
supply chains use for coordination and for managing risks and the performance achieved.
Keywords: supply chain management, risk management, supply chain management tools

Corresponding author. Corvinus University of Budapest, Department of Logistics and Supply Chain
Management. 1093 Budapest, 8 Fvm tr. +36 1 482 5226
The participation in the conference is supported by TMOP-4.2.1/B-09/1/KMR-2010-005

Introduction and research aims

The paper presents a research proposal which aims to discover the linkage between the
performance of the supply chain and the tools used for managing the entire chain as well as
risks. We have constructed a research model which indicates that the type of product (Fisher,
1997) and consequently the type of the supply chain determine the risks emerge in supply
chain operations. In our concept, companies use different tools to manage the supply chain.
They are using tools help to share information (EDI, computer-aided ordering, barcode, etc.),
supporting the materials flow (continuous replenishment, cross-docking, vendor-managed
inventory, postponement) and evaluating costs and performance realised by supply chain
partners (activity-based costing, supplier and customer assessment). Companies in the
different operational environment also use specific tools to handle risks. In our model (see
Figure 2) we suppose that the tools adapted for managing the operations of the chain are
sometimes also appropriate for managing risks, and we also indicate that the levels of
application of tools as well as the variety of tools determine the performance the supply chain
achieves. So our hypothesis is that the more sophisticated is the toolbox the companies
used in supply chain and risk management the higher performance they achieve.
The aim of the research is to test the research model and the hypothesis. To achieve
confirmation, we are intended to use a double methodology. First, we carry out interviews
with company practitioners, to test the relevancy of the research model and question. We
target two different industries traditionally using different tools for supply chain management
and facing with diverse risks. We organise interviews in food and automotive industry asking
two-two practitioners to tell us their opinion. After modulating the model (if necessary) we
start the second phase of the research: the quantitative phase. In this phase, we are going to
edit a questionnaire which aims to reveal the practice of Hungarian companies in supply chain
management, the risks they face with, and the tools they use in coordinating the chain and the
risks.

Literature review
Supply chain management is a well-known management concept which has a long research
history (Mentzer et al, 2001; Lamming et al., 2001; LaLonde & Masters, 1994). We interpret
supply chains as series of value creating processes spanning over company boundaries in
order to provide value to the end consumer (Chikn, 2008). Supply chain management is the
conscious management of supply chain processes in order to make supply chain participants
achieve a higher competitiveness (Gelei, 2003). In our concept the product manufactured in a
supply chain has a key role in what kind of risks emerge. Therefore we apply Fishers (1997)
well-known theory about product (functional-innovative) and, on this basis, supply chain
classification (physically efficient, market-responsive). We also believe that the supply chain
risk management practice of different organisations influences the tools supply chains use to
avoid risks. In our paper we define supply chain risks and their components by generally
accepted definitions in management (Dowling & Staelin, 1994; Shenkir & Walker, 2007;
Zoltayn, 2005). Defining risk and uncertainty has always been a tough call, Zsidisin et al
(2004, p 397, in Ritchie & Brindley, 2007) provide a feasible definition that risk is perceived

to exist when there is a relatively high likelihood that a detrimental event can occur and that
event has a significant associated impact or cost. Zsidisin and Ritchie (2009) also provides a
definition for supply chain risks. On this basis we can state that supply chain risk is a potential
occurrence of an incident or failure to seize opportunities of supplying the customer in which
its outcomes result in financial loss for the whole supply chain. Risks therefore can appear as
any kind of disruptions, price volatility, poor perceived quality of the product or service, or
any event damaging the reputation of the firm.

Performance of the supply chain

In a supply chain the performance of an entity can be measured individually by its direct
cooperating partners (direct suppliers or customers) based on the metrics defined by the
parties, but it is more interesting to evaluate the overall supply chain. Overall supply chain
performance can be measured by the value represented by the product or the service
manufactured and offered for the end consumer, as well as the profit achieved by and
distributed amongst supply chain members. Based on Beaumon (1999) and Gelei (2006) the
customer value consists of (1) the perceived benefits the customer experiences during
consumption and which come from the quality of product and the linked services and (2) the
perceived sacrifice consumer has to make to capture the product, so price (cost) and the life
cycle costs emerging during the life cycle of the product. Profit is the reward for the efficient
common activity of supply chain participants covering the costs and allowing sustainable
operation.
Based on the above presented concept of customer value we interpret supply chain
performance through the following metrics:

Share of supply chain-related costs / total revenue

Level of final customer satisfaction (no. of complaints / total no. of orders

fulfilled)

Customer service level (on-time delivery, accuracy in volume, frequency of

quality problems, responsiveness to changes in customer needs).

The selected dimensions of supply chain performance will be evaluated by the questionnaire
we are intended to apply in second research phase. The survey will make it possible to find
the linkage between the level of performance and the tools the companies use for managing
the supply chain and the risks.

Risk management in supply chains

It is commonly assumed, that conscious risk management in organisations overlapping all
processes and projects are able to mitigate the negative effects of risks and boost success and
profit at the same time, and thus risk management should be linked with firm performance

regarding the specific objectives of processes and projects (Gaudenzi, 2009). In a supply
chain context risks span over organisational borders (Svensson, 2001). According to this
approach, companies have to recognise threats generated inside and outside their borders as
well as distinguish between them. Risk can be captured in different contexts, namely materials
flows, information flows and the cost and performance assessment processes of various
interdependent organisations and so risk affects the overall supply chain performance. But
because these factors arise also in different functional areas within companies, the risks can be
interpreted in several ways. Based on a thorough literature review (Dowling & Staelin, 1994;
Mason-Jones & Towill, 1998; Jttner, 2005; Johnson, 2006; Thun & Hoenig, 2008), we
formulated some easily understandable and comprehensive categorisation of supply chain risk
management tools. In our recent concept we outline two dimensions categorising the tools in
supply chain risk management. The first dimension takes into account the channel through
which the risk appears. In this dimension we distinguish between intra-firm, supply chain and
beyond supply chain risks. The second dimension concerns the supply chain risk management
process stage, in which the tools are applied. Here we differentiate identification, evaluation
and management stages. We have to note that there are other classifications of supply chain
risk management tools as well. Companies can prepare themselves to the management of
some risks proactively, but there are risks that can be handled only in a reactive manner.
Therefore the cause-oriented and the effect-oriented (see Wagner & Bode, 2009 for further
description) supply chain risk management practices and tools can also be differentiated.
Methods we examine can also be classified also by the purpose of their application: to avoid,
reduce, transfer or accept the risks affecting the supply network (Mullai, 2009).

Tools for managing the supply chain

The performance realised is highly influenced by the way the supply chain is managed.
Usually there are management tools companies adapt to manage different kinds of processes
within a supply chain, such as materials flow, information flow and cost and performance
(Varma, 2006; Van Goor, 2001; Lee, 2000; Nagy, 2010). In our concept, we believe that there
are special supply chain risk management tools, as well as tools belonging to the above three
categories which can serve as supply chain risk management tools, too. The range of tools
companies use reflects to how consciously the supply chain is managed, and conscious
adaptation of tools also influence performance.
The first group of tools is intended to harmonise information flow between supply chain
members. According to Cigolini et al., (2004) the toolbox of information sharing affects the
application of all other supply chain management tools. An elementary part of the information
system is the corporate or inter-firm ERP system, which may appear in the form of an on-line
connection between partners (based on EDI or the Internet). Its role is to ease the information
and document flow between companies; e.g. in standardised form it is making the data
transfer more effective and decreases the time requirement of (order) processing. Standardised
information sharing supports punctuality and better control.

Automatic order transfer solutions (Computer-Aided Ordering) check the decreasing

inventory level at the customers point of sales and send notices to the central warehouse for
replenishment. Product identification systems (barcodes, RFID) help the flow of product
information and support tracking and tracing throughout the supply chain. Common operated
or shared databases make the information accessible to all members who are necessary to
forecast, planning and operating the chain. The more accurate and up-to-date the information
is, the more the chain is capable of adapting to demand changes. Distributing the exact
demand data of end customers helps to decrease the inventory level in the supply chain and
makes a positive impact on the bullwhip-effect (Disney & Towill, 2003). However, it has to
be noticed that the information exchange between supply chain partners has to be mutual,
selective and valid, but not necessarily symmetric (Lamming et al., 2001).
In smoothing materials flow, many activities of the operations have to be involved. The basis
of optimising materials flow in the supply chain is a clear assortment of goods. Composition
of the right assortment allows providing the goods that meet most of the customers needs,
and they buy the most frequently, which results in a higher turnover and increased profit. One
of the most important areas of materials management is inventory handling in the supply
chain, because this is a typical source of redundancies and waste. Many solutions have
evolved to handle inventories within the supply chain from vendor-managed inventory (VMI)
to those systems where suppliers individually and automatically decide about replenishment
of their customers warehouse according to the POS-data shared (Continuous Replenishment).
Forwarding materials within the supply chain is important as well. This not only covers the
planning and optimisation of costs of transportation, but application of specialised facilities in
which the bulk of products can be broken down, as well as a quick order-picking is carried out
to match customer orders, and goods can be transmitted quickly in smaller packages (crossdocking) (Gelei, 2008).
Cost and performance assessment is interpreted by Cigolini et al. (2004) not only for counting
costs and estimating overall performance, but supplier assessment as well, which can also be
extended to customer assessment. Assessment systems can be applied both on the supply
chain level and on the level of dyadic partnerships within a supply chain. Cost management
systems spanning over the supply chain partners make it possible for managers to examine the
total supply chain costs as well as the economic performance of individual firms. Before
applying such a system it is very important to discover most of the costs related to the supply
chain operations and their trade-offs. The most frequently adopted tool for this is Activitybased costing. Supplier and customer assessment tools are necessary to map the logistical and
financial performance of supply chain partners.
Although globally popular paradigms such as lean management, just-in-time delivery or
global sourcing can cause increased exposure to supply chain risks (Zsidisin et al, 2008), the
specific tools listed above can also moderate the disadvantages involved in these approaches.
Hence supply chain risk management tools concern both the above mentioned practices which
can (even partially) be used for managing risks, there are also risk-specific tools (supply chain
risk mapping, risk-adjusted revenue analysis, etc.) used by firms individually or together to

achieve supply chain level results. Linkage and structure of tools used for coordinating the
supply chain and/or managing risks is summarised in Figure 1.
Supply chain
management

Tools supporting
materials flow
management

Tools supporting
information flow
management

Supply chain risk management tools

Tools supporting
cost and
performance
assessment

Figure 1. Structure of tools applied in supply chain and risk management

All the tools are adopted by the supply chains in order to achieve a higher performance and
exploit the benefits of strong coordination. However, neither a company nor a supply chain
can be successful without taking care of risks originating from inside the firm or from the
environment, and trying to manage it. Managing risks in a supply chain and the tools adopted
for it, has a huge effect on the performance achieved.

Research model
Based on the literature review, we use the concept of supply chain management tools and
admit their role in supply chain performance. At the same time we suppose that the tools
adopted to discover and manage risks in supply chains also have an impact on supply chain
performance.
In the research model which we have constructed, we indicate that the type of product (Fisher,
1997) and consequently the type of the supply chain determine the risks emerge in supply
chain operations. In our concept, companies use different tools to manage the supply chain.
They are using tools help to share information (EDI, computer-aided ordering, barcode, etc.),
supporting the materials flow (continuous replenishment, cross-docking, vendor-managed
inventory, postponement) and evaluating costs and performance realised by supply chain
partners (activity-based costing, supplier and customer assessment). Companies in the
different operational environment also use specific tools to handle risks. In our model (Figure
2) we suppose that the tools adapted for managing the operations of the chain are sometimes
also appropriate for managing risks, and we also indicate that the levels of application of tools
as well as the variety of tools determine the performance the supply chain achieves.

In our framework we assume that direct links exist between the product types and supply
chain types, and the emerging risks the organisations face with. Finally, we hypothesise that
the more sophisticated is the toolbox the companies used in supply chain and risk
management the higher performance they achieve.

Supply chain
management
tools

Supply chain
risk
management
tools

Risks emerging
in supply
chains

Supply chain
performance
Type of
product and
supply chain

Figure 2. The research model

Research methodology
In our research, we differentiate two stages. First we are intended to test the research model in
a qualitative way. We make interviews in the food industry which produces traditionally
functional products to come across the risks they face and the tools they use in risk- and
overall supply chain management. The automotive industry will also be studied to get familiar
with the risks of innovative products market and market-responsive supply chains.
Literature review has addressed several questions which we would like to investigate in the
qualitative part of our research to determine the current supply chain management background
for the quantitative study:
1. To what extent are the supply chain members aware of the operations, the main actors,
and the coordination processes of the supply chain?
2. What are the primarily used management tools and practices in the materials flows,
information flows and the cost and performance assessment processes of the
interdependent organisations?
3. What are the current practices organisations use to consciously manage their risks and
how do they consider their application?

4. How and on what criteria do firms and their suppliers/buyers judge their supply
chains performance compared to the industrial average, and to what extent did they
achieve growth in comparison with their competitors?

Interviews are carried out during February and March. We try to reach logistics and/or supply
chain manager at firms operating in the selected industries, in order to get relevant a picture
about the supply chain operations and the tools used for managing risks and the overall chain.
The aim of the qualitative phase is to modulate the research model according to the opinions
of supply chain professionals. As the research model is completed, we start the second phase
of the research, the quantitative phase.
In the quantitative phase we are going to carry out a survey. The aim of the survey is to test
the whole research model and the hypothesis, as well as to get an insight into the supply chain
management and risk management practice of the Hungarian firms. The survey will be
conducted during the summer of 2011.

Summary
The aim of the paper was to present a literature review and a research model based on it.
Regarding the literature of tools used for managing the supply chains, the tools applied for
managing the risks in the supply chain and the concept of supply chain performance we found
that these are quite diverse concepts and nobody has merged them before. To be the first
doing so, we formulated a model which indicates that there are tools in supply chains which
are used to support information flow, materials flow, and cost and performance assessment
which can also support risk management, considering that there are many other specific tools
as well which are applied directly in supply chain risk management. Based on this supply
chain and risk management tool-concept, we assume that the variety of tools adopted has an
effect on supply chain performance. We formulated a hypothesis, too, which we are going to
test in qualitative (interviews) and quantitative (survey) ways.

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