RISK MANAGEMENT IN CASE OF LOGISTICS SYSTEMS BASED ON EXTERNAL RESOURCES. Mariusz SZUSTER

Transcription

1 RISK MANAGEMENT IN CASE OF LOGISTICS SYSTEMS BASED ON EXTERNAL RESOURCES Mariusz SZUSTER Poznań University of Economics, Poznan, Poland, EU, Abstract The main topic of the paper will be connected with the managing global logistics systems based on external resources. They may be involved in case of manufacturing, designing, R&D activity, logistics, sales, distribution. External resources may be a source of potential risk. All these fields of activity may be the source of threat and hazard, resulted from a higher number of engaged entities or from lack of knowledge about their real capabilities. The first part of the paper will contain presentation of possible relations between enterprises, trade companies, R&D institutions and logistics service providers. The core of the paper will be some results of research realized in this field. They will contain identification of sources of threat, evaluation of risk and potential consequences and finally description of methods which may be helpful in managing such a complex system. There will be also a discussion about usefulness of used management tools and directions of further research. Keywords: logistics, outsourcing, global sourcing, risk management. 1. OUTSOURCING IN GLOBAL LOGISTICS SYSTEMS The logistics system includes purchasing logistics, productivity logistics and distribution logistics [11]. One of the most significant trends in the changes occurring to today s productivity systems, is the substitution of vertical integrations or relations with horizontal relations between competitors or enterprises specializing in very specific technologies to allow companies to focus on their main competences [13]. The production process that creates value to the enterprise is continuously outsourced. Outsourcing is to perform a function or process such as manufacturing operation and other value-adding activities (also logistic) with reliance on external sources, a third-party or independent supplier [10]. Outsourcing became very widespread method or even part of strategy. Managers of productivity systems have to face the question: which activities to outsource and which of them to operate internally. Strategic outsourcing includes make-or-buy decision which produces the company s product internally or subcontract to other providers, manufacturers or suppliers [9]. Outsourcing has changed from peripheral business functions in the past, to more vital business functions being outsourced today [17]. Firms start with the outsourcing of their peripheral activities and they gradually move on to outsource activities which is of closer core to the heart of the enterprise [16]. Outsourcing has become also more global and extensive in its scope, involving more complex functions and tasks. Firms are drawing their boundaries around new skills and necessary capabilities. They are looking for new external resources and capabilities, which may be found in other countries. Enterprises can no longer limit themselves to local resources or facilities. Lower labour, land, raw materials and facility costs are the most commonly accepted reasons for global sourcing [12]. The majority of the companies identified low cost manufacturing as one of the most important factors for their global sourcing strategy [3]. All these international sources are related to the logistics systems of many companies. In response to the impact of global market competition, a new business operation format, global logistics systems have been developed [11]. The term global logistics system refers to the overall management system of a firm s undertaking of worldwide market distribution, product design, production, procurement, logistics, suppliers and inventory [11]. Members of global logistics systems usually are simultaneously part of a number of different supply chains or networks and they usually source from suppliers located in many countries, acting in different

2 areas. A global logistics system accomplishes a short time of expected response on market changes, manufacturing costs reduction and increase of a business performance risks. International sourcing of components, semi-products, skills, knowledge or ready-made products is more and more intensive. The sourcing of components from across the global marketplace is an increasing trend. This trend is the result of many independent decisions taken by firms around the world looking for new sources of competitive advantage [3]. However, these benefits cannot be guaranteed for companies which source globally since the trend to global buying has also increased the risk exposure [2]. Configuration of logistics system can be also the source of risks. Global sourcing makes logistics systems longer and more complex, involving more partners. All these decisions can also have unintended consequences, exposing organisations to considerable risk. 2. RISK MANAGEMENT Apart from recognizing the advantage of outsourcing and global sourcing, firms should also realize the risk connected with these decisions. Risk can be defined as the likelihood that the outcome from a process will not meet expectations [8]. These risks can have significant impact on performance of a business organisation. In practice, a growing number of companies are suffering an increased exposure to global sourcing risks [3]. Possible risks arising from global sourcing is connected with terrorism, natural disasters, political changes (like in the case of relations between Japan and China). There are many examples of delayed deliveries, damages, low quality of components, wrong raw material composition etc. For instance, in 2007 Mattel Inc, one of the world s largest toymakers, faced the biggest recall in the company s history [3]. They removed 9 million Chinese-made toys from the market as they were found to contain dangerous magnets and high levels of lead-based paint on the surface of many toys [1]. In the same year, the RC2 Corporation recalled Thomas and Friends train sets because of high levels of lead-based paint used by Chinese contractors [3]. In both cases the companies had provided the suppliers with their paint specifications, but the paint manufacturers did not comply. There is still a limited understanding about how supply risks should be assessed when making global sourcing decisions and how they are mitigated once global sourcing is in place [3]. Any outsourcing decision should be made with the full consideration of the potential risks that go along with operations [9]. Poorly managed risks can lead to lower product quality, decrease in turnover, loss of reputation, poor relationships with the other members of the supply chain and conflict amongst the organisation s stakeholders [4]. In any logistics systems their members are exposed to the risk of situation when their competitive advantages may be lost to competitors. Risk drivers can arise from the external environment, from within an industry, from within a specific supply chain, from specific partner relationships, or from specific activities within the organization [14]. Risk drivers arising from the external environment may affect each member of a global logistics system. Logistics system management involves many risks. Cucchiella and Gastaldi divided logistics risks into categories of internal (involving such issues as capacity variations, regulations, information delays, and organizational factors) and external (market prices, actions of competitors, manufacturing yield and costs, supplier quality, and political issues) [5]. Kleindorfer and Saad categorized these into risks arising from coordinating complex systems of supply and demand (internal), and disruptions (external) [7]. Most traditional risk management approaches decompose systems into isolated subsystems for analysis and recombination to create system-level measures [15]. These approaches were no longer effective to identify, assess, and respond to the growing array of risks across a complex enterprise. Members of a complex logistics system should worry about risks from every potential source. Dealing with all potential logistics risks should give more opportunities to control risk sources. In the organisation, risk management is an integral part of the decision making and control process.

3 3. METHODOLOGY AND RESULTS OF RESEARCH The target of the research was evaluation of involvement of manufacturers in process of risk management. Total sample at the first stage contained 426 manufacturers from Poland. Amongst them 288 declared that they use outsourcing of manufacturing or logistics functions, and they source internationally. This group of 288 companies was a focus of further survey. The basic question was who is responsible for risk management in both cases: international relations and outsourcing. Tab. 1. Who is the person responsible for risk control and analysis in case of international relations? the owner 86 president of the company 81 general manager 37 financial manager 10 purchasing manager 10 sales manager 12 import/export manager 22 quality assurance manager 8 risk manager 0 somebody else 11 nobody 11 Source: Own research. There was no company with the special position of risk manager. But it does not mean that there was no person responsible for this area. In 58% companies such a person was someone from the narrow group of top management. It shows how important is the area connected with risk control in case of international relations. In table 2 there are results of second question connected with risk management in the area of outsourcing control. Tab. 2. Who is the person responsible for risk control and analysis in case of outsourcing? the owner 4 top management 8 president of the company 31 financial manager 9 production manager 31 logistics manager 71 quality assurance manager 6 operation manager 2 risk manager 0 other managers 11 employee who has direct contact to outsourcer 28 employee of transport department 37 employee of forwarding department 2 employee of warehouse 17 employee of purchasing department 21 employee of production department 14 employee of sales department 58 employee of export department 1 another employees 53 auditing team (employees from several different department) 2 auditing team (employees from several different department and from outsourcer) 1 employees of the final client 1 somebody else 3 nobody 3 Source: Own research.

4 As it may be seen in the second case there are more responsibilities for this area than number of companies. The explanation is the situation when in one company there are more than one person responsible for control of outsourcing effects. Only 15% of person from the narrow group of top management were involved in this process. The consciousness of risk is much higher in case of international relations, than in case of outsourcing. In the first case predominated persons on much higher position. It may be effect of more strategic view for internationalisation than in case of outsourcing (especially outsourcing of transport functions which were most often declared). As a consequence, outsourcing of such functions like transport, warehousing or even production may be still perceived as an operational rather than strategic dimension. 4. CONCLUSIONS The results presented in tables 1 and 2 show that generally number of companies in which risk management does not function is very small. Most of companies has a consciousness of risk and necessity of its identification, evaluation and managing. This paper contains the first part of research in the area of risk management. It was shown the position of involved persons. The second stage of research will rely on identification of standardized methods used to quantify risk in the logistics systems to determine the effectiveness of outsourcing and global sourcing. The second stage will emphasize how the manager s estimates and measure the effectiveness of risk management and which methods were implemented on outsourcing projects in the logistics systems. ACKNOWLEDGEMENTS: The paper has been written under the research project financed from the sources of National Centre of Science in Poland, nr of the project 4232/B/H03/2011/40 LITERATURE: [1] About 9 million items recalled; danger from magnets and lead (January 2010). [2] Christopher M., Lee H., Mitigating supply chain risk through improved confidence, International Journal of Physical Distribution & Logistics Management, Vol. 34 No. 5, 2004, p [3] Christopher M., Mena C., Khan O., Yurt O., Approaches to managing global sourcing risk, Supply Chain Management: An International Journal 16(2) 2011, p. 67, 72. [4] Cousins P.D., Lamming R.C., Bowen F.E., The role of risk in environment-related supplier initiatives, International Journal of Operations & Production Management, Vol. 24 No. 6, 2004, p [5] Cucchiella F., Gastaldi M., Risk management in supply chain: a real option approach, Journal of Manufacturing Technology Management, Vol. 17 No. 6, 2006, p [6] Kaplan S., Haimes Y.Y., Garrick B.J., Fitting hierarchical holographic modelling into the theory of scenario structuring and a resulting refinement to the quantitative definition of risk, Risk Analysis, Vol. 21 No. 5, 2001, p [7] Kleindorfer P.R., Saad G.H., Managing disruption risks in supply chains, Production and Operations Management, Vol. 14 No. 1, 2005, p. 58. [8] Knechel W.R., The role of the independent accountant in effective risk management, Review of Business and Economics, Vol. XLVII, No. 1, 2002, p. 68. [9] Lee C.K., Ching Yeung Y., Hong Z., An integrated framework for outsourcing risk management, Industrial Management & Data Systems, Vol. 112 No. 4, 2012, p [10] Lei D., Hitt M., Strategic restructuring and outsourcing: the effect of mergers and acquisitions and LBOs on building firm skills and capabilities, Journal of Management, Vol. 21, 1995, p [11] Lin Y.Ch., Tsai P.H., Li Ch., The impact of a global logistics integration system on localization service and business competitive advantage, European Business Review Vol. 21 No. 5, 2009, p. 421.

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