The Background Of The Supply Chain Management Business Essay
During the inspection of trungson, the theoretical will focus on theory and management of supply chain risks. In addition, the thesis will include theoretical analysis of the value chain, focus on cost drivers. Understanding how trungson activities and how money is generated is very important, being able to suggest improvements in order to reduce the overall supply chain risks.
The thesis will focus general theories such as:
Supply chain management theory
Risk management theory
These theories should include aspects that can be appropriate to achieve the objectives of the thesis, which is to determine the facts risk and propose mitigation strategies for trungson. Theory of supply chain management includes the definition and interpretation of relevant provisions and the supportive frameworks for analysis purposes.
The theory of risk management including topics related to the meaning, framework, and strategies for supply chain risk. In addition, analysis of the external environment is covered in Pestel as part of risk management. Pestel can be a useful framework to examine the operating conditions of TrungSon.
With regards to purchasing theory, the Kraljic-model will be examined. Procurement is an important activity for TrungSon and strategies towards this aspect can help reduce costs and risk towards suppliers. Within purchasing is topics as supplier relationship and sourcing discussed.
Three factors, supply chain environment, temporal focus and supply chain flexibility, that affect to the choice of the firm when determining the risk management strategy of it is discussed later. However, Manuj and Mentzer (2008) argued that supply chain environment is the most important factor and the thesis will use factors such as the frameworks for this study. In addition, a risk management framework developed by Chain Risk Leadership Council supply (SCRLC 2011) will be used. This framework related to theory from Manuj and Mentzer (2008), Christopher (2005), and Waters (2011).
A supply chain can be recognized as a network that consists of suppliers, manufacturers, distribution centers, retailers, and raw materials, work-in-process inventory, and finished products that flow between facilities (David Simchi-Levi, P. K., & Edith Simchi-Levi 2004). Mentzer (2001) defines Supply chain as "a set of three or more companies directly linked by one or more of the upstream and downstream flows of products, services, finances, and information from a source to customer."
Based on these definitions we can make a generic illustration of a supply chain as follows:
Additionally, there are four types of supply chains Mentzer (2001), namely a "basic supply chain", an ‘’extended supply chain", an "ultimate supply chain" and a "partnership".
The basic supply chain is described as a network with a local company with an immediate supplier and customer directly connected with one or more of upstream and downstream flows of the products, services, finances and information.
The extended supply chain is equal to the basic supply chain, but it also includes the suppliers of the immediate suppliers and customers of the immediate customer, which are all linked to one or multiple streams of upstream and downstream products, services, finances and information. trungson can be considered in this category.
The ultimate supply chain is a network of all the companies involved in all of the upstream and downstream flows of the products, services, finances, and information from the original supplier to end customers.
A Partnership a dyadic relationship that differs from the supply chains described above because it only consists of two members, a buyer and seller, where there is no relationship upstream and downstream simultaneously between companies.
Supply Chain Management
There are many ways to define the supply chain management; however, it seems to be a common understanding of the expression. The general idea is that supply chain management involves coordinating activities between the different members of the supply chain.
According to David Simchi-Levi, P. K., & Edith Simchi-Levi (2004), SCM defined as a set of methods are used to efficiently integrate suppliers, manufacturers, warehouses, and stores so that goods is produced and distributed at the right quantities, place, and at the right time in order to minimize system wide costs while meeting service level requirements.
Whereas Tang (2006) defines SCM is the management of materials, information and finances flows through a network of organizations (eg, suppliers, manufacturers, suppliers, logistics, wholesalers / distributors, retailer’s retail) aims to produce and deliver products or services to consumers.
Supply Chain Risk
Many experts have a different look about the SCR, throughout many definition of expert, SCRLC (2011) & Kersten (2006) SCR is the damage that is rated by its ability to occur - it is caused by an event in a company, in its supply chain or the environment, affecting the business process at least a company in the supply chain negatively.
Supply chain risk can be calculated as a function of the probability of an interruption occurs and the consequences of the disruption (Aven 2007)
Manuj and Mentzer (2008) and Christopher (2005) there are many types difference of SCR. Christopher (2005) confirmed that supply chain risk is a source of potential risk to the business interruption.
. Supply risks
. Operational risks
. Demand risks
. Security risks
. Environmental risks
Supply risks cover areas such as supply disruptions, inventory, scheduling, and access to technology, price increasing, quality issues, uncertainly technology, product complexity, frequency of material design changes.
Operational risk includes operational analysis, production capacity, full processing, high level of process changes, changes in technology, and changes in active contact.
The demand risks involve aspects related to disruptions in the supply chain because of the difference in market demand.
The security risks concern information systems security; infrastructure security; freight breaches from terrorism, vandalism, crime, and sabotage.
Environmental risks are concerned to external forces that may disrupt the supply chain. These are forces or events that are difficult to forecast. An example of the risk environment can be a source of water pollution near to a farming site of TrungSon.
Waters (2011) talk about two different types of supply chain risks, Internal and External supply chain risks. External risks deals with risks outside Rauma Groups` control. The important task for Trungson is to construct the business to work as best as possible in the environment. The internal risks concerns risks to operations that Trungson can control.
Supply Chain Risk management
When working with risk management SCRLC (2011) argues that it should be distinguished between risks that should be included in risk management processes and those that should not. Risks that can cause unusual variations where the supply chain cannot respond to are those risks that should be included.
SCRLC (2011) defines supply chain risk management as "The practice of managing the risk of any factor or event that can materially disrupt a supply chain whether within a single company or spread across multiple companies. The ultimate purpose of supply chain risk management is to enable cost avoidance, customer service, and market position."
According to Manuj and Mentzer (2008) a firm’s background is the basis of the supply chain risk management strategy. As will be later discussed, supply chain risk management should have a long-term focus. Manuj and Mentzer (2008) have found that factors as temporal focus, supply chain flexibility, and supply chain environment affect a firm’s approach towards risk management.
Temporal focus involves a short-term focus where a firm utilizes strategies that provide immediate results. In this case, the firm finds it less important to manage risk. Research shows that when a firm has short-term focus, managers are more committed to performance metrics (Mentzer and Firman 1994). As an example that can be used is where the objective is to cut costs within a short period of time, and where the manager is measured on this performance. With this focus in mind, the manager might achieve the objective by renegotiating contracts with suppliers and restructuring the company. However, it might also result in less control of second tier suppliers in terms of quality. And in a long-term perspective, the immediate objective of reducing costs, can lead to increased costs.
The second focus that affects a firm’s approach to risk management is regard to supply chain flexibility. Flexibility can be defined as a firm’s ability to change and react with little penalty in time, effort, cost or performance (Upton 1994). A firm’s flexibility can be a competitive advantage as it makes a firm more agile in terms of finding and initiate alternatives faster than others. Being flexible can be seen as an advantage where supply and demand is uncertain. Research by Buckley and Casson (1998) shows that being flexible is valuable for supply chains that operates with high supply- or demand risks.
However, being flexible is also more costly. The third focus is regard to supply chain environment. This focus concerns about the environment a firm experience in terms of high/low supply risks, and high/low demand risks. Manuj and Mentzer (2008) have developed a table, based on Lee (2002) that shows the different types of supply chain environments
Postponement deals with delaying delivery or production in order to achieve flexibility and reduce costs. Postponement can be categorized in terms of form postponement, which concerns the product regard to labeling, manufacturing, and packing. The other form of postponement is in relation to time. Time postponement covers the topic of time after a firm has received an order from customer.
Speculation can be considered as the opposite of postponement. Speculation involves making decision based on expected demand. In relation to this thesis, it can be illustrated with an example where all of Rauma Group’s supply chain members are producing to customer demand.
Hedging, in terms of supply chain risks, concerns having more than one option when making decisions. This can be exemplified to sourcing of suppliers. Multiple sourcing can be more expensive than sole sourcing, however, a firm can experience less risks regarding quality, disruptions, price and opportunism, among others.
Integration concerns the element of control. The greater control a firm wants over its supply chain, the more it can integrate. On the other hand, the level of integration includes also the cost element. A highly vertical integrated firm will have higher costs. The consideration of cost / benefit in terms of integration is an important issue for a firm; therefore an analysis of the supply chain environment can provide solution.
As been seen, Rauma Group is vertical integrated in the production from roe to sales and distribution.
Securing strategies aims to enhance the supply chains to improve security in issues regard to information systems, terrorism, and sabotage, among others. This may not be seen so relevant to fish farmers. However, Rauma Group operating in an industry, which can be perceived unpopular by environmentalists, may experience sabotage on production sites. The information systems of Rauma Group may also be an attractive target for financial criminals who want secret corporate information.
Manuj and Mentzer (2008) split avoidance strategies into two different types. Type 1 avoidance strategy is about when there are risks linked to a certain product or geographical market, or with a supplier or customer that is undesirable. Furthermore, type 1 avoidance strategy aims to eliminate the risk.
Type 2 avoidance strategy concerns to reduce frequency and probability of risk events. Opposite of the type 1 avoidance strategy, these strategies occur when a firm realize they have to enter or be in a market with high supply and demand risks.
That being said, their studies showed that when a firm has the possibility of entering a SHDH - supply chain environment, the firm seeks to utilize type 1 strategy. If this is not an option, the firm will still enter the environment, if the cost/benefit analysis is appropriate with a type 2 strategy.
2.6.1 Supply Chain Risk Management Process
The International Organization for Standardization (ISO) has a framework in terms of risk management, known as ISO 31000. The SCRLC (2011) has used this standardization as a base to develop its framework of risk management towards supply chains. It also correlates with the risk management approach of Manuj and Mentzer (2008), Christopher (2005), Walter (2011), and Zsidisin, G. and B. Ritchie (2009). This risk management framework will be used as a basis in this thesis.
The supply chain risk management process consists of five steps
The three steps of risk- identification, analysis, and evaluation, can be recognized as Risk assessment.
The process begins with identifying the internal and external environments. These factors can lead to a SWOT-analysis that sums up the internal strengths and weaknesses, and the external threats and opportunities.
Further, the steps of risk assessment are to identify and analyze the potential risks and their impacts.
When the risks are identified and prioritized, the last step is to do risk treatment, which means to develop mitigating strategies. Typical mitigating strategies can include measures to reduce impact in the supply chain of a disruption, plans of how to respond on risks, and strategies of how to recover from a disruption.
Combined with these steps is the continuously communication and information flow between the different members in the supply chain, in addition to monitoring and review. These actions can help on a continuously improve the risk management process.
2.6.2 Identify internal and external environments
The frameworks of PESTEL can be utilized to identify and examine the internal and external environments of a firm or organization. Not only to be used with risk management, the frameworks can be used as tools when developing managerial strategies. It deals with Political-, Economic-, Social-, Technologic-, Environmental-, and Legal factors that a firm experience.
188.8.131.52 Political factors
The political factor considers the government policy and interventions in the economies the organization operates in. In terms of the aquaculture industry this can be exemplified by ruling regulations and political interference both in country of production, but also in the customer’s market. Obstacles from the Chinese government can be relevant in this consideration, but also ban of import of Norwegian salmon to Russia can be used as an example.
184.108.40.206 Economic factors
The economic factors covers topics as growth in the market, inflation, fluctuations in currency, changes in taxation and interest rates. It is not only conditions in Norway that are relevant in this concern, but also the foreign markets. Growth in the U.S. economy might lead to increased demand for Norwegian salmon, opposite reduced growth may affect demand negatively.
220.127.116.11 Social factors
The social factors take account for changes in social trends, as for example an aging population or growth in general population, and how these changes affects the organization regards to its market and customers, but also own employees.
18.104.22.168 Technological factors
These factors include technological changes that can affect the industry. The aquaculture industry in Norway is investing in technological developments in order to produce more efficiently. The research organization, SINTEF, has its own department, Create, that works "to combine world-leading companies that supply equipment and technology with prominent scientific research institutions into a centre with a common focus to innovate technology, products and solutions specifically to improve the grow-out phase of marine fish culture" (SINTEF 2009). New technology can reduce the production unit cost. Examples of technological developments can be concerned to sea cages, feeding and equipment used in production.
22.214.171.124 Environmental factors
The environmental factors relates to climate and weather changes and how this can affect an organization. These factors are obviously relevant for companies in the aquaculture industry. Examples of an environmental factor may be related to climate change, as the seawater temperature impact the growth rate of salmon.
126.96.36.199 Legal factors
This is a matter of legislation and changes in the environment where the organization operates. For instance, it can be assumed that the environment differs in countries from the western- and eastern world when it comes to legislation regard to employees. Health, safety and environment (HSE) are important issues in Norway. However, countries that do not have the same policy regard to these issues may experience cost advantage.
2.6.3 Examples of supply chain risks
Following is a set of examples of risks that can affect a firm and its supply chain in the aquaculture industry.