Familiar trains of thought

Terje Aven is perhaps one of Norway’s most prominent risk researchers, with more than 130 publications on risk-related issues, and in this article he picks up familiar thoughts and threads from papers previously reviewed on this blog, first and foremost perhaps his article from 2010 on how to define and describe risk, and also his 2007 paper that contained a framework for unifying risk and vulnerability, where uncertainty is a major part of the equation, just as it is here.

Three different perspectives

The paper starts off by comparing three definitions of risk:

1) AS/NZS 4360

Risk is the possibility of something happening that impacts on your objectives. It is the chance to either make a gain or a loss. It is measured in terms of likelihood and consequence

2) COSO ERM

Risk is the possibility that an event will occur that adversely affects the achievement of objectives. Risk is described by likelihood and impact.

3) ISO 31000

Risk is the effect of uncertainty on objectives. An effect is a deviation from the expected (positive or negative). Risk is often expressed in terms of a combination of the consequences of an event and the associated likelihood of occurrence.

and looks at how these definitions are different from each other and what this entails for the understanding of risk.

What makes them different?

The paper makes a major point in highlighting that these definitions are perhaps not contradictory, but nonetheless slightly inconsistent:

• all refer to objectives as a point against which risk is measured
• AS/NZS and COSO refer to probabilities or possibilities as the main pillar of risk, while ISO uses uncertainty
• AS/NZS and ISO accommodate  both desirable and undesirable outcomes, while COSO only refers to undesirable consequences
• all definitions pair consequences and likelihood
• all lack a precise definition of likelihood and probability

Thus, they are perhaps more confusing than actually clarifying what risk is. Would you agree?

What are the problems with these definitions?

There are three questions that arise from these definitions:

• Should risk be linked to objectives?
• Should risk be defined through probabilities or should risk be defined through uncertainties?
• Is it possible to establish a unified perspective?

The preliminary answer is that

• Objectives are a two-edged sword. First of all, an objective either way may hide the overall best solution, and who is to say what the right objective  really is, and thus, which consequences that are really undesirable or desirable?
• Probabilities are not a certainty, they are a tool and nothing more than numbers that are used to express uncertainty, and as all tools, they have their limitations.
• Considering that the three definitions are quite divergent, a unified perspective may seem impossible from the outset, but it doesn’t take too much reformulation to come with a more holistic point of view, and that is the topic of this article

So how can we establish a view of risk that captures all perspectives?

A unified perspective?

The unified framework for enterprise risk assessment and risk management the authors come up with rests on 3 main pillars:

1. Risk is covering two components
   a) the impact of events/consequences in relation to some reference
   b) the associated uncertainties
2. Risk is expressed using knowledge-based or judgemental probabilities
3. These probabilities are conditional on a background knowledge which may be based on many assumptions.

The figure below illustrates the concept:

I think the figure perfectly captures all elements of risk, the impact (positive or negative), the probability of said impacts, and the uncertainty associated with the probabilities, shown by the size of the squares marking the impacts.

Critique

Not all of Terje Aven’s discourses on risk are easy to follow as they tend to be highly quantitative in nature; this one is spot on, and I think he has a major point. Having said that, there wasn’t much enterprise risk in the article, and the example case didn’t shed much light on it either. Personally, I’d say that enterprise could have been omitted from the title without making much difference. In fact, I think that would indeed have been a better title.

Reference

Aven, E., & Aven, T. (2011). On how to understand and express enterprise risk International Journal of Business Continuity and Risk Management, 2 (1), 20-34 DOI: 10.1504/IJBCRM.2011.040012

Author links

• linkedin.com: Eyvind Aven
• uis.no: Terje Aven

Related posts

• husdal.com: How to define risk
• husdal.com: Risk management vocabulary

Have business schools lost their way?

Ghoshal (2005) argued that “bad management theories are destroying good management practices“, blaming business schools for the demise and corruption of good business ethics, because it is scientifically easier to teach shareholder value maximization at the expense of everything else than to argue for (let alone calculate the value of) corporate social responsibility as a driving force in business and supply chain management. With that as a backdrop, Fawcett and Waller set out to describe what theory is, what constitutes a valuable theoretical contribution and how theoretical deliberations can produce richer explanations in supply chain research.

What is theory?

Theory, so the authors, comes down to three different types of conversations or dialogues often found in academic journals:

• Description focuses on what we observe or how things are done. Although informative, description by itself is often less than fully satisfying and is seldom enduring. We inherently want to know more.
• Explanation elaborates the whys that underlie the whats and hows we encounter in the world around us. Explanation relates phenomena of interest to create better understanding. Explanation helps managers understand key causal relationships, helping them discern that if they pull lever “A,” outcome “B” will result. Insight into why the world works the way it does has the potential to endure as well as to influence. This is theory.
• Prescription informs what to do when faced with a given challenge or set of circumstances. Importantly, accurate prescription is based on sound understanding—that is, good theory. Absent the understanding created by good theory, our prescriptions will be flawed, leading to either (a) a partial, but incomplete solution to our dilemma or (b) an unexpected and potentially counterproductive result.

These conversation types are not mutually exclusive,  and the authors state that “as business academics, our opportunity, and responsibility, is to help explain the decision-making environment that surrounds managers, by mingling description, explanation, and prescription within a single conversation”.

Mind you,

Our research makes the greatest contributions to knowledge discovery and dissemination when it helps us understand the core phenomena, and their interrelationships, that influence our tumultuous world.

Perhaps akin to what Christopher and Holweg wrote about supply chain turbulence in their article on Supply Chain 2.0?

What constitutes a valuable theoretical contribution?

Fawcett and Waller hit the nail on the head when they argue that “The challenge for authors, editors, and reviewers alike is to determine what justifies a legitimate contribution to an ongoing conversation. Fortunately, no clear, easy-to-define metric exists. If it did, our conversations would become formulaic and stale as authors played the game of getting published, as I wrote about in The Catch 22 of academic publishing.

But how do we distinguish a valuable contribution and how can we evaluate if what we come up with is really valuable?

• When we demonstrate how a new variable changes our understanding of the focal phenomena, theoretical insight often emerges.
• When we find paradoxical inconsistencies in reported findings about a common phenomenon, we should be spurred to additional inquiry. Such questioning may lead us to a completely new way of thinking about our world. We might even start a new conversation.
• We might find it useful to try on a new pair of theoretical lenses from another discipline or field to help us suspend our assumptions about how the world works. New lenses often help us see more clearly.
• We should occasionally challenge the appropriateness of our methodological tools. As we do so, we may realize that the way we collect and analyze data constrains our vision, hiding from view alternative contexts, phenomena, and explanations.
• Today’s decision contexts are dynamic. A careful evaluation may reveal that extant theory no longer adequately explains our decision-making environment. Sometimes “generation gaps” are real and what worked in the past is no longer relevant or valid today.

Ultimately, so Fawcett and Waller, the measure of a valuable theoretical contribution is whether or not it helps us perceive and understand the world more clearly. James Stock wrote about Broader research = better research already in 1997, and I think he was right, and still is.

How can supply chain research become better?

As business academics, we have the opportunity and obligation, say Fawcett and Waller, to consider how our research can identify and delineate paths to value creation, corporate competitiveness, and societal well-being. How can we do that?

• Step 1: Become knowledgeable about real-world problems
  Being conversant in the day-to-day language of business can mitigate the knowledge production gap that emerges when we ask questions that only interest a handful of other academics
• Step 2: Periodically look through a new set of lenses
  To avoid getting overly comfortable and dependent on a limited set of inquiry tools, we must investigate theories and methods from varied disciplines. By examining vexing problems through new lenses, we will see various facets of complex phenomena in a new light.
• Step 3: Learn to communicate via appropriate language
  We can and must do a better job of identifying and communicating the practical implications of our research. It should not be our goal to simply entertain other academic researchers.

Reference

Fawcett, S., & Waller, M. (2011). Making Sense Out of Chaos: Why Theory is Relevant to Supply Chain Research Journal of Business Logistics, 32 (1), 1-5 DOI: 10.1111/j.2158-1592.2011.01000.x

Author link

• linkedin.com: Stanley E Fawcett
• linkedin.com: Matthew A Waller

Related posts

• husdal.com: Borrowing our way to a science

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Quo vadis, SCM?

Two weeks ago I asked the question, Quo Vadis, SCRM?, and the direction of supply chain risk research seems to be very similar to supply chain management research, which is only naturally, since one provides the basis for the other. Today’s article investigates the history of the SCM literature looking at the various trends and developments in the field through a historical analysis covering the 10-year-period between 1997 and 2006. During this decade, SCM evolved into a more prominent area of research, or borrowed its way to a discipline as Smith and Buddress (2005) call it. Supply chain management always has been and probably always will be a melting pot of various disciplines, with influences from logistics and transportation, operations management and materials and distribution management, marketing as well as purchasing and information technology, and manyothers, all working together “to produce an overall supply chain strategy that ultimately enhances firm performance.”

The top three topics of SCM to date

Analyzing past and present literature the authors find 13 topics or categories of topics, three of which stand out more prominently than the 10 others:

• SCM Strategy 23%
  • e.g. Strategic alignment, competitive advantage, agency theory, risk management
• SCM Frameworks, Trends and Challenges 18%
  • e.g.Trends, definitions, reviews and problems
• Alliances/Relationships 16%
  • e.g. Relationship building, trust, commitment, vertical and horizontal cooperation
• E-Commerce 8%
  • e.g. How e-commerce and the Internet affects the supply chain
• Time-based Strategies 6%
  • e.g. Just-in-Time, Inventory management, mgility and flexibility, postponement
• Information Technology 5%
  • e.g. Internal and external decision support systems and information exchange
• Quality 5%
  • e.g. ISO and QM practices
• Supplier Development and Management 4%
  • e.g. Supplier selection, training and improvement
• Environmental and Social Responsibility 3%
  • e.g. Environmental policies, ethical practices, goverment regulations, human rights
• Outsourcing 3%
  • e.g. Outsourcing, 3PL, and contract manufacturing
• HR Management 3%
  • Organizational change, virtual organizations, learning skills, responsiveness
• Buyer Behavior 2%
  • e.g. Inter-firm behavior, negotiations and organizational decision processes
• International/Global 2%
  • e.g. Global logistics, cultural issues, international trade, worldwide sourcing

The top three make up 57% of the reviewed literature and from my point of view I would liked to know how many of these 405 articles relate to supply chain risk and related subjects, but I guess they are more or less evenly scattered among the 13 topics.

The top three are important not only because of the numbers alone, but because of an increase in articles in recent years, thus also signifying a trend:

SCM Strategy

The most discussed area in the literature is that of Supply Chain Strategy, but – and this is a big “but” – most of these articles only investigated strategy alignment between the firm and one key supplier rather than a chain investigation, according to the authors. Consequently, so they say,

…there is room for further investigation from the viewpoint of non-purchasing management within the top management teams of organizations to establish whether these suggested strategic alliances and streamlining have come to fruition or are still only ideas in the minds of ambitious supply chain managers…

Thus, despite the increase of a greater focus on the strategic importance of alignment between supply chain and the parent firm, there is considerable work left to be done. Vivek Sehgal’s book on Supply Chain Strategy is a good starting point.

SCM Frameworks, Trends and Challenges

SCM Frameworks, Trends and Challenges represent the second largest area of recent growth within the supply chain field, and is focused on constructing frameworks for the development and mechanics of supply chains and the overall understanding of SCM by explaining various components of the chain itself.  According to the authors,

…Based on our analysis, and the maturation of SCM, we see this area in a steady or decreasing state, as researchers appear to be examining other areas relevant to SCM. We believe that contributions provided by such studies were important for building the foundations of SCM…

Does this suggest that no new frameworks will developed in future literature? I doubt so. Business is continually evolving, so are supply chains, and so should SCM frameworks. In my opinion. There is always room for new ideas and new concepts. Besides, perhaps SCM can simply do what James Stock argued for in his 1997 article on applying theories from other disciplines to SCM, and always find new horizons to expand into?

Supplier Alliances and Relationships

The third-largest group of articles in this review did not fully emerge until around 2003, and  only 13 artides in the sample focused on any form of buyersupplier relationship issues before 2001. The authors explain that

…The resurgence of publications in this area over the past 5 years is surely a result of a general trend within industries of moving away from simple transaction and contractual-based relationships, and toward more long-term relational forms of collaboration between parties involved in supply chain activities. The development of these long-term, strategic relationships between buyers and sellers within the supply chain has been previously shown to offer opportunities to create considerable competitive advantage…

While many supply chains have gained considerable from vertical and horizontal collaboration, others have claimed the opposite in more recent articles I have come across. Too much collaboration and development can actually harm performance.

Level of analysis and research design

Visualizing their review findings and looking at the level of analysis (firm versus network) and research design (empirical versus non-empirical), it is clear that most researchers are clinging to empirical case studies of a single firm or chain:

What this figure tells me is that non-empirical research focusing on supply networks could be one of the future SCM research trends, the same research gap that exists in supply chain risk management research.

Future Research

Despite having been around for nearly 20 years, if counting from the very early beginning and the first definitions of SCM in the early 90s, there are still opportunities for growth and improvement, and the authors list the following as possible future research alleys:

Larger Sample Sizes

Many studies in supply chain management are empirical, relate to one focal company only and thus suffer from statistical condusion errors due to small sample sizes.

…researchers can delve into a few companies but examine multiple tiers and many suppliers within each tier in order to further increase sample sizes and observe more network or chain wide phenomena. Addressing this issue will ensure that a more system-wide perspective of SCM is achieved within academic research and can partially counter the small sample size problem…

That is task #1.

One-Tier Investigations

Many of the articles reviewed only looked at the relationship between the main supplier and the manufacturer, which very often represents an important dynamic. However, within the dyad there is a multiplidty of issues that are yet to be addressed.

… one alternative is to focus on one organization and increase the sample size by looking at all of the suppliers of that organization across the various tiers, thereby offering a much richer sample in terms of the interaction between suppliers and purchasers across the entire chain.  While more difficult to perform, future studies which expand the focus beyond simple one-tier buyer-seller relationships are necessary for understanding how further supply chain efficiencies can be achieved…

That is task #2.

Limited Methodological Analysis

Several of the articles limited their methodology to correlation analysis where multiple regression or SEM would have provided a more in-depth analysis. Further, they often failed to report descriptive information such as sample size, frame of reference or even response rate.

…if future studies are to improve the analyses presented need to be more sophisticated or at least more thorough. Researchers could examine related fields to benchmark reporting standards for analytical procedures, as well as some of the shortcomings of past work. Here,  triangulation is a good way to mix qualitative and quantitative methods, resulting in cross-method synergies and an improved approach for studying SCM…

That is task #3.

Lack of Longitudinal Studies

Most studies represent a spedfic moment in time while in many instances a longitudinal study would be far more informative. Although these studies require considerably longer time-frames, following a group of firms longitudinally would provide significant data in developing megatrends in the supply chain.

…While longitudinal data are difficult to collect, these data provide an effective tool for studying organizational processes and enhance confidence in the assessment of causalit. SCM research which, for example, captures multi-tiered buyer-supplier relationships over a product life-cycle might be much more beneficial than if viewed at a single point in time…

That is task #4.

Limited Global Supply Chain Analysis

Globalization is becoming a powerful force within corporations and the world community. Thus, it is critical that researchers work to examine global SCM research questions, regardless of data access issues. American companies, and their foreign counterparts, are increasingly doing business overseas.

…global supply chains represents one of the least published topics within SCM literature over the past decade. However, at this moment it is arguably one of the most critical to industry practitioners. Among others, future research addressing SCM postponement on a global supply chain basis is very needed…

That is task #5.

Conclusion

This is an excellent article, connecting the past, the present and the future of supply chain management research, and it is indeed interesting to see how some topics have increased and decreased in number of articles over the years. While I would have loved to see all 405 articles listed in their references, I will trust that only the most important were selected for mentioning and that the rest is perhaps not worth reading (or at least not worth writing about). In the end I can only agree with the authors when they say that

It is our hope that researchers will use the gaps identified herein to generate much needed conceptual and empirical work in the SCM literature, thereby creating a body of literature that is more heavily influenced by a deeper analysis of the supply chain on a chain wide or network basis as opposed to the more popular dyadic studies. Certainly, there is ample opportunity for a wide range of methodological tools to analyze such chain wide or network phenomena. Rich detailed qualitative methodologies using approaches such as grounded theory and snowballing to delve deeply into a supply chain can prove to be valuable additions to the literature. Qualitative studies focusing on networks and using analogies to social networks in the consumer literature could serve as a point of entry to better understand these complex interdependent network relationships.

Continuing to advance the more popular streams of SCM literature is important for the evolution of the field, and the authors are right in saying that doing so will, undoubtedly, expand our understanding and knowledge of SCM. Clearly then, I and all the other supply chain (risk) management researchers have our work cut out for us.

Reference

Giunipero, L., Hooker, R., Joseph-Matthews, S., Yoon, T., & Brudvig, S. (2008). A Decade of SCM Literature: Past, Present and Future Implications. Journal of Supply Chain Management, 44 (4), 66-86 DOI: 10.1111/j.1745-493X.2008.00073.x

Author links

• fsu.edu: Larry Giunipero
• linkedin.com: Robert E Hooker
• linkedin.com: Sacha Joseph-Matthews
• mscd.edu: Tom E Yoon
• linkedin.com: Susan Brudvig

Related posts

• husdal.com: Future trends in supply chain management
• husdal.com: SCM – the new research cocktail
• husdal.com: Quo vadis, SCRM?

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Chain versus network

A supply chain is actually a misnomer. While this may be true in some case, more often than not it is a network, not a chain, as can be seen in Harland et al. (2003) and their article on Risk in supply networks. This misconception of the supply chain as a chain has also resulted in another erroneous image of what a supply chain is, namely the buyer-supplier dyad or buyer-supplier relationships, as seen in Triads in supply networks by Choi and Wu (2009).

The usual conceptualization of a supply chain as a chain has resulted in them being described from a focal firm perspective, neglecting the interdependencies between supply chains (e.g. shared suppliers). The overlapping nature of supply chains is more accurately described by a network. This location of supply chains as an element of a supply network is important in the consideration of events that have impact beyond a single supply chain.

Consequently, it is only when viewing the supply chain as a supply network that the full consequences of a disruption emerge, and thus, we need to separate the wheat from the chaff or the network from the chain:

• a supply chain describes the flow of information, materials and cash into and out of a focal company; and
• a supply network describes the connections between supply chains that share common elements.

Essentially then, while the focal firm has a supply chain, this chain at the same time is part of a larger network, as seen in Jüttner et al. (2003) an their Supply Chain Risk Management – Outlining a Future Research Agenda.

Disturbances versus disruptions

If we separate the chain form the network, then, when looking at the whole system, it is possible to discern between disturbances (affecting one focal company or one chain) and disruptions (affecting many companies and the entire network or parts of it), much like Peck (2006) did in Reconciling supply chain vulnerability, risk and supply chain management.

Disturbances can be separated from disruptions in terms of their impact on a supply network. Disturbances involve connected supply chain actors adapting to variations in material flow or information. This process of adaptation is constrained by the structure of the chain, that is to say that the chain structure does not change as a result of the adaptation process.

Disruptions involve the removal of ties/nodes from the network (either permanently or temporarily) as a consequence of some unanticipated critical event. As a result, the post-disruption network structure is irreversibly different to the pre-disruption network and the adaptation process inevitably involves the residual actors renegotiating existing and in some cases establishing new relationships, resulting in an irreversible change to the network structure.

In summary, disruptions differ from disturbances in terms of their range and impact. Disturbances do not change the chain structure whilst disruptions result in network irreversible structural changes. Network responses to disruption differ from normal network formation and evolution processes, in that the latter involves a considered process not constrained by time, whilst the former requires an urgent adaptation constrained by time.

This concept is not so unlike the deviation-disruption-disaster framework used in the book chapter on Risk Management in Global Supply Chain Networks by Visanadham and Gaonkar (2008), whose disruptions are the same as disturbances and whose disasters are the same as disruptions. Interestingly, this almost the same concept is not mentioned in the reference list for this article, but considering the search methodology they used in their literature review, it is not surprising that they did not find it.

Literature review explained

Regular readers will remember my previous post on a literature review article that explored how supply chain risk management research had evolved over the past decade, where I lamented that the researchers did not disclose much about their search methodology, thus making it difficult to follow their steps. Not so in this article. Here the authors provide detailed step-by-step information on how they searched, e.g. citation/co-citation is thoroughly explained, and also what particular keywords they used. This is indeed very helpful for other researchers attempting similar types of reviews in other fields of research. In this case, the following keywords were used and linked with supply chain disruption or supply chain disturbance: transaction cost economics (TCE, resource dependency, resource based (theory or view), buyer seller relationships, economic organization, network formation, social networks. Had I been on the team I probably would have included supply chain turbulence and supply chain volatility, and maybe more, just to make sure I get as many articles as possible.

Networks and relationships

Particular emphasis was put on articles relating to relationship formation, relationship dynamics, network formation, network attributes, and why firms form networks and relationships, leading to different-looking types of networks:

The authors postulate that

each of these network attributes has a particular significance in the way that networks respond to disruption. For instance, a disruption occurring at a node with high inbetweenness centrality will result in a greater disconnection amongst the network actors than a disruption occurring in a node with low inbetweenness centrality. In a similar fashion network, holes represent opportunities for nodes to build new connections with previously unconnected nodes following a disruptive event. Nodes with high-degree centrality enjoy a privileged position of power, which they may or may not use to their advantage, and this is in contrast with the network attribute of equivalence, which describes nodes, with no comparative privilege. The role of weak ties in responses to disruption may be of particular significance, as they are recognized as a mechanism for the effective dissemination of information across a network. If part of a network becomes aware of a disruption sooner than another part of the network, it follows that its actions are likely to be more effective in mitigating the impact of disruption.

Well spoken and perhaps not so unlike Cheng and Kam (2008) and their view of how disruptions propagate through a network and impact just a link or a node, a subnetwork, or – worst case – the entire network.

Conceptual framework

In the end, the authors develop the following conceptual network and hypotheses:

1. The time taken for a network to recover will be greater in dense networks, compared to the time taken for less dense networks to recover.
2. The impact of a disruption will be greater in less dense networks than in more dense networks.
3. Disruptions in dense networks will result in greater instability across the network during the recovery phase.
4. Networks with a higher proportion of holes, and associated high dependency ties, will experience greater disruptive impact on those networks with fewer holes.
5. Networks with a high proportion of holes, and associated high dependency ties, will take longer to recover from a disruptive impact than those networks with fewer holes.
6. Disruptions in structurally evolving networks will have greater impact than in mature networks with proportionately less holes.
7. Nodes whose shortest connecting path to a disruptive event is via a weak tie will be impacted less than a node whose shortest connecting path is through a greater number of strong ties.
8. Nodes whose shortest connecting path to a disruptive event is via a weak tie will recover more quickly than a node whose shortest connecting path is through a greater number of strong ties.
9. The co-location of influence (as a result of degree or inbetweenness centrality) and disruption will result in greater impact than the location of disruption at nodes of lesser influence.
10. The co-location of disruption and power will result in longer network recovery periods than the dislocation of disruption and power.
11. Disruptions connected to powerful nodes (described by centrality) will result in less impact and then accelerated recovery period when compared to disruptions connected to less powerful nodes.

Conclusion

The objective of this paper, so the authors say, was to review the extant relational literature relating to networks, with a view to combining these theoretical perspectives with the literature surrounding supply chain disruptions. That they have done, no doubt about that, and this is one of the best articles on supply chain disruptions I have come across in a very long time. It is also a fine extension of the work done by Craighead et al. (2007), who came up with six propositions that relate the severity of supply chain disruptions to supply chain design characteristics and supply chain mitigation capabilities, and  I’m definitely looking forward to seeing future research that builds on the work of Greening and Rutherford.

Reference

Phil Greening, & Christine Rutherford (2011). Disruptions and supply networks: a multi-level, multi-theoretical relational perspective International Journal of Logistics Management, 22 (1), 104-126 DOI: 10.1108/09574091111127570

Author links

• linkedin.com: Phil Greening
• cranfield.ac.uk: Christine Rutherford

Related posts

• husdal.com: Supply chain disruptions and network attributes
• husdal.com: Risk Management in Global Supply Networks
• husdal.com: SCRM Research – past, present and future
• husdal.com: Risk in supply networks

Material, financial and information flows

The article takes a familiar approach in classifying and categorizing different supply chain risks the literature they review, namely

• material flow risks
• financial flow risks, and
• information flow risks,

an approach many supply chain researchers will readily recognize, i.e. the “boxes, bucks and bytes” in Kleindorfer and Wassenhove’s Managing Risk in Global Supply Chains, strangely enough not mentioned in their collection of literature. On a side note, to complete the flows that make up supply chain management, Wassenhove added two more flows,

• people flows, and
• knowledge or skills flows

in his book on Humanitarian Logistics, flows that in my opinion are equally important in supply chain risk management, as people are often the weakest link in the supply chain, and people are the agents that more often than not perceive risks as different from what objective measures tell them to be.

Risk definiton

When looking at their list of 80 or so references I was surprised to not find many articles I would have considered important in looking back how the supply chain risk management literature has evolved. However, when looking at the definition of supply chain risk they employ, it became clear to me why they were so “selective”:

supply chain risk should refer to (i) events with small probability but may occur abruptly and (ii) these events bring substantial negative consequences to the system

While the authors may subscribe to a risk definition similar to that of Paul Kleindorfer, I beg to disagree here, as I believe that the focus on risk as something that is only very negative is not the right way to address the full spectrum of risk issues. Consequently, I think the authors have not fully captured the development of supply chain risk management research.

Literature review

First the authors describe how they found the articles they reviewed:

Based on the description of definitions in previous section, we use search keywords supply chain, supply chain risk or supply chain risk management together with risk or uncertainty. After obtaining these articles,we use the criteria ‘‘high impact and low probability risk’’ to filter the most relevant ones. Finally we have shortlisted and reviewed 138 articles between the years of 1995 and the first half of 2008.

This is a valid approach, but I would have liked to know more about the search keywords. Are those the keywords employed by the authors of the reviewed articles? If so they may not always fully describe the content the article, since the number of keywords allowed is often limited by the journal publisher, and some authors may deliberately chose to use certain keywords and to omit other keywords. Or did the authors (of this article) read and then decide what keywords that fit? Also a bit puzzling to me is that they say to have reviewed 138 articles, but only 80 or so made it into the references of the article, which in hindsight may account for the articles that I thought were missing from this review.

Solid work

Having said the above, I am still very much impressed with the work the authors have done. Using citation and co-citation analysis, they identify three separate time periods and topical clusters within those periods.

Main issues discussed during the year 1995 until 1999 include financial risk management and operations strategies such as adoption of lean concept and early supplier involvement .Between years 2000 and 2003, the number of articles in SCRM slowly increases. Main issues vary from operation plans to relationship of supply chain partners. In the same time period, we also note the emerging of studies on information technology and information flow. Meantime, we also note a rising discussion on globalization risk associating with political and cultural practices. A dramatic increase of publications starts in 2004, from which SCRM exhibits a steady rising of interest from academic researchers and practitioners. Challenges and opportunities of outsourcing to low cost countries are the favorite discussion topics. Others include supply chain partner relationship, supply chain environmental, economy and political issues and growth of information sharing and security. Several studies on financial risk are also noted.

Note the scale on the y-axis above. I must say that I find it hard to believe that while there haven’t been written that many articles on supply chain risk management, but obviously more than enough, they have actually been cited close to 500 times in 2003. Possible, yes, but the authors do not say where the citations have been taken from, so it is hard to judge credibility of the figure.

Nonetheless, the figure leaves no doubt that supply chain risk management has seen a dramatic increase in interest in the recent decade.

Research gaps

The authors identify a number of research gaps or possible new research strands for budding researchers:

Robust planning: exploring the uncertainty inherent in a supply chain, and developing optimization decisions which provide more predictable results.

Revenue management: using pricing policies to allocate and relocate capacity from disrupted to non-disrupted segments of the supply chain.

Agency theory: investigating understanding supply chain interdependencies in a systems perspective.

Option theory: integrating real options and financial options for improving strategic/tactical and operational decisions.

System dynamics: understanding and analyzing the inherent control policies in a supply chain, e.g. the bullwhip effect in supply chain disruption management.

Reverse logistics: using returned items as a backup or reserve inventory to improve supply chain reliability and to reduce tied-up capital

I find this a very interesting list, especially the last suggestion, which also adds in sustainability, perhaps the coming issue in future supply chain management, as reported by eft.com.

Critique

This is a well-researched article. It is perhaps not so well written or well-structured. By that I mean that it doesn’t flow so well when reading it, and it takes some time for the main points to sink in. Some figures are not self-explanatory and are also not described  in enough detail in the text to fully understand what they convey. Overall however, the article brilliantly sums up the core topics of supply chain risk management of the past, the present, and where it may be headed to in the future.

Reference

Tang, O., & Nurmaya Musa, S. (2010). Identifying risk issues and research advancements in supply chain risk management International Journal of Production Economics 133 (1), 25-34 DOI: 10.1016/j.ijpe.2010.06.013

Author links

• linkedin.com: Qu Tang
• linkedin.com: S Nurmaya Musa

Related posts

• husdal.com: A literature review in supply chain risk management
• husdal.com: Risk and uncertainty in supply chains

More than meets the eye

To me, the major point of this article is not the case study of a Chinese manufacturer of Special Purpose Vehicles, but a cause and effect diagram showing how internal and external risk affect all processes in the supply chain. Even more useful is a set of nine criteria used for assessing the trustworthiness of a case study. Not to mention the 80 or so references in the bibliography, where – as always – I didn’t find articles that I thought they would have cited, but more importantly, I found lots of articles I had not heard of before. Add to that a very detailed description of how the case study was undertaken and the lessons learned from it, this article is nothing less than a cookbook in supply chain risk management case studies.

Cause and effect

One very illustrative figure in the article is a cause and effect diagram showing internal and external supply chain risk in a product design change perspective.

Although based on this particular case study, in my opinion this diagram is generally applicable to almost any manufacturing supply chain.

Internal risks are related to:

• R&D risk: The inability to quickly redesign the product to meet customer’s requirements for design change
  
• Production risk: The inability to quickly and efficiently produce the product with customer’s changed design
  
• Planning risk: The inability to maintain stable and consistent planning production planning and scheduling
• Information risk: The inability to share information among different supply chain roles and make it accurate, secure and visible across the entire supply chain
• Organizational risk: The inability to adjust the organization structure and operational processes to match the dynamic characteristics of customer demand

External risks are related to

• Policy risk: The inability to meet industry and government regulations, trade rules and legal standards
  
• Supply risk: The inability to guarantee supply availability, timeliness, cost and quality
  
• Delivery risk: The inability to deliver on time and to guarantee the logistic capability

Trustworthiness criteria

A very interesting selling point of this article is the use of trustworthiness criteria and how the case study meets these:

• Credibility: Extent to which the results appear to be acceptable representations of the data
• Transferability: Extent to which the findings from one study in one context will apply to other contexts
• Dependability: Extent to which the findings are unique to time and place; the stability or consistency of explanations
• Confirmability: Extent to which interpretations are a result of the participants and the phenomenon as opposed to researcher biases
• Integrity: Extent to which interpretations are influenced by misinformation or evasion of participants
• Fit: Extent to which findings fit with the substantive area under investigation
• Understanding: Extent to which participants buy into results as possible representations of their worlds
• Generality: Extent to which findings discover multiple aspects of the phenomenon
• Control: Extent to which organizations can influence aspects of the theory

I find this an incredibly useful set of criteria, perhaps a few too many, but nonetheless, I think these are the critera every case study should be judged against.

Critique

There is only one “negative” point to be made about this article: It’s a bit on the long and detailed side, too detailed perhaps in its description of the case study. However, I don’t see where it could have been shortened. Having said that, the positive takeaways from this article which I already mentioned in the beginning more than outweigh the fact that it does take a while to fully read this article. Kudos on an job well done.

Reference

Lin, Yong, & Zhou, Li (2011). The impacts of product design changes on supply chain risk: a case study International Journal of Physical Distribution and Logistics Management, 42 (2), 162-186 DOI:10.1108/09600031111118549

Author links

• linkedin.com: Yong Lin
• gre.ac.uk: Li Zhou

Related posts

• husdal.com: Product design and supply chain risk

It may not be this simple

Although the authors test their model of loyalty formation on the basis of commitment and trust  on  as many as 795 logistics outsourcing relationships in the the US and Germany, they also caution that the results should by no means be generalized or accepted as facts about cultural traits and how business operates in these two countries. Life (and business life) is much more complicated than that. Nonetheless, the article does paint an interesting picture of how business relationships are formed in the US versus in Germany, and which elements that foster loyalty and which elements that don’t.

3PL – a risk manager

Logistics outsourcing is increasing and many companies depend on their 3PLs for managing their logistics risks, because after all, 3PLs are what makes supply chains move. This is reflected in my own on How Norwegian freight carriers handle transportation disruptions, where I found that

• Freight owners do not appear to be overly concerned about transportation disruptions, because both mitigative and contingent measures are handled by the freight carrier.
• Freight carriers are acutely aware of their important role in the overall supply chain.
• Freight owners seek vertical integration of one or several selected freight carriers into their supply chain, and are willing to pay a “risk premium” for securing on-time delivery.
• Freight carriers establish asset-specific and flexible solutions to meet the contingent needs of different freight owners.

Essentially then, it’s the third-party logistics providers who handle and manage supply chain risks and thus become risk orchestrators, as I eluded to in a previous post.

What is logistics outsourcing?

Back to the paper, the authors start out by saying that while logistics outsourcing has been identified as a key topic in contemporary logistics research , one of the difficulties faced by researchers in this area is the assortment of definitions used to describe the concept. In this study, then,

logistics outsourcing involves a relationship between a company and an LSP which, compared with basic logistics services, has more customized offerings, encompasses a broad number of service activities, is characterized by a long-term orientation, and, thus, has a rather strategic nature

As to what kind of services that a third-party logistics provider could offer vis-a-vis potential customers, this post on the flexibility of logistics providers has a very useful list, and although it focuses on service flexibility, this flexibility is integral to customization and long-term orientation.

USA versus Germany

Citing several renown works on national and cultural differences in their literature review, the authors conclude that in contrast to US Americans, Germans …

• … extend trust more readily, especially to in-group members
• … are more accepting of information sharing
• … dread change and innovation
• … adhere to rules and regulations more strictly
• … place higher emphasis on stable relationships
• … are more loyal toward relationships, especially with in-group members
• … seek consensus and try to avoid conflict
• … require personal bonding for maintaining long-term business relationships
• … place lower emphasis on immediate economic benefits
• … are rather long-term oriented

Having grown up in Germany, and sort of semi-German in my heart and soul, and having spent some time in the US, I would agree to some of the points above, but certainly not all. FYI, a more detailed comparison can be found in my post on How loyalty is formed in business in my blog at the Kinaxis Supply Chain Expert Community.

The model

The theory behind this article is that there are two dimensions to loyalty:  retention and referrals, acting together as presumed below.

The questions to be investigated are how do trust and commitment influence the two dimensions of loyalty. On a related note, Trust, Risk and Control in Strategic Alliances is an interesting side topic.

The result

The results show a very diverging formation of loyalty in the US versus Germany. Commitment assumes a key role in the United States. While trust has no significant direct effect on retention and referrals, commitment has a strong direct effect on both dimensions of loyalty. In Germany, the effect of commitment on loyalty is substantial, yet significantly weaker than in the United States, while trust in Germany has a strong and significant direct effect on both loyalty dimensions. Interestingly, so the authors,

Germans seem to focus more on frictionless long-term relationships fostered by trust, because business relationships in Germany often are accompanied by personal relationships and mutual admittance of relationship partners to the respective in-groups. Americans, on the other hand, are comparatively impersonal in the business world and rather calculative. Therefore, trust as an expression of the quality of the interpersonal relationship between buyer and seller is usually able to stimulate loyalty in Germany, while it has no direct effect in the United States. Here, instead, trust has to create commitment before it fosters loyalty behavior.

So, now you know it, Germans and Americans are very different when it comes to forging business relationships. Really?

Reference

Wallenburg, C., Cahill, D., Michael Knemeyer, A., & Goldsby, T. (2011). Commitment and Trust as Drivers of Loyalty in Logistics Outsourcing Relationships: Cultural Differences Between the United States and Germany Journal of Business Logistics, 32 (1), 83-98 DOI: 10.1111/j.2158-1592.2011.01008.x

Author links

• wikipedia.de: Carl Marcus Wallenburg
• indigopearl.eu: David L Cahill
• osu.edu: A Michael Knemeyer
• uky.edu: Thomas J Goldsby

Related links

• community.kinaxis.com: How loyalty is formed in business – USA versus Germany

Related Posts

• husdal.com: Challenges in 3PL
• husdal.com: Cooperative Strategy

Shorter, faster…better?

Why is the Northern Sea Route so important? Looking at this map of global shipping lanes, the answer is obvious and simple: The navigation distance from a port in Northwest-European to a port in the Far East much shorter compared to the route via the Suez Canal, and obviously, this shorter distance not only saves fuel, it will also allow a vessel to make more trips and carry more goods over the same time it would have taken it to go via Suez. The table below compares some of the major routes:

However, for all the potential benefits, there are also many possible risks, first and foremost uncertainty in the schedule reliability, because the Northern Sea Route is open during the summer season only, and there are no fixed dates guaranteeing when  ice-free conditions will start or end. While this may not be so much an issue in bulk shipping, in liner shipping reliability is a crucial issue, as the Maersk Slow Steaming project has shown.

Two case studies

The authors apply the Northern Sea Route to two possible cases of bulk shipping, where iron ore or nitrogen fertilizer is shipped from Norway to China via the Northern Sea Route or via Suez or the Cape of Good Hope, and cullate the differences in days at sea, fuel consumption, costs and other charges.

In summary, while the Northern Sea Route is shorter, it also has speed restrictions, and thus may take equally long time as the other routes. However, slower speed leads to considerable fuel savings, and more importantly, to some, a sizeable reduction in CO2 emissions.

The gains from shipping operations on an ice-free Northern Sea Route appear to be reduced number of days at sea and more than doubling of the vessel fuel efficiency. For the corporate players in bulk shipping of relative low value raw materials, cost savings for fuel may appear as a driver to explore the Northern Sea Route for commercial transits, and not necessarily reduced lead time.

The Northern Sea Route coastal route alternatives, with vessel draught and beam limitation, are a hindrance for large vessels, and therefore achieve the same economies of scale in shipping as via Suez.

Environmental demands faced by the maritime shipping industry may emerge as one of the drivers for developing the Northern Sea Route. Increased knowledge about environmental benefits and costs for both the Northern Sea Route and Suez routes will probably be important factors in this respect.

The examples are very well calculated with traceable assumptions and calculations. That is a job very well done and is an impressive piece of work.

Not risk-free

The article contains a short section on supply chain uncertainty and risk categories, where the authors emphasize that establishing the Northern Sea Route is a highly uncertain undertaking and not without caveats. Besides the obvious climatological and seasonal issues, there is also ample political risk:

For the Northern Sea Route, ice-season variations and future Russian policy to Northern Sea Route infrastructure developments and foreign vessel transits currently appear as decisive uncertainties.

In other words: Things can change quickly here, for the better or for the worse. Then there are many environmental issues that need to be addressed, thus making corporate social responsibility a major keyword for shipping companies planning to use the Northern Sea Route.

If the Northern Sea Route is to be a feasible route in a corporate social responsibility context, the global benefits of reduced CO2 emissions from shipping and potential other environmental benefits should compensate for the added external costs caused by operating on the Northern Sea Route. Examples of such external costs in the Arctic sea are effects from increased air pollution (e.g. soot), deposition of various materials, and ship incidents and accidents with oil spill in highly vulnerable areas. Ships fuelled with LNG, a proven propulsion technology, might reduce the environmental costs on the Northern Sea Route

Logistics has a prominent role in the execution of company social responsibility, and just how far the corporate social responsibility of a shipping company could or should go can be seen in this post that I wrote some months ago: Corporate Social Responsibility – Do or Don’t Do?

Critique: Supply chain flexibility, agility and adaptability?

In the introductory section of their article, Schøyen and Bråthen claim that

Establishing the Northern Sea Route as an alternative shipping route to Suez and Cape of Good Hope could contribute to more flexible, agile and adaptable supply chains, because more route choices will result in a higher capacity, and may reduce chances for disruption and congestion.

This is reiterated in one of their three research questions

Does the Northern Sea Route, as a possible complementary route to Suez, represent an opportunity to improve agility and adaptability in supply chains?

Unfortunately, after reading the article, I must say that this one question has only been partially answered. The conclusion does state that

Combined with the fact that added shipping alternatives gives more route alternatives and flexibility, the Northern Sea Route option may possibly increase supply chain agility and adaptability

but apart from mentioning flexibility and agility a couple of times in the article, this topic is not explored as it could have been, by relating the ample literature on supply chain flexibility or supply chain agility to the impressive and solid calculations the authors did on the viability of the Northern Sea Route. While I cannot not claim to be an expert on the subject of flexibility or agility, I find it odd to have a research question that is not backed up by references to some related literature.  One of the reasons why this may be lacking in this paper is that supply chain flexibility and agility is not what this paper is about in the first place, and two out of three questions answered isn’t that bad.

Having said that, this doesn’t make the article less convincing in that it is indeed the case that the Northern Sea Route does have the potential for making supply chains more agile and flexible. The paper makes a very good case for it, so implicitly, the question is answered, but I would have liked to seen a reference or two on flexibility and agility and what it means for supply chains and how the Northern Sea Route contributes to that, or not. In my opinion there can be no doubt that the Northern Sea Route increases flexibility, but perhaps not so much as to agility (as it is usually defined).

On the plus side, I should mention that the reference list does contain a number of articles related to logistics and supply chain risk that I haven’t heard of before, and which I intend to review in the future.

All in all, an excellent paper, and I look forward to reading more papers from Halvor Schøyen in the future.

Conclusion

Will the Northern Sea Route make the Suez route become obsolete? Definitely not, and obviously, the Northern Sea Route is not for everyone, as can be read from this statement in the conclusion:

For innovators and risk takers in ship operations and technology, the Northern Sea Route appears as a possible market niche and opportunity to gain market power.

So what do you think, will the Northern Sea Route become an established shipping lane in the future? And who is likely to take the advantage here? Already there are some countries and port agencies are trying to position themselves as possible future transit hubs for this route.

Reference

Schøyen, H., & Bråthen, S. (2011). The Northern Sea Route versus the Suez Canal: cases from bulk shipping Journal of Transport Geography DOI: 10.1016/j.jtrangeo.2011.03.003

Author links

• linkedin.com: Halvor Schøyen
• mfm.no: Svein Bråthen

Related links

• bfm.ru: The Northern Sea Route (Article in Russian citing me)
• wikipedia.org: Northern Sea Route

Related books

bfm.ru: Northern Sea Route (Article in Russian citing me)
• amazon.com: The Natural and Societal Challenges of the Northern Sea Route

Related posts

• husdal.com: A map of global shipping lanes
• husdal.com: How far does Corporate Social Responsibility go?
• husdal.com: Maersk Slow Steaming – Less cost, less disruptions?

3PL – more than logistics

Orchestration can be defined as the activity of managing, coordinating, and focusing the value-creating network, and as entities that connect members of the supply chain, 3PLs serve a critical role responsible for achieving effective logistics integration.  3PLs have become the linchpin of the orchestration of supply chains, and they have become the glue that ties the individual supply chain actors together. In fact, 3PLs and the services they provide are perhaps the key ingredient in any supply chain, they are managers of the supply chain and they are eliminators of  uncertainty in the supply chain.

Why outsource?

Contrary to my last post and the paper that simply lists the benefits of outsourcing,without further discussion or reasoning,  this paper uses no less than three theoretical approaches as to determine the reason for why firms would outsource their logistics activities: Transaction cost economics (TCE), Resource-based theory (RBT) and Network theory (NT).

TCE theory states that a firm’s ownership decision is based on minimizing the sum of its transaction and production costs.

According to the RBT perspective, as a bundle of resources that are heterogeneously distributed across firms, with differences between them that persist over time.

In the NT perspective, outsourcing enables the firm to manage its supply chain as a single entity through the application of relationship building and network coordination.

This leads to the following three reasons for why firms would want to outsource and what they expect from it:

I think that merging these three frameworks does provide a rich backdrop for investigating the different roles a 3PL can assume in a supply chain. This is the first theoretical foundation of the article.

How outsource?

The second theoretical foundation used to describe logistics outsourcing looks at the scope and the criticality of the tasks outsourced. Scope can be defined as the breadth or degree of responsibility assigned to the 3PL. Criticality then is the importance of the outsourced task or function to the firm.

Depending on the range of the scope or the degree of the criticality, four types of relationships emerge, along with their associated logistics services:

Out-tasking, which involves outsourcing a specific task, such as inventory management, i.e. Non-strategic Transactions.

Co-managed services, which involves assigning a larger (and usual important) scope of the task or function to the 3PL, i.e. Partnerships.

Managed Services, where the 3PL designs, implements, and manages an end-to-end solution for a complete function, i.e. Contractual Relationships.

Full Outsourcing, where the 3PL is assigned total responsibility for the design, implementation, management, and often the strategic direction of the function, operation, or process being outsourced, i.e. Strategic Relationship.

Successful supply chains need successful logistics, and it is no surprise then that the contemporary role of the 3PL has moved from simple out-tasking to full outsourcing, or from the lower-left quadrant to the top-right quadrant of the figure above. That is the new role of 3PL providers. 3PLs are not just supply chain service providers, they are now supply chain strategy providers, taking charge where the individual supply chain stakeholder is not taking (enough) charge.

Why orchestrate?

The concept of orchestration implies that successful supply chains, or supply networks, are governed by an aggregate player—a ‘‘hub’’ firm—whose role is to provide the required services and assume control of a part of the supply network, and consequently, there is

an undeniable trend that 3PLs have become brokers organizing supply chain networks. Through this process of organizing networks, sharing information, managing assets, and reducing inventory, 3PLs facilitate SCM best practices and become an orchestrator.

Not companies, but supply chains compete, said Martin Christopher, but in order to compete, one needs a good 3PL, obviously, and a 3PL that can provide flexibility, as described in Naim et al. (2010).

How orchestrate?

What defines an orchestrator? Well, four things, according to the authors:

As 3PLs work simultaneously with multiple supply chain partners, they can standardize data and processes across firms and provide supply chain visibility beyond the individual firm. In addition to providing standardization and visibility, they can be neutral arbitrators between entities because they are typically unbiased third-parties. 3PLs can serve as change agents, especially in the case of full outsourcing. Finally, because 3PLs can see opportunities for improvement through standardization and visibility and pursue them without being perceived as driving their own agenda, they can often facilitate collaboration much more effectively than a customer, supplier, or competitor within the supply chain.

Therefore, what makes a 3PL an orchestrator is the degree to which he can assist a company with standardization, visibility, neutral arbitration, and collaboration. The model is formulated in the figure below:

Based on their model, the authors develop seven propositions as to how the 3PL can fill the role as orchestrator:

Proposition 1: The higher the degree of standardization provided by the 3PL, the greater the value creation orchestrated by the 3PL.

Why? Because standardized processes enable smooth hand-off and flow of goods among all members of the supply chain.

Proposition 2: Standardization will positively impact visibility of the 3PL.

Why? Because without standardization, visibility would not be possible, since standard data and processes enable visibility to opportunities for load consolidation, improved asset utilization

Proposition 3: The higher the degree of visibility provided by the 3PL, the greater the value creation orchestrated by the 3PL.

Why? Because 3PL firms have the ability to see across multiple firms and echelons of the supply chain and orchestrate them as a whole for the good of all.

Proposition 4: Visibility will positively impact neutral arbitration by the 3PL.

Why? Because by having full visibility of the chain 3PL firms can see conflicting issues and barriers from the outside and instigate changes without being perceived as pursuing their own or some competitor’s agenda.

Proposition 5: The greater the degree of neutral arbitration provided by the 3PL, the greater the value creation orchestrated by the 3PL.

Why? Because companies may be more willing to listen to the advice of a neutral 3PL who has a wide range of experience and provides a clear benchmark in their particular industry.

Proposition 6: Neutral arbitration will positively impact collaboration of the 3PL.

Why? As a neutral arbitrator with visibility of information from multiple parties in the supply chain, 3PL companies can play a unique facilitating role in collaboration, similar to proposition 4.

Proposition 7: The greater the degree of collaboration provided by the 3PL, the greater the value creation orchestrated by the 3PL.

Why? Because 3PLs are uniquely positioned to find opportunities where they can encourage firms to share resources and combine knowledge, skills, and physical assets to create strategic advantage and enhance profits.

Conclusion

This paper is solid academic craftmanship, albeit “craftmanship” is perhaps the wrong word here. It is interesting to see how the mundane side of day-to-day supply chain operations, aka 3PL, is gaining attention as a crucial contributor to the overall value creation. There haven’t been too many papers on this, albeit some have lamented the unfortunate separation of supply chain management and logistics. The role of 3PLs is undoubtedly becoming increasingly important, not only as a supply chain facilitator, but also as a supply chain risk mitigator, something I have barely begun to research myself, and which this paper has inspired me to continue investigating. Perhaps logistics is what drives supply chains, and it is logistics that we should focus on, and not the other way around, where supply chain management overshadows logistics?

Reference

Zacharia, Z., Sanders, N., & Nix, N. (2011). The Emerging Role of the Third-Party Logistics Provider (3PL) as an Orchestrator Journal of Business Logistics, 32 (1), 40-54 DOI: 10.1111/j.2158-1592.2011.01004.x

Author links

• lehigh.edu: Zach Zacharia
• lehigh.edu: Nada R Sanders
• neeley.edu: Nancy W Nix

Related posts

• husdal.com: 3PL Outsourcing – Challenges and benefits
• husdal.com: Transportation – the forgotten staple
• husdal.com: Logistics – the new SCM science

Shippers and carriers – the missing link

Transport providers and carriers play an important role in supply chain operations, but having said that, Supply Chain Management often neglects the mundane side of physical distribution and transportation, and forgets that these activities form the backbone of SCM, as Helen Peck wrote in 2006, and many other papers have also highlighted the role of logistics in supply chain management, with the shipper-carrier-customer triad developed by Bask (2001) being one of my favorite models that describes this issue.

One of the best descriptions linking the risks and uncertainties within supply chains with risks and uncertainties in logistics is what I found in a German book on risk management in logistics, from which the above figure is adapted.

Benefits

Shippers use 3PL providers to improve operational efficiency and effectiveness, to reduce freight costs and to the quality of service, and to enhance flexibility in terms of delivery speed and customer service. Based on a survey of 126 shippers, the authors list the following major benefits:

• Fixed assets
  • Reduction inutilization of fixed assets
  • Reduction in information technology infrastructure
  • Improvement in financial performance
  • Increase in asset turnover
• Inventory investment
  • Reduction in inventory investment
  • Reduction in “cash to cash” cycle
  • Improvement in inventory visibility
  • Increase in inventory turnover rate
• Logistics costs
  • Reduction in logistics costs
  • Enhanced access to carriers and fleets
  • Leveraged cost savings across SCM
• Shipper service
  • Increased shipper logistics services
  • Reduced cycle time
  • Increased fill rates
• Information technology
  • Improved access to timely and accurate information
  • Access to skilled personnel
  • Elimination of inefficiency
  • Increased customer flexibility

Unfortunately, these benefits and their implications are not described any further, which perhaps was not the purpose of the paper in the first place. After studying the paper, I also think it is wrong to call this the “major” benefits, since they all appear as choices in the survey questionnaire, where the shippers are asked to label them as “Not important”, “Important” and “Most important”, and I would assume that some shippers marked some items as “Not important”, hence disqualifying them form being the included in the list of “major” benefits. Maybe I’m just playing devil’s advocate here…

Challenges

Having frowned at the list of benefits, what I think the authors did get right is the list of challenges. Albeit on a much smaller scale, it reflects what I myself found in my research on How Norwegian freight carriers handle disruptions:

Logistics represents the interface between outgoing and incoming flows, and logistics provision approaches the supply chain from two sides. On side are the transportation infrastructure and the transportation mode, the prerequisite for logistics. On the other side are the transportation means used within each mode, the operational side of logistics.

Finding the right 3PL isn’t easy, and failures, so the authors say, can more often than not be related to these top four issues:

1. the incapability to meet the shipper’s specific logistics requirements
2. the incompatibility of information systems between shipper and 3PL
3. the failure of 3PL to meet a shipper’s future growth needs
4. the lack of control and security at the 3PL.

Again, as the case with the “major” benefits, the “top four” challenges are the four choices available in the survey, which sort of defeats the notion of really selecting the four most important out of many possible challenges.

Recommendations

To address these challenges, shippers need to develop the appropriate metrics that can measure and capture the 3PL’s  capabilities as to operations, finance and information systems.

• Operations
  • Inventory management
  • Transportation services
    • adaptability to accommodate changes the shipper needs
    • efficiency in providing services
    • effectiveness in providing services
    • flexibility in handling contingency plans
    • agility – how fast they can respond to changes
  • Warehousing facilities
    • infrastructure that can meet future expectations
    • availability of state-of-the-art technology at receiving and shipping locations
    • maintaining a high level of inventory accuracy
    • accuracy of orders processed
    • on-time shipping
    • cost savings and other factors
• Finance
• Information systems

Interestingly, transportation and warehousing is extremely well covered and detailed, while the other recommendations are only cursory treated in the paper.

Conclusion

In my opinion and to my knowledge, the paper correctly describes some of  the benefits and challenges in outsourcing logistics to third party providers. However, while the survey population seems sufficient, the survey itself could have been better designed with more questions or variables that would have clearly defined the top top top benefits and challenges

Reference

Ansari, Al, & Modarress, Batoul (2010). Challenges of outsourcing logistics to third-party providers International Journal of Logistics Systems and Management, 7 (2), 198-218 DOI: 10.1504/IJLSM.2010.034426

Author links

• seattleu.edu: Al Ansari
• zu.ac.ae: Batoul Modarress

Related posts

• husdal.com: Logistics risks in Germany
• husdal.com: Logistics risks in the Netherlands