The article by Chopra and Sodhi (2004) examines the importance of a tailored approach to managing risk. The core information of the article is that managers can formulate customized, balanced, and effective strategies to reduce risk for their organizations by having a specific and a clear understanding of the major risks, their interconnectedness, and what drives those risks in the supply chain. The interconnectedness of the risks makes it challenging to manage them. Based on the article, the first important thing about supply chain risks is that some strategies focused on mitigating risk can increase risk in specific organizational domains instead of reducing it. The reason for this is that various risk mitigation strategies influence different supply chain domains differently.
Organizations should focus on major risks, such as inventory risk, disruptions, capacity risk, delays, receivable risk, procurement risk, and forecast risk. Companies can use approaches, such as having additional customer accounts, increasing their competence, pooling or aggregating their demand, increasing their flexibility, increasing their responsiveness, having redundant suppliers, adding inventory, and adding capacity to handle the major risks. The article also highlights that organizations must balance the cost of strengthening or mitigating a reserve against the risk level, which can be achieved by using the three time-tested strategies. Examples of these strategies include delaying or postponing the final production stage, designing shared elements across items, and merging inventory. Organizations can also work with responsive suppliers to minimize inventory, particularly for valued items with reduced life cycles.
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The article also describes procurement risk as the risk that emerges due to price increases by suppliers or due to exchange rate fluctuations. The occurrence of a procurement risk can lead to high sourcing prices (Chopra & Sodhi, 2004). Procurement risk can also negatively affect the objectives of an organization by influencing the public perception of an organization, leading to project contract losses, affecting profitability and customer perception, affecting the possibility of other risks and causing chaos due to product shortages (Murray, 2013). Price volatility and increased uncertainty regarding the availability of specific products in the procurement sector can lead to decreased revenues, inventory write-downs due to weak demand, product shortages, and low stock prices (Nagali et al., 2008).
Countering procurement risks entails developing financial hedges, ensuring balanced revenue and cost flow by location and designing flexible global volume, and adopting long-term agreements (Nagali et al., 2008). Nagali et al. (2008) also emphasize the importance of the adoption of long-term contracts to deal with procurement risks and uncertainties. Long-term contracts protect organizations against demand and price variations. For example, a commitment to purchase a fixed product quantity when the demand is weak would lead to a substantial accumulation and expense of the inventory. A reduction in product price would compel an organization to pay more than its competitors due to the organization’s commitment to a fixed price (Nagali et al., 2008). Nagali et al (2008) also proposed a procurement risk management (PRM) model for managing procurement risk. The model uses a contract portfolio to simultaneously measure and manage multi-period and correlated cost, demand, and the presence of uncertainties. The model entails two components. The first component entails measuring uncertainties linked with buying aspects and the second component entails managing the risks with structured contracts.
Murray (2013) suggests that organizations are weakened by the lack of a robust procurement risk management strategy. An organization should not confuse contract management with procurement risk management. While contract management occurs after the award, risk management should be used to shape contract management (Murray, 2013). Procurement risk management, nevertheless, is used throughout the procurement cycle. Managing procurement risk entails clear responsibility allocation to a specific person, who should complete risk audits by including the input of key stakeholders (Murray, 2013). The top management should evaluate the risk register, sign it off, and suggest the risk tolerance level.
References
Chopra, S., & Sodhi, M. S. (2004). Managing risk to avoid supply chain breakdown. MIT Sloan Management Review , 46 , 53-61.
Murray, J. G. (2013). Debate: The need for procurement risk management. Public Money & Management , 33 (4), 285-287.
Nagali, V., Hwang, J., Sanghera, D., Gaskins, M., Pridgen, M., Thurston, T., ... & Shoemaker, G. (2008). Procurement risk management (PRM) at Hewlett-Packard company. Interfaces , 38 (1), 51-60.
