Veli-Matti Virolainen
Lappeenranta University of Technology RISK MANAGEMENT
IN SUPPLIER NETWORKS
Veli-Matti Virolainen
Lappeenranta University of Technology RISK MANAGEMENT
IN SUPPLIER NETWORKS
Reasons for network
By networking companies can exploit economies of scale and scope. Even large buyers are not big enough to generate and exploit the economies of scale on their own. The suppliers cannot achieve the economies of scope all alone.
By networking companies are able to share, reduce and transfer their risks
Networking brings new risks and changes the nature and significance of know risks
This area has not been very familiar, subject of research until recent years especially from SME’s point of view
Sourcing Options Vertically integrated production Single sourcing Preferred vendor Adversarial leverage Competition/
spot prices Network sourcing Purchasing from subsidiaries Joint Ventures Strategic Alliances Lean supply High asset specificity
Core competencies
Acquired/merged capabilities
Medium asset specificity
Complementary competencies
Allied capabilities Low asset specificity
Residual competencies
Separate capabilities Partnership Markets Hierarchy
Benefits provided by different governance structures
markets partnership hierarchy + economies of scope
+ effective management and control
+ cost-efficiency through ownership
+ competence enhancing innovations
+ exploitation of monopoly power
+ efficient internal communication
+ focus on core competencies
+ ability to coordinate disperse knowledge
+ ability to create incentives
+ risk sharing
+ communication and information sharing
+ improved quality
+ shorter time-to-market
+ economies of scale and scope + economies of scale
+ lesser risk
+ less specific assets
+ flexibility
+ variety
+ high-power incentives
+ efficiency through competition
Classification of Network Related Risks
Asset specificity related “hold up” risks
Nature of knowledge related “spill over” or “appropriability” risks
Competency market-related “inefficiency” risks
Time horizon applied
Data gathering:
interviews System supplier 5 System supplier 1 .
.
. System supplier 4 .
.
. Summary: potential risk factors "Risk map" of network company Company-specific method for risk identification and assessment Risk management process of network company OEM (electronic) OEM (metal) System supplier 1 Discussion in companies Testing in chosen companies
Empirical study
Risks were divided into the following risk areas
Core competence and position in value chain
Risks related to technology
Risks connected with persons
Risks associated to micro and macro environment
Financial (costs and pricing) risks
Deficient resources, development and ability to change The financial preconditions for operation will be weakened or operation disrupted
Problems in cost management and pricing Problems in demand Delivery problems What can cause problems? What can be the source of the above problems? Demand diminishes noticeably
Fast fluctuation in demand
Demand stops growing
Demand is misdirected
Demand grows very fast will cause problems for supply capacity and cost management External factors, eg. changes in the industry, the geographical area or the economy
Customers' marketing problems
inaccuracy of forecasts
weakened competitiveness of customer
problems with new product designs, either in timing or success
Losing a customer
the trust of the customer has been lost because of supply problems or leakage of information
reconfiguration of the customer's network (changes in business or ownership, creation of larger operational units, redirection/change in the demands of the customer: growth in volume/internationalisation
the equipment and know-how cannot be applied to new products/new manner of operation
Lack of replacing customers (lacking marketing know-how, core competence does not meet the demands of the market)
Delivery problems Problems in demand What can cause problems? What can be the source of the above problems? Problems with delivery times
Problems with quality
DELIVERY TIMES:
-deliveries are delayed because of internal reasons, or subcontractor's deliveries are delayed
production capacity is not sufficient for increasing volumes
planning problems in production (information not reaching all parties, or misleading information)
other customers' orders cause backlog
repeated problems and interruptions in production (problems in the start-up of new production units, changes in key personnel, deficiencies in competence)
QUALITY PROBLEMS
-deficiencies in competence (as above)
-customer's specifications inaccurate/faulty
-the operational environment of the endproduct unknown
-changes in product requirements, information not conveyed in the network
-quality problems not detected prior to delivery to customer
Deficient resources, development and ability to change Problems in cost management and pricing The financial preconditions for operation will be weakened or operation disrupted
Delivery problems Problems in demand What can cause problems? Mistä em. ongelmat tarkemmin voivat johtua? Production costs too high
Investment costs too high
Unsuccessful pricing
PRODUCTION COSTS:
-the price level of raw materials or components high (key supplier's discount not received, new types of components, strong growth in demand)
-the price level of subcontractors rises
-personnel costs rise (strong growth in demand, lack of skilled workforce, competence in production increased, new operations and know-how along with new responsibilities)
-deficient planning in production increases costs
-loss of production/quality repairs needed
-production equipment and know-how outdated
-internationalisation brings new costs
INVESTMENT COSTS
-increasing operational capital --> company's material responsibility increases, bigger entities are supplied, delivery times are shortened while the subcontractor's storing responsibility is increased (transfer of storage in the network)
- the growth of investments becomes too big for the company
-quickened cycle of investments (production lines are renewed more often)
-wrong investment performed, does not pay itself back
- expensive money
PRICING
own pricing not successful
market price too low
customer has too much influence on pricing
Deficient resources, development and ability to change Problems in cost management and pricing The financial preconditions for operation will be weakened or oper...
Delivery problems Problems in demand What can cause problems? What are the reasons behind the problems? Market change affects the products and position of an important customer
Ownership changes of important customer
. Technology changes
. Internationalisation
. Personnel resources
.Deficiencies in strategic thinking, core competence not considered
The role and influence of the customer too strong
Traditions for development lacking (used to receiving instructions from customer)
. Organisation culture avoids sharing of knowledge
Lack of resources
. Lack of marketing knowledge
Deficient resources, development and ability to change Problems in cost management and pricing The financial preconditions for operation will be weakened or operation disrupted
Risk category
High
Medium
Low
Priorisation of risks
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5
4
3
2
1
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5
Consequence
Means of risk management
The “best practise” courses of action of an SME in a network (point of view of the SME): what courses of action in the network cooperation of the SME support also risk management (networking strategy)
Being prepared for chosen typical SME risks; risks found out to be typical for and concerning nearly all SMEs; how to be prepared for these
Recognition, follow-up, and anticipation of the risk situation of the company and reacting to it; focused risk assessment + priorisation of actions
Being prepared for risks
Criteria
the importance of the risk: probability/chance and effects
possible courses of action: reducing the probability of appearance of risk, diminishing the consequencies (avoiding/decreasing), the risk cannot be prevented (transfer, sharing, tolerating)
what is demanded/ what does it cost to be prepared
The targets for action are chosen on the basis of the above criteria
NB! If even a small risk can be reduced without costs, it is worth doing
Strategies and visions, core competence, position in the supply net understood
Independence and dependence: at what level
Order and delivery processes, control of material and information flow
Sharing and holding information
Contracts: how are risks - opportunities priced and balanced
Vertical and horizontal cooperation
From the point of view of the network builder (key supplier): how to control the decentralised structure, what kind of structure is efficient and controllable (depth/width), should the key supplier look also deeper and at the whole? “Best practise” in network cooperation?
Being prepared for uncertainties in the network
Costs and pricing Demand Delivery capability Demand of end customer (customer's customer) Position in the supply chain/ network Common product development, process development, marketing of the network
Decentralisation and choice of customers and areas of business
Follow-up of the market situation Strategies, core competence, flexibility
Cooperation in the supply chain, common processes. Horizontal cooperation
Development and management of the customer relationship. Protection of data References
Quality and environmental systems
Information sharing, transparency of processes and network?
Being prepared for uncertainties in the network
Costs and pricing Demand Delivery capability Reliability and punctuality of delivery Development of the order-delivery chain
Securing own production capacity and key personnel, sustaining professional skills, training
Follow-up and securing of subcontractors; screening of choices and training
Development of data transfer and data management, correctness of information (forecasts and preknowledge)
Paying attention to the start-up of new products / equipment Correctness of product documents
Understanding product requirements; also for subcontractors
Being prepared for uncertainties in the network Costs and pricing Demand Delivery capability Investment costs Planning and analysis of investments*
Pricing the participation in customer's product development
How to step into internationalisation ? Pricing Costing and follow-up of costs
Other costs Process development, information sharing
Adapting stocks and time demands
Developing costing *what to take into account?
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