Msc Thesis in Logistics & Supply Chain Management (1).pdf

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Aarhus University, Business & Social Sciences Msc Thesis in Logistics & Supply Chain Management

HOW DO FAST MOVING CONSUMER GOODS COMPANIES MANAGE SUPPLY CHAIN RISKS IN THEIR ESTABLISHED EXCHANGES? MARCH 2014

STUDENT: GEORGIOS NTALLAS EKSAMENSNR: 414462 SUPERVISOR: CHRIS ELLEGAARD


PREFACE

T

his Master Thesis project, which lies in front of you, is the efforts of a five month period, to review, study and present the major risks that FMCG companies face in their established exchanges and how do they handle them. As the master thesis project is the last part of my master program, I honestly feel that I could not make it without the assistance of several people that I need to thank. First of all, I would like to sincerely thank Mr. Chris Ellegaard, my supervisor teacher, who was there for me, by providing his valuable assistance and guidance during this project. Moreover, I would like to thank My Market for their assistance in reviewing and examining the case study and the help that their risk management team offered to me. Also I would like to thank Mr. Alexandropoulos and Mr. Konstantinidis, as well as their companies Athenian Brewery and Honey-Center, who offered me the opportunity to conduct interviews with them, as I know that the free time on their schedule is limited. Finally I would like to thank my parents who were always there for me, supporting me to strive for the best and reinforce me financially, so I could work unobstructed, in order to reach my goal.

Georgios Ntallas

Athens, February 2014


SUMMARY This Master Thesis project aims to answer two basic questions concerning supply chain risks in FMCG companies:  

What are the most significant risks that FMCG companies have to tackle down? What action plans are implemented by FMCG companies in order to mitigate those significant supply chain risks?

A thorough literature review was necessary in order to understand better important concepts such as supply chain, supply chain management, risk management and supply chain risk management and be available to answer the questions. One of the most important aspects of the literature is the supply chain risk management process. According to Manuj et al (2008) the SCRM process can be divided in five steps: Risk identification, Risk Assessment and Evaluation, Selection of appropriate risk management, Implementation of supply chain risk management strategy and Mitigation of supply chain risks. Those steps are extremely important for the companies as they help them to be prepared to mitigate risks with alternative action plans. In order to have a common tool for ranking the risks according to their significance, impact to the company and probabilities of occurring, a risk matrix was created. This risk matrix is used as ranking tool for the two interviews with experts of the FMCG industry in Greece, in order to have a common scale of measurement for the risks. The most important risks for those companies are presented, as well as their evaluation and company’s mitigation strategy. Additionally further possible actions are proposed. Furthermore a case study of a limited mitigation plan is presented, concerning a Greek super market and one of their suppliers. The purpose of the case study is to show how did the retailer identify and assess their potential risks and how did they plot their action plan and what further actions should they have done to limit the risks. To conclude with, the posed questions are answered in accordance with the given information through the interviews and the case study.


Table of Contents PAGE Preface: …………………………………………………………………………………………….. 2 Summary: …………………………………………………………………………………………. 3 Table of Contents: …………………………………………………………………………….. 4 Abbreviations: ………………………………………………………………………………….. 7 Figure Table: …………………………………………………………………………………….. 7

CHAPTER 1: INTRODUCTION ……………………………………………… 8 1.1 BACKGROUND ………………………………………………………………………….. 8 1.2 RESEARCH PROBLEM ………………………………………………………………… 9 1.3 RESEARCH OBJECTIVES …………………………………………………………….. 9 1.3.1 RESEARCH QUESTIONS ………………………………………………………… 9 1.3.2 DELIMITATION …………………………………………………………………….. 10

1.4 RESEARCH METHODOLOGY ………………………………………………………. 10 1.4.1 RESEARCH METHODOLOGY …………………………………………………. 10 1.4.2 RESEARCH MODEL & OUTLINE …………………………………………….. 11

CHAPTER 2: LITERATURE REVIEW ……………….…………………….. 13 2.1 SUPPLY CHAIN MANAGEMENT …………………………………………………. 13 2.1.1 SUPPLY CHAIN ……………………………………………………………………. 13 2.1.2 SUPPLY CHAIN MANAGEMENT …………………………………………… 13 2.1.3 FMCG SUPPLY CHAIN MANAGEMENT …………………………………. 15

2.2 RISK ………………………………………………………………………………………….. 16 2.2.1 RISK MANAGEMENT ……………………………………………………………. 17 2.2.2 SUPPLY CHAIN RISK MANAGEMENT ……………………………………. 17


2.2.3 FMCG SUPPLY CHAIN RISK MANAGEMENT …………………………. 18

CHAPTER 3: SCRM PROCESS……………………………………………… 19 3.1 SCRM PROCESS ………………………………………………………………. 19 3.2 RISK IDENTIFICATION ……………………………………………………………… 20 3.3 RISK ASSESMENT & EVALUATION …………………………………………... 22 3.4 RISK MITIGATION STRATEGIES,SELECTION & IMPLEMENTATION 26

CHAPTER 4: EMPIRICAL DATA ………………………………………………….…….. 30 4.1 FOCUS & GOALS …………………………………………………………….. 30 4.1.1 INTERVIEW FOCUS &GOALS …………………………………….. 30 4.1.2 CASE STUDY FOCUS & GOALS …………………………………… 30

4.2 STRUCTURE & PROCEDURE ……………………………………………. 31 4.2.1 INTERVIEW STRUCTURE & PROCEDURE ……………………. 31 4.2.2 CASE STUDY STRUCTURE & PROCEDURE ………………….. 32

4.3 INTERVIEW PARTNERS …………………………………………………… 32 4.3.1 INTERVIEW EXPERTS ………………………………………………… 32 4.3.2 CASE STUDY FIRM PARTNERS …………………………………… 33

CHAPTER 5: EMPIRICAL STUDY ANALYSIS ………..…………………………….. 34 5.1 STERGIOU S.A. – MY MARKET CASE STUDY ……………………. 34 5.1.1 RISK IDENTIFICATION ……………………………………………….. 35 5.1.2 RISK ASSESSMENT AND EVALUATION ………………………. 36 5.1.3 RISK MITIGATION STRATEGIES, SELECTION & IMPLEMENTATION ……………………………………………………………………………………………… 38

5.2 INTERVIEWS – QUESTIONNAIRE …………………………………….. 39 5.2.1 RISK IDENTIFICATION ……………………………………………….. 39


5.2.2 RISK ASSESSMENT AND EVALUATION ………………………. 41 5.2.3 RISK MITIGATION STRATEGIES: SELECTION & IMPLEMENTATION ……………………………………………………………………………………………… 45

CHAPTER 6: CONSLUSIONS..……………………………………………………………. 48 CHAPTER 7: FUTURE RESEARCH ……………………………………………………… 50 REFERENCES ………………………………………………………………………………….. 51 APPENDICES ………………………………………………………………………………….. 53


ABBREVIATIONS FMCG: Fast Moving Consumer Goods SCM: Supply Chain Management SCRM: Supply Chain Risk Management

FIGURE INDEX FIGURE 2.1: INTERGRATING AND MANAGING BUSINESS PROCESSES ACROSS THE SUPPLY CHAIN FIGURE 2.2: SUPPLY CHAIN MANAGEMENT FRAMEWORK: ELEMENTS & KEY DECISIONS FIGURE 2.3: TYPE OF RISKS, SOURCES AND DESCRIPTION FIGURE 2.4: SUPPLY CHAIN RISKS FIGURE 3.1: RISK IN THE EXTENDED SUPPLY CHAIN FIGURE 3.2: RISK IDENTIFICATION SUMMARY FIGURE 3.3: CREATING RISK PROFILES FIGURE 3.4: TYPE OF LOSSES & CONSEQUENCES FIGURE 3.5: RISK ASSESSMENT & EVALUATION FIGURE 3.6: RISK RANKING FIGURE 3.7: SUPPLY CHAIN TYPES AND RISK MANAGEMENT STRATEGIES FIGURE 5.1: MY MARKET RISKS FIGURE 5.2: RISK ASSESMENT & EVALUATION FIGURE 5.3: ATHENIAN BREWERY’S RISK IDENTIFICATION FIGURE 5.4: HONEY-CENTER RISK IDENTIFICATION FIGURE 5.5: RISK ASSESMENT & EVALUATION: FIGURE 5.6: RISK ASSESMENT & EVALUATION


CHAPTER 1: INTRODUCTION

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his chapter aims to describe and analyze the research problem of this project, define the research method that is going to be implied and set the objectives that will lead to the formation of the research questions.

1.1 BACKGROUND Nowadays companies are searching, more than ever before, for any detail that is going to give them an advantage over their competitors. By ameliorating their supply chain they have the opportunity to gain that advantage, as they obtain manufacturing flexibility, they decrease the cost of the products and they offer their products to the costumers faster and safer. According to Mentzer et al (2001) supply chain is defined as “a set of three or more entities (organizations or individuals) directly involved in the upstream and downstream flows of products, services, finances, and/or information from a source to a customer”. To achieve excellence in the supply chain though, is not so easy. Companies have to tackle down major risks and disruptions in the supply chain such as national law restrictions, terrorism actions, weather, accidents etc. Obviously those risks can increase losses for the companies and that is why a supply chain risk management plan is required. In accordance with Harland et al (2003) risk is defined“as a chance of danger, damage, loss, injury or any other undesired consequences”. Furthermore according to Mitchell (1995) “risk contains different types of loss and the risk of any particular type of loss is a combination of the probability of that loss P and the significance of that loss to the individual or organization I , Risk n = - P (Loss n) x I (Loss n) “ . Moreover, according to Manuj et al (2008) companies have to follow some steps to manage successfully any supply chain risks. Those steps are: 1. 2. 3. 4. 5.

Risk identification Risk assessment and evaluation Selection of appropriate risk management Implementation of supply chain risk management strategy Mitigation of supply chain risks


1.2 RESEARCH PROBLEM Taking into consideration that FMCG companies are related with goods, such as soft drinks, grocery and dairy products that are subject to expiration dates and small inventories, it is obvious that those companies have to deploy management strategies limiting supply chain risks and uncertainty, preventing if it is possible any disruptions and assure constant and continuous flow of goods. Thereafter, in this thesis project is going to be discussed how FMCG companies take all the necessary management measures to tackle down any risks that might occur in their established exchanges.

1.3 RESEARCH OBJECTIVES This research Thesis aims to broaden the knowledge on how to identify and manage supply chain risks in the established exchanges of FMCG companies. More specifically the objectives of this Thesis are:   

To identify supply chain risks that have to do with FMCG established exchanges. To classify those risks according to their importance for FMCG companies and point out the most significant. Suggestions for actions that could take place in order to avoid or mitigate supply chain risks

1.3.1 RESEARCH QUESTIONS

Taking into consideration the above mentioned objectives the research questions are formed as follow:  

What are the most significant risks that Greek FMCG companies have to tackle down? What action plans are implemented by Greek FMCG companies in order to mitigate those significant supply chain risks?

Σελίδα 10 από 52 1.3.2. DELIMITATIONS

To have a better understanding of how FMCG companies choose their supply chain risk management strategy, it would be ideal to study and have a set of interviews with different kind of companies that collaborate and have partnerships with them. Although that this would be extremely helpful is difficult to be achieved, due to the page restriction of this Thesis project and the time constraint. Thus, I am going to focus on FMCG companies exclusively. Moreover, the same weight is going to be given, in both external and internal supply chain risks as both of them can affect the supply chain causing serious consequences. The most important issue during this research project is the difficulties that might occur while searching for conducting the interviews with supply chain managers. Many of them do not have time to help or they are simply unwilling to provide their knowledge. That might lead to small sample making it hard to draw safe conclusions. Finally, I am going to focus more in qualitative analysis than in quantitative, because the data that are going to be extracted from the questionnaire are going to be suggestions for management actions or an already followed risk management plan.

1.4 RESEARCH METHODOLOGY 1.4.1 RESEARCH METHODOLOGY

For this thesis I am going to use qualitative research as I believe that by the time that this project has to do with management actions and decisions, it makes it easier to understand management’s behavior. There is a slight possibility of using quantitative research too, only if the outcome of the interviews requires it (ex. Company losses by wrong actions and a comparison between them). The methodology consists of Literature and Empirical research. For the literature research I am going to gather information from the internet (scientific articles and journals), the school library and the material that was provided to us during our studies. The literature research will help me to understand better terms and methods concerning supply chain risk management(especially in


the FMCG industry) and what is the procedure that should been followed by the companies in order to achieve better results. As it has to do with the empirical research, it is going to be based on interviews and questionnaires answered by managers of FMCG companies, in order to examine and understand what actions they have taken to tackle down any risks or disruptions; and how those actions are correlated with the theory research that was conducted before. There will be also a case study of a disruption that a Major Greek supermarket had faced a year ago. In order to rank and prioritize the risks I have created a risk matrix that is going to be used during the empirical research.

1.4.2 RESEARCH MODEL & OUTLINE

This Msc Thesis consists of seven chapters in total. The first one is the introduction chapter that includes some background information, the research objectives, questions and the research methodology and outline. The second chapter refers to the literature review and more specifically is explaining terms such as supply chain, supply chain management, food supply chain, risk management, etc. . The third chapter analyses the supply chain risk management process in order to have a better understanding on how companies should act prior to a problem. The two following chapters (4, 5) consist of the empirical data,( in this particular case are interviews from food industry experts) and the outcome and analysis of these data. The final chapters (6,7) are the conclusion chapter of this thesis project, and the chapter for future recommendations.



CHAPTER 2: LITERATURE REVIEW

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n this chapter, terms such as supply chain, supply chain management (SCM), Risk management, etc., are going to be explained and discussed. Furthermore an explanation of these terms concerning the FMCG industry is necessary as the needs might be slightly different.

2.1 SUPPLY CHAIN MANAGEMENT The following sub-chapters will focus in defining the terms of supply chain, supply chain management and FMCG supply chain management as it is extremely important for the reader to be acquainted with those terms before proceeding with the analysis of this thesis project.

2.1.1 SUPPLY CHAIN

There are many definitions of the supply chain in the literature that are focusing on different attributes. Nevertheless a precise definition for the supply chain is been expressed by Mentzer et al (2001) after taking under consideration various definitions. According to Mentzer et al (2001) “supply chain is defined as a set of three or more entities (organizations or individuals) directly involved in the upstream and downstream flows of products, services, finances, and/or information from a source to a customer”. 2.1.2 SUPPLY CHAIN MANAGEMENT

As it is stated by Mentzer et al (2001) there are many different definitions of SCM that can be classified on three categories: implementation of a management philosophy, management philosophy and a set of management processes. Despite it is also stated that a single definition is not adopted yet, they give the following definition,”SCM is defined as the systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole.”.


Croxton, Garcia-Dastugue and Lambert(2001) recommend the definition that is developed and used from the Global Supply Chain forum and defines that “SCM is the integration of key business processes from end user through original suppliers that provides products, services and information that add value for customers and other stakeholders. The following figure shows which key business processes have to be implemented by SCM. FIGURE 2.1:

INTERGRATING AND MANAGING BUSINESS PROCESSES ACROSS THE SUPPLY CHAIN

Source: Lambert and Cooper (2000)

According to Croxton, Garcia-Dastugue and Lambert (2001) management of all firms should take into account this eight key business processes, although the fact that the importance of each process and activity may differ. Moreover, supply chains are complicated and they usually consist of many firms. On the other hand, a firm could possibly be member on many supply chains. Taking into consideration the above mentioned, it is of paramount importance that the organizations select wisely which of those supply chains and which key processes have to be managed. In accordance with Lambert and Cooper (2000), the SCM framework consists of the three following elements: Supply Chain Network Structure, Supply chain Business Processes and Supply Chain Management Components. FIGURE 2.2:

SUPPLY CHAIN MANAGEMENT FRAMEWORK: ELEMENTS & KEY DECISIONS

Source: Lambert and Cooper (2000)


Furthermore, in order to make supply chains more manageable, Lambert and Cooper (2000) suggest distinguishing firms between primary and supporting members. Thereafter a primary member is defined as “all those autonomous companies or strategic business units who carry out value-adding activities (operational and or managerial) in the business processes designed to produce a specific output for a particular customer or market.” and a supporting as “companies that simply provide resources, knowledge, utilities, or assets for the primary members of the supply chain.” That does not mean though, that a company that is a primary member in one supply chain cannot be a supporting member in another supply member. Finally, Supply Chain Management Components is the last element of the Framework. According to Lambert and Cooper (2000) nine management components have been identified and it is clear that by adding more components or by increasing the contribution of every component to the management, the level of integration of the business process link can be increased. Those nine components are: planning and control, work structure, organization structure, product flow facility structure, information flow facility structure, management methods, power and leadership structure, risk and reward structure, and culture and attitude. 2.1.3 FMCG SUPPLY CHAIN MANAGEMENT

The major difference that is found in FMCG supply chain management has to do with the food supply chain management subcategory. According to Land and Ding (2008) there are characteristics that distinguish Food supply chain from supply chain. Those characteristics are the following:     

Shelf life constraints for raw materials and final products that affect the product quality through the supply chain. Production seasonality Many of the products require refrigeration transport and storage means Need for portion traceability of work in process because of quality and environmental claims and product responsibility. “Variable process yields in quantity and quality due to biological variations, seasonality, and random factors connected with weather, pests, and other biological hazards.”

Moreover, there are some further characteristics such as: long production times, small or zero inventories due to expirations dates and possible delays due to quality tests. According to Levinson (2009) “the food supply chain typically starts on farms and involves many different types of facilities – including processors, packers, distributors, transporters and retail stores- before finally reaching the consumer.


2.2 RISK According to Mitchell (1995), “risk concept contains different types of losses and the risk of any particular type of loss is a combination of the probability of that loss P (lossn) and the significance of that loss to the individual or organization, I (loss n).” Therefore:

Riskn = P (lossn) x I(lossn)

Moreover, Harland et al (2003) defines risk as”chance of danger, damage, loss, injury or any other undesired consequences.” Risks can be divided into several categories, depending in which section they affect. Thus we have Technical risks (Risks that have to do with technology, quality and performance. This could also belong in Operation risks), External risks (Risks that derive from Governmental decisions and Laws, weather conditions, etc.), Operational risks such as employee and property risks and Financial risks that have to do with credibility or currency issues. Financial risks can also be put into External risks. The following table shows types of risks and their description.

FIGURE 2.3: TYPE OF RISKS, SOURCES AND DESCRIPTION

Source: Harland et al (2003)


2.2.1 SUPPLY CHAIN RISK

Most of the above mentioned risks, if not all, can apply in the supply chain. With supply chain risk term we mean all those risks that are responsible and can cause a disruption or a delay in the flow of goods in the supply chain. Those risks can be separated into two categories, internal and external supply chain risks. Internal risks include risks that have to do with business operations such as forecast errors, machine dysfunctions, inventory issues, human mistakes, delayed deliveries and IT problems. On the other hand external risks have to do with risks that are outside of the supply chain and sometimes are unpredictable, such as weather conditions( floods, earthquakes, hurricanes), or have to do with governmental decisions, political conditions(wars, rebellion), financial frauds, fire, raw materials shortages , etc. .Concerning the FMCG supply chain risks, one major issue is the fact that many of the raw materials can be vulnerable to diseases when it comes to food industry or to products that are based in agricultural raw materials. That can cause problems to the supply chain as the end product could be delayed or be in less quantities than the desirable. The following figure shows many of the potential supply chain risks.

Figure 2.4 : SUPPLY CHAIN RISKS

Source: Manuj et al (2008)

2.2.2 RISK MANAGEMENT

Risk is a “component” that can be found in any firm, thus is extremely important for their viability to learn how to manage risk sufficiently.


According to Harland et al (2003), “attitude towards risk is influenced by the nature of the business but also by individual style and behavior. Attitude changes with experience; an individual, organization or sector used to taking risks may change their attitude after experiences heavy losses.” Taking into consideration this paragraph is easy to understand that even if there is a low risk possibility of an occurring event we cannot say and judge if the management plan is going to work, as the manager puts his personal opinion and behavior while applying the plan. Therefore, risk management is the effort of the management team to predict, analyze and form a plan to tackle down risks that can affect any function of a business in order to minimize costs, maximize profits and succeed in their goals. 2.2.3 SUPPLY CHAIN RISK MANAGEMENT

Supply Chain Risk Management can be defined as the plotted strategies or actions that have to be taken from the management team, in order to prevent or to mitigate any possible risks in the Supply Chain. According to Cristopher et al (2002) SCRM is defined as “the identification and management of risks within the supply chain and risks external to it through a co-ordinated approach among supply chain members to reduce supply chain vulnerability as a whole.” Moreover, Norrman and Lindroth (2002) define SCRM as “SCRM is to, collaboratively with partners in a supply chain or your own, apply risk management process tools to deal with risks and uncertainties caused by, or impacting on, logistics related activities or resources in the supply chain.” Finally, according to Manuj et al (2008) companies have to follow some steps to manage successfully any supply chain risks. Those steps, which are going to be analyzed further in the next chapter, are: 1. 2. 3. 4. 5.

Risk identification Risk assessment and evaluation Selection of appropriate risk management Implementation of supply chain risk management strategy Mitigation of supply chain risks


CHAPTER 3: SCRM PROCESS

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n this chapter I am going to present, discuss and analyze a framework for a successful supply chain risk management. Each of the steps of this process is going to be discussed in separate sub-chapter.

3.1 SCRM PROCESS Sodhi and Tang (2012), state that the SCRM process consists of four steps. Those steps are risk identification, assessment and evaluation of those risks, mitigation of the risks and responding to incidents through communication, coordination and other means. According to Manuj et al (2008) the following – five step- model for risk analysis and mitigation is proposed. 1. Risk identification The purpose of this step is to categorize the potential risk according to the type of risks that have been referred previously. Moreover, it is important to apprehend in which stage of the extended supply chain the risk can be found. FIGURE 3.1: RISK IN THE EXTENDED SUPPLY CHAIN

Source: Manuj et al(2008), Adapted from Mentzer (2001)

2. Risk assessment and evaluation In this stage the management team has to analyze the risks that have been identified before. Not all of those risks are critical for the supply chain, so it is necessary to include in the analysis which are the probabilities of occurring, what are the potential losses for the firm, what are the consequences, etc.


3. Selection of appropriate risk management strategy After finishing with the assessment and evaluation, the next stage is to select the appropriate strategy. This strategy has to be tuned with the general corporate and the supply chain strategy. 4. Implementation of supply chain risk management strategy There are several characteristics that are important prior to the implementation of the strategy. As the information technology is considered an important factor of the SCRM process, the filtering of the data and the important information is vital. Moreover, the understanding of the firm structure will help to improve communication between employees and the management. 5. Mitigation of supply chain risks Despite having a risk management plan plotted it is not sure that all risks are tackled down. Risk management covers risks that are possible to happen. Thus an alternative strategy is required in order to cover unexpected events that are going to lead to unexpected losses.

3.2 RISK IDENTIFICATION Risk identification consist the first stage of SCRM process. In order to achieve a mitigation plan in a satisfactory level, it is necessary to map as many of the possible hazards that threaten the firm, and as Greene and Trieschmann (1984) states, if not all possible risks or sources of risk are identified then it is extremely difficult to mitigate those unidentified risks in the future . Thus, it is critical to mention that risk identification should be continuous in order to ensure that the management team is aware of all the possible risks. By source of risk we mean all the aspects of the organizational environment of the firm that can affect positive or negative the firm. According to Tchankova (2002), “risk identification is the first step of risk management. It develops the basis for the next steps: analysis and control of risk management. Correct risk identification ensures risk management effectiveness.”

Moreover, according to Waters (2007) it is unrealistic to list all possible risks, so he concludes that it is more precise to say that risk identification points out the most significant risks. Furthermore he introduces a general procedure for risk identification with the following steps:


1. 2. 3. 4. 5.

Define the overall supply chain process. Define this into a series of distinct, related operations. Systematically consider the details of each operation. Identify the risks in each operation and their main features. Describe the most significant risks in a register.

In order to achieve those steps and succeed in identifying the significant risks, firms have to use, according to Waters (2007), some of the following tools designed for general and supply chain risks: historical data, brainstorming, cause and effect analyses, scenario planning, supply chain mapping, relative importance to the supplier and the costumer. FIGURE 3.2: RISK IDENTIFICATION SUMMARY

Source: Waters (2007)

On the same time it is important to classify risks in accordance with their position in the extended supply chain and if they are categorized as domestic or global.According to Manuj et al (2008) “the objective is to create what can be referred to as a profile for each of the risks identified in table 11. The risk profile contains elements of the specific risk within the broad category, whether the risk is atomistic or holistic, quantitative or qualitative and affects domestic or global operations.” FIGURE 3.3: CREATING RISK PROFILES

Source: Manuj et al(2008)

1

Figure 2.2.2, page 16 (More figures for Supply Chain Risk Categories in Appendix)


Finally, according to Harland et al (2003) “the categorization of types of loss helped to examine possible consequences; examples of consequences of non-trade compliance are shown in figure 3.3.” FIGURE 3.4: TYPE OF LOSSES & CONSEQUENCES

Source: Harland et al(2003)

3.3 RISK ASSESSMENT AND EVALUATION Risk Assessment and Evaluation is the second step of the SCRM process. According to Sodhi and Tang (2012) risks can be separated into normal and abnormal. Normal risks are identified as those risks that can be managed into the supply chain management. Risk assessment is not considered necessary for those risks. On the other hand, abnormal risks are those risks that can cause significant losses to the company and the possibilities of occurring cannot be predicted precisely, as there is scarcity of data and difficulties in accessing them. Waters (2007) states that there are two ways of measuring risks: qualitative and quantitative. According to Sodhi and Tang (2012) and Harland et al (2003), companies have to assess risk by answering what are the possibilities of a risk to occur and what are the impact and the consequences for the firm if the risk is not managed. Those questions are part of the quantitative risk measurement. The outcome of the quantitative risk measurement could be measured in monetary units. Quantitative measurement should be preferred than Qualitative, because it provides better precision to the risk assessment team, and easier comparison between the risks. On the other hand, qualitative risk measurement describes the concept of the risk and how it affects the firm. For example how much does the risk affects organization’s reputation and image.


Moreover, firms have to take into consideration the possible duration of the exposure to the risk. According to Waters (2007), probability of events could be given by the three following approaches:   

Calculating theoretical probability by using the existing knowledge of a condition. Analyzing Historical data in order to draw conclusions about how often the event occurs and what are the probabilities of it happening again. Taking under consideration firm’s people opinions about the probabilities of occurring.

All of those three approaches have drawbacks as in first and third approach real events are more complicated and it is hard to identify and analyze all the aspects. Moreover, historical data are considered to be good approach but we should bear in mind that conditions might have changed. According to Manuj and Mentzer there are two major paradigms in the literature concerning risk assessment paradigms, probabilistic choice (PC) and risk analysis (RA). “PC is based on the concept that unwanted choice will be compensated with good events.”On the other hand, “RA paradigm works on the concept of minimizing regret. Regret is the difference between the cost of an optimal solution that would have been adopted if the decision maker knew beforehand what would happen, and the cost of the solution actually adopted.” Moreover they state that risk assessment frameworks are divided in three wide categories: Decision Analysis, case study and perception based. They also suggest Delphi Method, (brainstorming by a consultancy team inside the firm in order to conclude in a consensus), when organizations lack of historical data and further information. Decision Analysis: Decision Analysis is a methodology that includes many procedures and tools for assessing risks and aims to address and evaluate choices by a quantitative approach. This method applies statistical tools such as decision trees, influence diagrams, probabilistic forecasting and multivariate analysis to real world problems in order to provide a graphical representation of the alternatives, so as to provide the most suitable alternative. Case Study: Harland et al (2003) developed a supply chain risk assessment framework by using a few case studies. These case studies helped the focal firm to map the supply network, to be aware of their location and identify, assess and manage risks in the supply chain by implementing the proper strategy.


Perception Based: Perception based tool has to do with asking the right questions to the right managers into the firm. By concentrating in the critical points of the supply chain the managers achieve to assess potential risks.

All the above mentioned help the risk assessment team to prioritize and categorize risks according to their impact in the supply chain; thereafter the firm will pay more attention to the risks that its supply chain is more vulnerable. In order to prioritize the risks, the management team should take into consideration several factors such as the severity of the risk, financial consequences, cost and resources needed for the risk mitigation. The next table from Manuj and Mentzer (2003) is a tool for the assessment and evaluation as it presents an explanatory analysis of the risks containing possible losses, the probabilities, impact and the worst possible scenario and if this scenario is acceptable/ affordable from the firm. Thereafter it is easier for the risk assessment team to evaluate the risks. FIGURE 3.5: RISK ASSESSMENT & EVALUATION

Source: Manuj & Mentzer (2008)

The following table is created in order to be used for the risk ranking. Risks will be divided into four categories according to their frequency of reoccurring and the impact that they have to the firm: Insignificant, Moderate, Significant and Catastrophic. In order to rank easier the risks every category is going to be marked with a color.


FIGURE 3.6: RISK RANKING

Source: own

Insignificant:

Significant:

Moderate:

Catastrophic:


3.4 RISK MITIGATION STRATEGIES: SELECTION AND IMPLEMENTATION According to Jüttner, Peck, and Christopher (2003) a distinction between risk drivers and risk mitigation strategies is obligatory. It is obvious that the improvements and the general evolvement in the supply chain management brought new challenges and risks as an outcome of those actions. Those management decisions have enhanced the firm’s and supply chain’s exposure to risks and potential disruptions. Those decisions that are taken from the organization in order to achieve better profitability and improve competitiveness are identified as risk sources/drivers.

According to Jüttner et al (2003) some of the risk drivers are given below: 1. 2. 3. 4. 5.

Efficiency oriented rather effectiveness Supply chain Globalization Focused factories and centralized distribution Outsourcing Limited suppliers base

On the other hand, Norrman and Jansson (2004) state that risk mitigation strategies aim to reduce the consequences if an adverse is realized. Moreover, according to Sodhi & Tang (2012) “risk mitigation entails efforts to reduce the impact of risk incidents in case such incidents do occur.” Jüttner et al (2003) assorts four generic supply chain risk mitigation strategies: 1) Avoidance, 2) Control, 3) Cooperation,4) Flexibility , while Manuj and Mentzer (2008) classify risk mitigation strategies in the seven following categories: 1. Avoidance: Avoidance is preferred when the risks associated with operating in a given product market or a broader geographical area, or working with limited suppliers or customers, is considered unacceptable (Miller 1992). That could lead the firms to delay their introduction to a market or even to withdraw from a market or to withdraw specific products or to decide to invest in low risk (uncertain) markets. 2. Postponement: This strategy gives the advantage to the firm to produce, whenever is applicable, a generic product that is based on the total aggregated demand. By that the firm can delay the differentiation point. This strategy could be efficient under normal circumstances while in case of a disruption they provide great flexibility to the firm. 3. Speculation: According to Manuj &Mentzer(2008) “in speculation, decisions are made on anticipated customer demand.” Perry (1991) states that “when customer-service standards are defined by the competitive environment and customer-driven, supply


chain resources are directed to those specific products and customers that provide the firm with a competitive advantage.” 4. Hedging: Hedging strategy offers flexibility to the firm as gives the opportunity for dispersing activities and collaborators (suppliers, customers, etc.). Concerning the supply chain, if a disruption occurs, is not going to affect all the entities simultaneously. 5. Control: According to Juttner et al (2003), “companies may seek to control contingencies from the various risk sources, rather than passively treat uncertainties as constraints within which they must operate.” Such examples are increased inventories, vertical integration, etc.

6. Transferring/Sharing Risk Transferring/Sharing risk can be achieved by outsourcing and contracting. Outsourcing helps the firm to share or even to transfer the risk to suppliers. Moreover, contracting strategy offers an array of options to the retailers, where they can choose from according to their levels of risk aversion. 7. Security: Security is of major importance as firms have to deal with plenty of hazards such as: risks that might derive from chemical or biological hazards during shipping or safety issues during the production. According to Manuj & Mentzer (2008) “the ability to sort out what is moving, identify unusual or suspicious elements and concentrate on them, and deal with the rest of the movements through a sampling-based process may be a viable strategy. Moreover, Tang and Christopher (2006) propose the following robust strategies for mitigating supply chain disruptions, that could be included or be a part of the prereferred mitigation strategies. 1) Postponement: 2) Strategic stock: Could be part of Control. Retaining inventories in strategic locations in order to increase flexibility. It is considered inefficient to FMCG companies related to the food industry as these products have limited inventories. 3) Flexible Supply Base: Having alternative suppliers might increase the cost but gives extra flexibility to the firm and minimizes the losses in a disruption event. 4) Make and Buy: Produce some of the products or part of the products in house factories and outsource other activities simultaneously. 5) Economic Supply Incentives: Giving financial incentives to suppliers in order to stay in the market while binding them to certain quantities. 6) Flexible Transportation: There are three approaches, multi modal transportation, multi carrier transportation and multiple routes.


All of the approaches offer flexibility to the organization by giving the opportunity to shift the mean of transportation or the route. 7) Revenue Management via dynamic pricing and promotion: Common mechanism for shelling perishable products. 8) Assortment planning: Display products in order to affect consumer’s choice. 9) Silent product rollover: New products are inserted in Market without announcement. Lack of information leads consumers to choose other available products. The biggest drawback of these robust strategies is that cost might overcome the benefits of their implementation. Another drawback could be that the desirable strategy will not fit in the firm’s generic management strategy. As it is referred previously, risk management strategies have to comply with the supply chain management strategy and the generic corporate strategy. Manuj and Mentzer (2008) present 4 different supply chains, according to supply or demand uncertainties. In the following figure risk management strategies are divided in those four categories.

FIGURE 3.7: SUPPLY CHAIN TYPES AND RISK MANAGEMENT STRATEGIES

Source: Manuj &Mentzer (2008)

According to Freedman (2003), firms have to apply an explicit strategy that must be communicated effectively through the members of the risk assessment team. Organizations might face several issues while attempting to implement the risk strategy. Freedman (2003) suggests the following:     

Strategic Inertia: Firm’s managers staying inactive. Lack of Stakeholder commitment: Not having everyone on board. Strategic Drift: Not focusing on the goal Strategic “Dilution”: Loose leadership and low commitment levels from the members. Strategic Isolation: Communication and synchronization problems.


   

Failure to understand progress: KPI Measurement Initiative Fatigue: Abundance of projects that might lead to derailment. Impatience: Manager’s will to implement the strategy immediately. Not celebrating success: Not recognizing progress may put overall success in jeopardy.

Concerning the above mentioned pitfalls, firms should aim to reduce complexity while implementing the risk assessment strategy. Reducing complexity in the supply chain is of major importance, as the supply chain partners could be widespread around the world, where there is a diversity of legal and political environments that could raise complexity. According to Manuj & Mentzer (2008), one way of managing complexity is flexibility. “Flexibility is important in a global supply chain because it plays a facilitating role in the coordination process and provides a unique ability to help firms manage the high levels of environmental and operating uncertainty inherent in international operations.” Besides flexibility, other important factors are IT, organizational learning and performance metric.


CHAPTER 4: EMPIRICAL RESEARCH

T

he empirical research consists of a presentation of a case study and the outcome of interviews and a questionnaire. Moreover, the procedure and the structure of the case study are going to be presented as the focus and the goals of the interviews and the questionnaire.

4.1 FOCUS AND GOALS This sub-chapter describes where the focus for the interviews and the case studies should be and which the goals that are being set are. 4.1.1 INTERVIEW/QUESTIONNAIRE FOCUS & GOALS

The programmed interviews take place with FMCG industry professionals who are supply chain oriented. Those people are fully aware of the processes and the techniques that are used to tackle down potential risks in the supply chain and are ideal for the interviews as they can provide the necessary data. The focus of the interviews will be in the supply chain risk management process that is followed by the company and what are the costs of implementation. Moreover, a minor focus will be in potential losses in case of misjudging the risk. The set goals for the interviews are to have a list of the major risks according to the experts, categorized by their significance and their impact to their firm. Moreover, it is important to note down how a firm faces a risk/disruption in the real word and to understand how they select their strategy and what actions have they taken to mitigate those risks and how. 4.1.2 CASE STUDY FOCUS & GOALS

The case study has to do with a Greek major Super Market that faced a disruption when their bread supplier could not fulfill the order due to a fire in their factory. The focus on the case study will be to bring into the surface if there are any mistakes from the supplier or the retailers actions concerning the risk management process, to learn what their risk management plan was and to examine if there was any further actions that could help the super market to avoid this disruptions. The case study focus exclusively on the fresh products of the FMCG retailer as those products is hard to be managed, due to their expiration date and the absence of inventory. Furthermore, the supermarket will fill in a questionnaire for categorizing specific risks according to their significance.


4.2 STRUCTURE & PROCEDURE Here it is going to be explained the structure of the interviews and the case study, as the steps before the interview arrangement.

4.2.1 INTERVIEW/QUESTIONNAIRE STRUCTURE & PROCEDURE

In order to arrange the interviews, I firstly contact the companies via e-mail, and in the cases that they did not reply I had to call the company in order to arrange face to face meetings. Concerning the case study the first option was adopted. Moreover, there where cases that companies did not accept a face to face interview so I had to form a questionnaire and send it via email. The most serious complication during this procedure was the fact that the biggest number of the reached firms replied negative for sharing any information and that led to limited data. Concerning the interview structure, there are going to be prepared some questions in advance but in case of any additional questions that have to be answered or any queries, the interviews are going to be in a loose semi structural format in order to be flexible to participate in the conversation. In addition, in order to avoid yes/no answers there are going to be used “open” questions. The first part of the interview is to know better the interlocutor, in order to feel familiar with each other. Afterwards I have to elaborate on the thesis project and explain the main goals and the purpose of this paper. The main part of the interview consists of 3 parts. In the first part the posed questions have to do with the kind of risks that their companies are currently facing. Then they are asked to prioritize those risks according to their significance and the impact to the organization. The second part consists of questions that aim to give data and information on how the firm and the risk management team is facing those risks, what are their actions prior the agreement with suppliers and if there are any supplementary actions required afterwards. The last part of the main part is the “aftermath” of risk management plan. In this part they provide me with information if the plan was successful and efficient, if there were any losses (financial, etc.) and if there were any other further actions required in order maintaining supply chain resilient. The final part of the interview is a limited conclusion of the previous discussion and assurance from my side that the given information are confidential, and are going to be used only for academic purposes.


4.2.2 CASE STUDY STRUCTURE & PROCEDURE

In order to be fully aware of the case study I had to contact all the involved parties for an interview. Despite being willing to explain the incident to me, the supplier in the examined case study did not want to share any further information about the strategy that his firm followed after the disruption and the losses that they possibly had. Therefore the biggest weight was on the retailer’s reaction. Furthermore, I accessed the web for information concerning the case study. The procedure was the same as was described above. The first part of the case study structure was to collect information about the firms through their official websites in order to know the status of the organizations. The next step was to let the respondent narrate the case study from his perspective, in order to have an objective point of view for the case study. The main part of the case study interview was to have a clear picture of what were the consequences for the retailer, what was their action plan before and after the disruption and in general if they had an SCRM process plotted. In this part it is important to understand if the company was ready to face potential risks and to observe who was responsible from the organization for the taken decisions (risk management team or individuals). The last part of the case study is about concluding on what did go wrong and what have the company done precise in order to tackle down the disruption and Moreover, to come up with more actions and mitigation strategies that could possibly be applicable in the specific situation.

4.3 INTERVIEW PARTNERS This chapter presents the experts that are going to participate in the interviews and the role that they have in their organization. Moreover, in this sub-chapter the parts of the case study are going to be presented.

4.3.1 INTERVIEW EXPERTS & QUESTIONNAIRE

ATHENIAN BREWERY: Athenian Brewery is the biggest beer producer company in Greece. They are responsible for launching in the Greek Market, Heineken and Amstel brand names among others.


Athenian Brewery was found in 1963 and nowadays the export their products in 11 countries. Due to Horeca Exhibition that took place in Athens during February, their time was limited. Thus instead of an interview they answered to the adjusted questionnaire.

Mr. Loukas Konstantinidis: Mr. Loukas Konstantinidis is a food technologist and quality manager. Moreover, he is responsible for accessing risks and plotting a risk management strategy for the company. He works for Honey-center (Κέντρο Ελληνικής Μελισσοκομίας in Greek)P. Kavouras & SIA O.E , a Greek company that provides the Greek market with honey, products that derive from honey and all the necessary items and tools that are needed for the honey industry.

4.3.2 CASE STUDY FIRM PARTNERS

STERGIOU SA: Stergiou SA is a confectionery, bread & sandwiches company that was found in Athens in the middle 60’s. The company is an exclusive supplier of the Greek army, many of the major Greek hospitals and the Super Market, My Market concerning the fresh bread, sandwiches. The company employs more than 200 people. Moreover, Stergiou owns a network of bakeries that sells his product directly to customers.

My Market: My Market was founded in 1976 as Metro and was re-launched as My Market in 2004. My Market is the third biggest retail Super Market in the country with 58 stores in their network. Despite the Greek debt crisis they succeed opening 13 new stores in the last 4 years and they employ more than 4.000 people.


CHAPTER 5 EMPIRICAL STUDY ANALYSIS

T

his chapter aims through the analysis of the case study, the interviews and the questionnaire, combined with the theory presented earlier in this paper, to provide a better understanding on how do organizations prepare themselves and react to potential risks and disruptions in general and in their established exchanges.

5.1: STERGIOU S.A. – MY MARKET CASE STUDY During the summer of 2012, and more specifically in the late August, a fire started for reasons unknown in the production unit of Stergiou SA confectionery and Bread Company. Due to the fact that Stergiou had exclusive partnerships with many organizations, that disruption led them to be inefficient in supplying specific kind of products to them. By the time that their products have short expiration dates it is obvious to realize that he was not able of retaining an inventory, so they could handle the crisis smoothly. My Market is one of those companies that have an exclusive partnership with Stergiou concerning buns, cakes, fresh bread and sandwiches. The dates after this incident, Stergiou decided that they could cover the production of buns and cakes, which have a little bit longer expiration date (almost a month) and a daily production was not necessary, from their bakery stores instead of the production unit. Despite trying to mitigate the disruption, they could not find a way to put back in truck the production of the fresh bread and sandwiches, by the time that their expiration date was of four days maximum. This ineffectiveness led My Market to have shortages in the above mentioned products for at least two months that Stergiou could not deliver them. In the forthcoming sub-chapters I will explain and analyze the actions that My Market did while signing the contract with Stergiou and while the disruption in their partnership occurred, in accordance with the SCRM process that was analyzed above in this paper.

Σελίδα 35 από 52 5.1.1 RISK IDENTIFICATION

Risk identification is the first step of the SCRM process and it is considered extremely important as it gives a clear picture of the possible “threats” that a company could face. That is why My Market, through their SCRM team, try to map the most significant and realistic risks that could harm the firm. Their first steps are to categorize the risks in order to know better in which section of the supply chain they might occur. Firstly they categorize risks in two bigger categories, internal supply chain risks and external supply chain risks. Internal risks are further categorized into the following categories: Supply risks, Demand risks, Security risks and Operational risks. In the external risks the most significant categories are Weather related risks and Hazard risks. The following table shows the most important risks that have been identified by My Market. FIGURE 5.1: MY MARKET RISKS EXTERNAL RISKS WEATHER

HAZARDS / OTHER

Snow (this could be in operational risk too, as the outcome of the risk is distribution related problems.)  

Earthquakes Port workers Strikes

INTERNAL RISKS SUPPLY

  

DEMAND



Inaccurate forecasts

OPERATIONAL

 

IT risks Transportation disruptions FIFO loose strategy Wrong ordering

  SECURITY

  

Source: My Market interview

Bad product quality Late deliveries Inaccurate forecasts

Employee accidents Fire in the facilities Vandalisms


Concerning the specific case study, the Stergiou risk management team had not had highly prioritize the specific disruption. On the other hand My Market risk management team prioritize this risk in the internal risks and more precise in supply risks. During the contract talks they have agreed that there is not necessary to put a clause in a case of disruption due to hazard reasons as something like that was unlikely to happen. Moreover, despite being an exclusive partnership there was not signed a clause that could limit My Market of signing with other suppliers. According to Manuj et al (2008) it is to create a profile for every risk in order to be easier for the company to assess the risk and to know exactly what kind of potential losses they might have. Concerning this, My Market identifies almost the whole of the risks as domestic risks, as their operations are only in Greece (except limited cases that the supplier is abroad) and moreover, they distinguish two possible types of losses: financial losses and reputation losses.

5.1.2 RISK ASSESSMENT & EVALUATION

Risk assessment and evaluation constitutes the second part of the SCRM process. It is extremely important for firms, as it is designed to provide them with information about losses and consequences, as well as with the probabilities of a risk to happen. My Market uses a combination of Decision Analysis and Perception Based method. The most important type of loss for them, according to My Market risk management team, is the one that affects their reputation, as they believe that the potential financial losses that are the aftermath of bad reputation cannot be calculated in long terms. That is why they mostly prefer Perception Based method, as according to Manuj and Mentzer Perception Based tool gives the opportunity to the managers to assess potential risks by concentrating in the critical points of the supply chain. Moreover, they could use the Delphi method too, but they believe that it would require more time in order to reach a consensus. Additionally they believe that a consulting team does not know, as they do, how the organization works. Decision Analysis is used for risks that “hide” potential financial losses, which are going to be significant for the company. In this case study My Market deals with Supply risks and more specifically with the late deliveries risk (in this case is no delivery at all from the supplier), as due to the fire in Stergiou facilities, the supplier was unable to deliver the order to the super market. This risk is been evaluated as possible and the impact on the company as major. According to their evaluation, the risk is considered as significant by the time that it can cause shortages to the super market and harm the super market‘s reputation, as well as causing losses.


During the interview they stated that in Stergiou case the evaluation could be different if they knew that they would be in shortage for two months. After this experience they decided to add a new supply risk category named delivery disruption. This category is evaluated as infrequent with severe impact on the firm. This risk would still be classified as significant since the possibilities of occurring are not as many as in the late delivery risk. The following table shows which are the most significant risks for My Market, what is the impact to the company and finally what are the probabilities of occurrence according to figure 3.5.

FIGURE 5.2: RISK ASSESMENT & EVALUATION RISKS

PROBABILITY

IMPACT

EVALUATION

Wrong Ordering

POSSIBLE

MEDIUM

SIGNIFICANT

Lack of Quality Control

UNLIKELY

MINOR

INSIGNIFICANT

Under/Over Receiving

POSSIBLE

MAJOR

SIGNIFICANT

Buyer orders with his initiative

UNLIKELY

MINOR

INSIGNIFICANT

LIKELY

MAJOR

CATASTROPHIC

INFREQUENT

MAJOR

MODERATE

Late Deliveries

POSSIBLE

MAJOR

SIGNIFICANT

Loose Inventory Control

POSSIBLE

MINOR

MODERATE

Security issues

UNLIKELY

MEDIUM

INSIGNIFICANT

IT / Technological issues

UNLIKELY

MAJOR

MODERATE

FIFO loose implementation

Weather conditions disruptions

According to this table, My Market’s most significant risk is considered to be a loose implementation of the FIFO strategy. They state that by not following correctly the strategy, they are forced to destroy those products in the Super Markets, as product


returns are not accepted by the suppliers, due to the clauses in signed contracts. Moreover, there are additional costs added by the “scrap” procedure followed in their stores.

5.1.3 RISK MITIGATION STRATEGIES: SELECTION & IMPLEMENTATION

As it is mentioned above, the fire in Stergiou facilities caused a lot of problems in My Market, as it left its super markets with shortages concerning confectionery products, sandwiches and fresh bread. Regarding confectionery products that have a short expiration date, Stergiou took the responsibility and decided to use a variation of make and buy mitigation robust strategy. Stergiou could not continue the production of all of their products in the home factory and decided to continue the production of products with a longer lifespan (cakes for example) to their three retailer shops that had the capability of baking (in smaller quantities though). The variation is that Stergiou shifted the production, but did not outsource it; by the time they could cover the needs of their clients, concerning the confectionery products. On the other hand Stergiou did not have a mitigation plan for continuing the production of the fresh bread and the sandwiches. A solution according to the literature would be an implementation of the make and buy strategy and most specifically to outsource part of the production. However this is not so realistic, as the strategy is not considered an effective solution when the company is not facing a disruption and it could probably cost more than the benefits that is going to offer. On the other hand, My Market had to face a supply chain disruption that led their super markets to shortages, concerning mostly the fresh bread and secondly the sandwiches. Their problem was that Stergiou was their exclusive supplier, concerning fresh bread and sandwiches, and they were not sure what the right action for the company was during the disruption. Concerning other products where there are many suppliers, My Market usually implements Revenue Management and Assorting Planning techniques in order to “hide” possible supply disruptions. The lack of an alternative supplier leads My Market to financial losses, but not significant enough to harm the organization. The biggest issue for the firm was the fact that their clients would not find fresh bread in the stores and that would harm their reputation and strengthen their competitors. Moreover, taking into account that the type of the supply chain was an efficient supply chain with low demand and supply uncertainty, led My Market to a major drawback to their risk management strategy, related with not applying the control and the Flexible Supply Base mitigation strategy. In accordance with Macneil (1978)


an aspect of the control strategy could be to design contract in such a way that account for possible changes and risks. That actually means that My Market could put specific clauses in cases of supply disruptions that could “force” the supplier to find an alternative way to fulfill the orders. As they explained they had not followed the control strategy because they underestimated the probabilities of a fire event in the facilities of a major supplier. Despite the fact that this may sound reasonable there are still additional actions that the firm could do in order to mitigate the disruption. They could adopt the flexible supply base robust strategy that is referred by Tang and Christopher (2006). According to this strategy the firm could have more than one supplier for a specific product in order to achieve bigger flexibility. The drawback of this strategy is that it raises the cost under normal circumstances, but in the examined case that could not be a major problem as there are only two products, with small purchasing cost. My Market did not have an alternative supplier and the greatest mistake, which they admitted ex post, was that they did not approach an alternative supplier during the disruption, as they were reassured that the production will start again almost in a month.

5.2 INTERVIEWS –QUESTIONNAIRES The following sub-chapters are going to present the most significant risks related to the supply chain, according to Greek FMCG companies professionals and how do their companies act in order to “tackle down” those risks. 5.2.1 RISK IDENTIFICATION

According to Athenian Brewery, they had formed a risk assessment team in order to identify, assess and mitigate risks. This team closely cooperates with Procurement and Planning Departments in order to achieve smooth operations and the continuous flow of goods. As he stated, they try to list as many possible risks as they can in order to be ready to face any disruption in their supply chain. This task is considered infeasible as the risks can be hundreds, so the firm records only the risks that they believe that can harm them directly and in such a way that it will cause them significant financial losses and lead to a bad reputation. Moreover, during the risk identification they are consulting their suppliers so they can cover all of the possible threats that their company might face. That is why in their signed contracts they put special terms that have to be fulfilled, such as: exact delivery dates, quality issues, specific service level, etc. The following table shows the most significant risks according to Athenian Brewery’s risk assessment team.


FIGURE 5.3: ATHENIAN BREWERY’S RISK IDENTIFICATION RISK CATEGORY

RISKS

TYPE OF LOSSES

SUPPLY RISKS

 

LATE DELIVERIES/DELAYS INACCURATE FORECASTS

COMBINED FINANCIAL AND REPUTATIONAL

OPERATIONAL RISKS



FINANCIAL PRIMARILY AND REPUTATIONALY SECONDLY

 

WRONG ORDERING/ INACCURATE LEAD TIME STOCKPILLING INEFFICIENT/WRONG DISTRIBUTION

ENVIRONMENTAL RISKS

 

EXTREME WEATHER NATURAL DISASTERS

FINANCIAL

TECHNOLOGICAL RISKS

 

MACHINE BREAKDOWN IT ISSUES

FINANCIAL

GEOPOLITICAL RISKS

 

PORT TRADE UNION STRIKE CORRUPTION

FINANCIAL

DEMAND RISKS

 

BACKORDERS QUALITY / PRODUCT DISSATISFACTION STOCK ALLOCATION

 Source: Athenian Brewery Questionnaire

BOTH

Mr. Konstantinidis, representing P. Kavouras & SIA O.E, stated that in order to identify the most significant risks for the company they closely collaborate with their future suppliers. Regarding their approach, they brainstorm with their future suppliers, prior the agreement, in order to point out the most significant threats that they could possibly harm their supply chain. After this they agree in the contract terms by adding special clauses and terms in order to bind each other. Acting like that, according to Mr. Konstantinidis, allows the company to map all of the possible threats, concerning both sides. Furthermore, I was informed that they decided not to form a risk assessment team as their company is a domestic small company that operates in the Greek Market, and they believed that risk should be assessed by the person that has the biggest experience in company’s trades. The following figure shows the identified risks for P. Kavouras & SIA O.E – Honey Center.


FIGURE 5.4: HONEY-CENTER RISK IDENTIFICATION RISK CATEGORY

RISKS

TYPE OF LOSSES

SUPPLY RISKS



LATE DELIVERIES/DELAYS OF RAW MATERIALS

COMBINED FINANCIAL AND REPUTATIONAL

OPERATIONAL RISKS



REPUTATIONAL



WRONG ORDERING/ INACCURATE LEAD TIME DEFICIENT DISTRIBUTION

ENVIRONMENTAL RISKS

 

EXTREME WEATHER NATURAL DISASTERS

FINANCIAL

TECHNOLOGICAL RISKS

 

MACHINE BREAKDOWN IT ISSUES

FINANCIAL

GEOPOLITICAL RISKS/OTHER

 

PORT TRADE UNION STRIKE AIR TRAFFIC CONTROLLERS STRIKE

FINANCIAL

Source: Honey-center interview

5.2.2 RISK ASSESSMENT & EVALUATION

After the risk identification, Athenian Brewery’s risk assessment team has to prioritize and rank the founded risks according to their impact to the organization. In order to achieve that and be fully aware of the potential threats they mostly use Perception Based tool and the Delphi technique. Firstly they make a list of the identified risks and then with the assistance of the responsible managers they rank those risks according their possibilities of occurrence and the consequences that might cause to the firm. Afterwards they implement the Delphi technique by providing the list that they have made to a consulting team, in order to have a more precise opinion about the potential risks. According to the risk assessment team the most significant risks for Athenian Brewery are fitted in the demand risks category. Those risks are presented and ranked in the following table according to figure 3.5.


FIGURE 5.5: RISK ASSESMENT & EVALUATION: RISKS

PROBABILITY

IMPACT

EVALUATION

Inaccurate Lead time

POSSIBLE

MEDIUM

SIGNIFICANT

Unsatisfactory Quality

UNLIKELY

MEDIUM

INSIGNIFICANT

Backorders

POSSIBLE

MAJOR

SIGNIFICANT

Inventory Issues/ Stockpiling/Stock allocation

LIKELY

MEDIUM

SIGNIFICANT

Lack of Raw Materials/Late Deliveries

LIKELY

MAJOR

CATASTROPHIC

INFREQUENT

MAJOR

MODERATE

Freshness Issues/ Returns

POSSIBLE

MAJOR

SIGNIFICANT

Demand Fluctuations

POSSIBLE

MINOR

MODERATE

Security issues

UNLIKELY

MEDIUM

INSIGNIFICANT

IT / Technological issues

UNLIKELY

MAJOR

MODERATE

Weather conditions disruptions

Source: Athenian Brewery Questionnaire

The most significant risks for Athenian Brewery are put in the operational, demand and supply risks categories. The most significant out of all is the possible lack of raw materials and the possibility of late deliveries. It is obvious that with the possible absence of the raw materials the firm is unable to produce its final product and launch it to the market. Thus Athenian Brewery puts in the contracts clauses that require deliveries from their suppliers in exact dates and specific lead times in order to face this problem as well as the backorders issue. On the other hand, according to Mr. Konstantinidis, P. Kavouras & SIA O.E/Honey – Center forms the list of risks by using if scenarios technique in order to find the impact and the possibilities of the potential risks. In this company, as in the two prereferred, a perception based variation is being used. Due to the fact that they are a small company, they try to map and assess all the possible risk by brainstorming and critical thinking. This technique according to Mr. Konstantinidis examines situations that decline from normal and it is mostly based on the experience that the managers of the firm have. It is important to refer that their way of thinking during the brainstorming process looks identical with what


Waters (2007) have suggested, as they try through their existing knowledge of the situation and the historical data to determine the probabilities of occurrence. The following table consist the outcome of the interview with Mr. Konstantinidis and it briefly describes the type of the identified risks, the probabilities of occurring and the impact that those risks to the firm. The probabilities of the risks where given in percentages and they were converted according to the figure 3.5 during our conversation. The most important risks as are listed in the following table are related with the operational part of the supply chain and more specifically with distribution problems. Other significant risks for the company are related with raw materials issues, late deliveries from the suppliers and weather conditions as they can affect the distribution to the islands.


FIGURE 5.6: RISK ASSESMENT & EVALUATION: RISKS

BRIEF PRESENTATION

PROBABILITIES

SIGNIFICANCE

5% / Infrequent

Product Quality Assurance

The product has to be checked in order to meet clients and company’s standards. Client dissatisfaction due to quality related issues.

Medium Impact to the company. Risk is ranked as moderate.

Weather conditions

This category contains severe weather conditions, as well as winds that can block ship departures to the islands.

10% / Infrequent

Medium Impact to the company. Risk is ranked as moderate.

Raw Materials/ Late Deliveries

Shortages of raw materials are created due to late deliveries from the suppliers. As a result there are delays in executing the orders.

30% / Possible

Medium Impact to the company. Risk is ranked as significant.

Deficient Distribution

This risk could be listed in two categories as distribution is a part of operations. On the other hand, this issue is created several times due to port trade unions and air traffic controllers strike, causing disruption to the distribution.

30% / Possible

Minor Impact to the company. Risk is ranked as moderate

Technological /IT issues

Production problems due to machine breakdown

<5% / Unlikely

Major Impact to the company. Risk is ranked as moderate.

Σελίδα 45 από 52 5.2.3 RISK MITIGATION STRATEGIES: SELECTION & IMPLEMENTATION

The first action that Athenian Brewery plots to implement in order to mitigate the pre- mentioned supply chain risks prior the agreement with them is trying to be as precise as possible with their forecasts in order to meet the demand and avoid possible backorders. Moreover, they put contract clauses, this is recognized as a part of a transferring/sharing strategy as it is described by Manuj & Mentzer(2008),which bind both the suppliers and the company to specific dates and lead times. All of these actions though have been taken prior the potential agreements with their potential suppliers and constitute preparations from the firm’s side. The actions that the organization is going to take concerning their established exchanges are different. According the risk assessment team, after the agreement with the suppliers the risk assessment team deploys plan b, even plan c concerning the potential risks. The most significant risk is the late deliveries of raw materials. Due to the promotion-based Greek competitive market, the delay of raw materials that are intended for tailor made activities could be disastrous for the firm as “deducts” reliability and enhances bad reputation. Moreover, such an event turns the consumers and the retailers to competitors. The supply chain in this case is characterized as of responsive supply chain with low supply and high demand uncertainty, by the time that there is strong competition in the market, based on promotional activities. Concerning this risk the organization has qualified the proper risk mitigation technique, as they should add flexibility in their supply base. That is why they selected to have two alternative suppliers in order to be flexible in disruptions; despite they know that this could increase the cost during normal circumstances. This is exactly the flexible supply base robust strategy as described by Tang & Christopher (2006). Another action that it could be effective, is the implementation of retaining strategic stock. According to the firm this could raise the inventory cost and could lead to stock allocation. On the other hand though, this could add flexibility to the firm and limit possible losses during a disruption. Another significant risk for the most FMCG companies that are related with the food industry is freshness issues and expiration dates management. According to the company freshness issues can be caused from several reasons. Some of them could be late or deficient deliveries of products that delay the packaging procedure and as a result late delivery to the retailers or wrong forecasting that could cause producing more than the demand requires. This is considered a significant risk, as those products are returned to the company, where they have to be destroyed According to the theory, the most suitable strategy is the robust strategy of revenue management through dynamic pricing and promotion; and this is the strategy that


the firm follows in occasions like that too. This strategy gives the advantage to the company to offer products that have short expiration day in “special” low prices or form a promotion that could give for example 2 products in the price of one. Despite being forced to sell products in lower prices, firm avoids the destruction cost, the cost of not selling the product and the inventory holding cost. The other two most significant risks according to the firm are backorders and inventory related issues, such as stockpiling and stock allocation. Concerning backorders, it could be created as an outcome of another risk referred before (lack of raw materials) and moreover, from wrong demand forecasting. Limiting backorders is extremely important for the firm due to competition. Backorders are mitigated by retaining strategic stock but according to the firm sometimes is not enough to cover the demand. Another way to limit this issue is using revenue management via promoting similar products that are available, if that is possible of course. The second significant risk is related with the inventory control. Stockpiling and stock allocation are two important issues that the company has to tackle down. The firm is aware of the fact that by retaining big stock increases the inventory holding costs, so they desire only to retain stock adequate enough to cover the demand and a safety stock in case of possible disruption. Despite their will something like that is not possible and there are situations that they had experienced stockpiling. Mr. Alexandropoulos informed me that his company uses again the revenue management robust mitigation strategy, as they think that this is a fast way to keep their inventory balanced. Despite this strategy though, they could also implement assortment planning. By this strategy the company aims to affect consumers’ selections by displaying their products in such a way that are always visible to them. Moreover, this robust strategy could be combined with revenue management. Stock allocation on the other hand occurs when the code of a product has been withdrawn from the production and the firm holds a limited stock for specific retailers. Based on the lead times and how often the retailer puts the order this could increase significantly the holding cost. So far they had not implement a strategy to face this potential risk. The most proper strategy for this risk seems to be transferring/sharing strategy and more precise the contracting part. By putting a clause for the case of stock allocation the firm binds the retailer to order the product on an exact date. Concerning Honey-Center, the most significant risk is the late deliveries of raw materials, as they affect directly the production and the packaging procedures. The created shortages lead to delays in the execution of the received orders. The firm implements the robust strategy of the flexible supply base in order to assure the smooth flow of their goods in the market by creating a larger base of


suppliers concerning raw materials. Moreover, as it is mentioned above, the creation of strategic stock is a great strategy for the Honey-Center as their products do not have short expiration dates and can be retained. Another moderate risk with minor impact to the company is the deficient distribution issue that derives from geopolitical risks such as port trade unions and air traffic controllers strike. Those problems interrupt the supply chain as many of the ordered quantities are destined for retailers who have their stores in islands. In cases like this, the only way to deliver the product is via ship or airplane. Despite those problems, that are quite often, there is not a major impact to the company, as Mr. Konstantinidis stated, by the time that the products can be retained for quite a long time and retailers know that such problems might occur. An additional mitigation action for this risk could be the adaption of decentralized warehouses in order to avoid the distribution problems concerning islands that are close to each other and the transportation is faster. Moreover, weather conditions and extreme natural disasters are considered as a moderate risk with medium impact to the company, as are infrequent. Despite being infrequent, they can sometimes be severe as they can interrupt the supply chain. The most common issues related to natural disasters are distribution disruptions and supply disruptions due to snow, wind and earthquakes. A solution to this problem could be to “adopt” decentralized warehouses instead of centric one. By this strategy the firm achieves flexibility but on the other hand it raises the cost significantly.


CHAPTER 6 CONCLUSIONS

T

his chapter is the outcome of this Thesis as it presents the drawn conclusions concerning the research questions and the research objectives which had been posed earlier in this thesis project.

Research Question 1: What are the most significant risks that Greek FMCG companies have to tackle down? The first research question aims to identify and rank the most significant risks related to the Greek FMCG organizations. In order to be efficient and fulfill their goals, companies have to plot a strategy plan proactively. All of the interviewed companies firstly identified possible risks that could cause disruptions to their supply chain. The next step was to rank the identified risks according to their significance concerning two factors, their potential impact to the company and the probabilities of occurring. The tool that is selected in order to assess and evaluate the risks varies from firm to firm according to their size and organizational structure. A risk matrix was created and was given to them for that purpose with specific levels of impact to the company and likelihood of happening. According to the presented case study and the interviews with one Multinational and one domestic company, most of the risks that affect FMCG companies are related with operational and supply risks. Concerning the position of the company in the supply chain those risks vary from loose FIFO implementation, late deliveries, lack of raw materials, backorders, wrong ordering, under/over receiving, extreme weather conditions, loose inventory control, freshness issues, product quality assurance, It/ technological related risks and deficient distribution. After the assessment and evaluation process and according to the risk matrix ranking the most significant risks for FMCG companies are the following: Under/ Over Receiving, Wrong ordering, late deliveries, FIFO loose implementation, backorders, loose inventory control , freshness issues, and lack of raw materials.


Research question 2: What action plans are implemented by Greek FMCG companies in order to mitigate those significant supply chain risks? After the identification, assessment and evaluation of the risks the next required step for a company, so it can be prepared for a disruption, is to come up with risk management mitigation plans. This is not an easy task as every risk should be addressed differently. Moreover, there are many cases in which a unique mitigation plan is not adequate enough to confront the potential risks, as the risk could be more complex and affect several aspects of the company. Most action plans concerning established exchanges are based in Tang and Christopher (2006) proposed robust mitigation strategies. The most significant risk concerning the retailers is loose FIFO implementation. FIFO strategy is essential for the management of expiring products as it allocates the short expiring products first in the shelf. FIFO strategy related risks could be mitigated by promotion actions for the short – expiring products, dynamic pricing and better training of the employees in order to manage the shelf space in an effective way. One of the most significant risks is lack of raw materials / late deliveries from the suppliers. This risk is of a major importance for FMCG companies as their products are fast moving the lack of raw materials or late deliveries can possibly delay or disrupt the supply chain and the production process. There are several mitigation strategies that could apply for this risk. The most effective are the flexible supply base that allows the company to have alternative suppliers and the retaining of strategic stock that enables the firms to have enough stock to their warehouses to handle potential crisis. Moreover, backorders and inventory control related issues are significant for FMCG companies. Backorders could be mitigating by more accurate forecasting and by retaining strategic stock. This though could lead to the creation of big inventory and raise the holding cost. Thus companies should implement revenue management by promotion or dynamic pricing in products that are in abundance. Revenue Management is an acceptable strategy concerning freshness issues, by providing short expiring products in low prices. Moreover, another mitigation strategy that could be implemented concerning this risk is assortment planning. By using this robust strategy, the firms display in a highly noticeable position the products that they want to sell in order to manage their inventory in an effective way.


CHAPTER 7 FUTURE RESEARCH The purpose of this Master Thesis was to identify how FMCG companies manage and rank risks that could affect their supply chains. Risks can vary from company to company concerning the “nature” and the position of the company in the supply chain. The research took into consideration three different kinds of FMCG companies, a retailer, a multinational company and a domestic company, in order to have a clear view of the issues that could threaten a FMCG company. That is why a risk matrix is created and presented in this project in order to make it easier for the companies to assess and evaluate risks according to the significance and the impact to the company. This Thesis could be used as a comparative paper for future relevant research concerning the ways that FMCG companies could mitigate the supply chain risks. Moreover, a future research could be involved with tools for monitoring the identified risks inside the company and their supply chains, especially the upstream supply chain that could affect operations in total. Additionally, as freshness issues arise in cases of delays of raw materials, a future research concerning traceability could be conducted, as it is extremely important for FMCG companies that operate in fresh food section to know more and specific information about the condition and the “position” of sensitive products. Furthermore a future research could search, sturdy and propose an alternative supply chain risk management process that could be more efficient for the companies.


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