Citation for published version:
Chen, J, Sohal, AS & Prajogo, DI 2013, 'Supply chain operational risk mitigation: a collaborative approach',
International Journal of Production Research, vol. 51, no. 7, pp. 2186-2199.
https://doi.org/10.1080/00207543.2012.727490
DOI:
10.1080/00207543.2012.727490
Publication date:
2013
Document Version
Peer reviewed version
Link to publication
This is an Author's Accepted Manuscript of an article published in Chen, J., Sohal, A. S., & Prajogo, D. I. (2013).
Supply chain operational risk mitigation: a collaborative approach. International Journal of Production Research,
57(1), 2186-2199, copyright Taylor & Francis, available online at:
http://www.tandfonline.com/doi/abs/10.1080/00207543.2012.727490
University of Bath
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Abstract
Along with increasing supply chain risks due to economic and environmental changes, it is
imperative to answer the question of how to reduce supply chain risks. This study examines
supply chain collaboration as a risk mitigation strategy. The study examines three types of
risks, namely supply risk, demand risk and process risk in relation to three types of
collaboration, namely supplier collaboration, customer collaboration and internal
collaboration, as a mechanism to mitigate those risks. The proposed relationship model is
tested with data collected from 203 manufacturing companies in Australia. The results show
that each area of collaboration effectively reduces its respective supply chain risk, but only
the mitigation of process risk and demand risk has a direct effect on supply chain
performance. In addition, both supply risk and demand risk increase process risk. We offer
theoretical and practical implications of the findings.
Keywords: supply chain collaboration, risk, supply chain risk
1. Introduction
A supply chain is a network of organizations that are involved, through upstream and
downstream linkages, in different processes and activities that produce value to consumers
(Christopher, 1992). When supply chain management emerged as a new philosophy
compared with the traditional way of managing supply chains, it was characterized by a
strategic orientation toward collaborative efforts to align different supply chain entities into a
unified whole (Mentzer et al., 2001). It is now recognised that competition is no longer
between individual companies but between different chains and that “ collaborative
advantage” (Kanter, 1994; Dyer, 2000) is achieved through supply chain entities leveraging
resources and knowledge in the whole network (Lejeune and Yakova, 2005; Cao et al.,
2010).
On the other hand, due to increased globalization, higher customer expectations and
environment volatility (Christopher and Peck, 2004; Norrman and Jansson, 2004), supply
chains are more easily exposed to risks. Supply chain risk management (SCRM) has emerged
as an important area of study. As a recent research area, the study of SCRM so far has not
been adequate to meet the challenges associated with increasing supply chain risks (Khan and
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Burnes, 2007; Thun and Hoenig, 2011). Extant studies have strongly focused on supply side
risk (Tang and Nurmaya Musa, 2011). However, the supply chain ripple effect makes it
essential to manage supply chain risks in partnership with other supply chain partners
(Norrman and Jansson, 2004). A direct supply chain is composed by a focal company, its
supplier and its customer (Mentzer et al., 2001). Its competence is not only threatened by
risks from the supply side but also from internal production and the customer side as well as
their interrelations. No matter what kind of risk management approach is taken, supply chain
risks should be understood and managed as a whole for an end-to-end supply chain (Rao and
Goldsby, 2009). But such studies are scant in the extant literature.
Implied by the supply chain perspective, supply chain collaboration is important to mitigate
supply chain risks but this approach has not been investigated thoroughly (Cheng et al., 2011).
The importance of collaboration has been reflected in some definitions of SCRM. For
example, Tang (2006) define SCRM as the management of supply chain risks “through
coordination or collaboration” among supply chain partners. Jüttner et al.(2003) also defines
SCRM as the management of risks for the supply chain “through a co-ordinated approach”
amongst supply chain members. Some studies have included collaboration into risk
mitigation frameworks (e.g. Zsidisin et al., 2000; Chopra and Sodhi, 2004; Christopher and
Peck, 2004; Giunipero and Eltantawy, 2004; Hallikas et al., 2004), but they are mainly
conceptual and provide little empirical evidence.
To address these research gaps, our study tries to empirically examine the following two
research questions: 1) What is the implication of supply chain risks on supply chain
performance? and 2) Can supply chain collaboration reduce supply chain risks? Our study
contributes to the body of knowledge on SCRM through fostering a supply chain perspective
and a collaborative approach of risk mitigation. It investigates risks and collaboration from
end-to-end, encompassing the supply side, production processes and the demand side.
Furthermore, as a survey-based study, it contributes to the SCRM literature in which there is
a pressing need for empirical studies (Tang and Nurmaya Musa, 2011; Thun and Hoenig,
2011).
The remainder of this paper proceeds as follows. In Section 2 the relevant literature and
theory are reviewed, based on which the research hypotheses are formed. The applied
methodology is introduced in Section 3 and the results are reported in Section 4. Section 5 is
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a discussion of the findings as well as theoretical and managerial implications. The paper
concludes with limitations of this study as well as future research directions.
2. Theoretical background and research hypotheses
2.1 Supply chain risk
The main use of the term “risk” is primarily based on the variance-based view (Miller, 1992) .
In the classic decision theory, risk is defined as the “variation in the distribution of possible
outcomes, their likelihoods, and their subjective values” (March and Shapira, 1987, p. 1404).
Large variations make the performance unpredictable and hence increase the level of risk.
Implied by the concept of variance, what is inherent in the concept of “ risk” is an expected
value (Yates and Stone, 1992; Shapira, 1995); it is the deviation from the expected value. In
this sense, risk is simply missing the target (Ellis et al., 2010). Encompassing both elements
into the concept of supply chain risk, we define supply chain risk as “the potential deviation
from the expected value of a certain supply chain performance measure” (based on Wagner
and Bode, 2008; Kumar et al., 2010).
In general, there are two types of supply chain risk, namely: operational risk and disruption
risk (Kleindorfer and Saad, 2005; Tang, 2006; Knemeyer et al., 2009; Wakolbinger and Cruz,
2011). Operational risk is more about supply-demand coordination and results from
inadequate or failed processes, people and systems (Bhattacharyya et al., 2010; Lockamy and
McCormack, 2010). Examples of operational risk are quality or delivery problems.
Disruption risk is caused by man-made or natural disasters such as terrorist attacks, strikes,
earthquakes and floods. Disruption risk is less controllable while operational risk is relatively
more controllable (Byrne, 2007). According to a global survey by Accenture in 2006,
managers report that the most predominant and daunting risks to their supply chains are still
those controllable risks which are associated with the performance of their supply chain
partners (Byrne, 2007). Therefore, this study focuses on operational risk in supply chain
contexts.
2.2 Supply chain operational risks and their implications on supply chain performance
The variation in a supply chain includes all those affecting the flow of goods across the
supply chain and the match between supply and demand (Jüttner et al., 2003). In a supply
chain, the variations are raised mainly from three sides: upstream from suppliers’
performance, downstream from customers’ demand, and internally from the production
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process of the focal firm (Davis, 1993; Germain et al., 2008). Correspondingly, we term the
three types of supply chain operational risk as: supply risk, demand risk and process risk. The
Theory of Swift, Even Flow (Schmenner and Swink, 1998) states that the more swift and
even the flow of materials through a process, the more productive is that process. Therefore,
the productivity of any process falls with increases in the variability associated with the flow,
be that variability associated with quality, quantities, or timing (Schmenner, 2004). In light
of this theory, variance-based supply chain risk (supply risk, demand risk or process risk) will
undermine supply chain performance.
Supply risk is the potential deviations in the inbound supply in terms of time, quality and
quantity that may result in uncompleted orders (Kumar et al., 2010). Inconsistency in the
suppliers’ performance will make their performance unpredictable and thus increase supply
risk. There are many factors that can affect suppliers’ performance such as production
capacity constraints, lack of quality control, congestion in the production, or even a machine
break down (Zsidisin and Ellram, 2003). All these can interrupt supply in terms of supply
lead time, quantity and quality.
In a survey by AMR research (AMR Research, 2007), supplier failure has been found to be
the No.1 risk factor. Due to the practice of outsourcing, the capability of the suppliers to
assure supply is critical for the buying companies. For example, quality problems in the
supplied components are a prominent threat to the buying company. As an example, in 2005
the German company Robert Bosch experienced a major loss as a result of delivering
defective pumps provided by one of their sub suppliers (Thun and Hoenig, 2011).
Inconsistent supply lead-time makes it unpredictable and thus increase the forecast error
(Zsidisin, 2003). Problems also occur when suppliers cannot satisfy volume or mix
requirements in the order. Since the buying company relies on its suppliers to maintain
capable production processes, the inability of suppliers to deliver the required material,
components or products will have detrimental effects on the supply chain’s ability to serve its
customers. With respect to the value chain model (Porter, 1985), success depends upon the
seamless linkages between different activities within the chain such as inbound logistics and
outbound logistics. Supply risk will have detrimental effects on outbound logistics, which
will ultimately impact on the performance of the supply chain. Therefore we propose:
H1 (a): Supply risk is negatively related to supply chain performance.
