Reducing probability

Reducing a probability that certain risk event causes loss to a company can be achieved in many ways. With certain supply decisions, the risk can be eliminated. (Ellegaard 2008, 427)

These kinds of decisions are related to avoiding buying from certain suppliers, in certain geographical markets and avoiding certain materials, technologies, currencies and products (Jüttner et al. 2003, 19). A buying company can also reduce the risk probability by influencing directly to the risk source (Ellegaard 2008, 427). Zsidisin and Ellram (2003, 18) have defined such initiatives as behavior-based risk management techniques. Behavior-based management techniques focus on improving suppliers’ processes, thereby reducing the probability of risk occurrence (Anderson & Oliver 1987, 78). According to the findings of Zsidisin and Ellram (2003, 17, 25) companies are implementing behavior-based techniques, that lower information asymmetries, align goals and develop supplier performance when a certain supply risk occurs frequently. The authors point out four behavior-based techniques: implementing quality management programs, supplier development, supplier certification and developing target costing. According to Chen et al.

(2013, 2189) the activities that affects directly on a supplier’s processes and capabilities requires close collaboration between a supplier and a buyer. Therefore, collaboration can be seen as one main behavior-based technique for risk mitigation. In fact, the literature argues that only through close collaboration with supply chain members, early and effective risk mitigation can be attained (Kern, et al. 2012, 65-66).

Modern supply chains are required to adopt more integrative and collaborative efforts as they are operating in a dynamic environment. Collaboration with suppliers has been seen as an important strategy to mitigate uncertainty. (Chen et al. 2013, 2189) According to Tang (2006, 453) SCRM refers to “coordination or collaboration” among the supply chain members. Also, Blos et al. (2009, 248) have stated that supply risks can be managed through collaboration among supply chain members that in turn ensures business continuity.

Simatupang and Sridharan (2002, 19) have defined a collaborative supply chain as “two or more independent companies work jointly to plan and execute supply chain operations with greater success than when acting in isolation.” In a collaborative relationship a supplier and a buyer communicate openly and work together in order to achieve common goals (Min et al. 2005, 245). Collaboration between a supplier and a buyer requires joint efforts in improving supply chain visibility, sharing information related to risks and developing supply chain continuity plans (Jüttner et al. 2003, 20). Developing a target costing is one example of the collaboration action that requires information sharing from both sides. Through close collaboration and information sharing, partners are able to determine ways to reduce costs.

Effective communication ensures a better understanding of the supplier’s cost structure and cost drivers. (Zsidisin & Ellram 2003, 18)

Certification is one way to improve suppliers’ processes and reduce the risk probability.

Suppliers are awarded of meeting regularly the goals that are related to quality, cost, delivery, finance and volume. In the certification process, a buyer receives a lot of information about the supplier’s performance and ensures supplier’s capability to produce materials. Supplier’s behavior becomes more aligned with the behavior of a buyer as the behavior that meets certification criteria is standardized. (Zsidisin & Ellram 2003, 18) This in turns enhances supplier’s processes and leads to cost reduction, quality improvements, increased trust and communication and a higher level of performance (Larson & Kulchitsky 1998, 76). Through the certification process, a buyer is able to engage a supplier for a long-term relationship (Zsidisin & Ellram 2003, 24).

Supplier development decreases the probability of risk occurrence (Zsidisin & Ellram 2003, 23). Supplier development means that a buying company will invest in developing suppliers’

capabilities and performance in order to help suppliers to meet the buying company’s short-term and long-short-term supply demand (Krause & Ellram 1997, 21). Supplier development includes, for example, enhancing supplier’s process capabilities, educating supplier’s personnel, placing buyer’s personnel to work for a certain period in supplier’s facilities (Ellegaard 2008, 427) and implementing quality management programs. The implementation of quality management programs in suppliers’ facilities reduces the risks related to suppliers’ quality issues and develops suppliers’ quality performance. The purpose of the quality management programs is to increase suppliers’ capabilities so that suppliers are able to meet a buying company’s quality requirements. (Zsidisin & Ellram 2003, 18) Risk and uncertainty can be reduced through increased trust between a buyer and a supplier (Ganesan 1994, 3). Moorman, Zaltman and Deshpande (1992, 315) have defined trust as

“the willingness to rely on an exchange partner in whom one has confidence.” Building long-term and deep relationships with supplier requires trust from both sides (Meehan & Wright 2011, 33). A trustful relationship with a supplier reduces the probability of risk occurrence as the more sensitive information is shared, communication is effective and both parties are committed to the relationship (Spekman & Davis 2004, 423). In addition to trust, commitment affects positively on supplier-buyer collaboration (Hudnurkar, Jakhar &

Rathod 2014, 192). Suppliers are more committed when the relationship is strong and are

less likely to behave opportunistically (Ellegaard 2008, 428). Trust and commitment are essential for building a long-term relationship and for achieving successful collaboration (Morgan & Hunt 1994, 24). A trustful and deep relationship can mitigate the risk of competitors acquiring a supplier. In addition, the deep relationship can reduce the lead times and the threat to miscommunicate the orders thereby making the supply chain more efficient.

Sometimes the relationship can become so deep that the core suppliers are almost part of a buying company. In some cases, a buyer has even provided financial and technological support and human-resource training to their core suppliers. (Sodhi & Lee 2007, 1432) According to Zsidisin and Smith (2005, 44) early supplier involvement reduces the likelihood of supply risk. Also, Spekman and Davis (2004, 415) highlight the benefits of involving a supplier in new product design and processes. With the help of early supplier involvement, buyers can manage different supply risks such as high costs, quality issues, supplier capacity constraints and extended product development times. For example, sharing forecast information and ensuring supplier production flexibility in the early phase reduces the capacity risk. Also, sharing development information, resources and design changes in an early stage with suppliers lowers the risk of extended product development times.

(Zsidisin & Smith 2005, 50)

According to Zsidisin et al. (2000, 190) it is not possible to eliminate all supply risks even though the supplier’s processes have been improved. The authors argue that buying companies are not able to control all risks. Therefore, companies need to be prepared against unexpected risk events and implement strategies that reduce the risk effects. The next section describes the techniques that reduce the risk effect.