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Research paper Purchasing organization involvement in risk assessments, contingency plans, and risk management: an exploratory study

George A. Zsidisin Alex Panelli and Rebecca Upton


The authors George A. Zsidisin is a Graduate Teaching Associate in the Department of Supply Chain Management, College of Business Administration, Arizona State University, Tempe, Arizona, USA. Alex Panelli is based at TradingHubs.com, Santa Rosa, California, USA. Rebecca Upton is based at Sabre Inc., Tulsa, Oklahoma, USA. Keywords Supply-chain management, Suppliers, Risk, Purchasing, Contingency planning Abstract Purchasing organizations use various strategies and techniques to minimize the chance and impact of detrimental events occurring in the supply base. Supply risk assessments are a necessary first step in managing those risks. An analysis of in-depth interviews with purchasing professionals from nine companies indicates that purchasing organizations often create contingency plans, and implement process-improvement and buffer strategies in response to perceived supply risks discovered in assessments. Even though risk assessments, contingency plans, and risk management efforts are generally acknowledged as being important, many of those interviewed believed that there was not enough done in their organizations to mitigate supply-related risks. Electronic access The current issue and full text archive of this journal is available at http://www.emerald-library.com
Supply Chain Management: An International Journal Volume 5 . Number 4 . 2000 . pp. 187197 # MCB University Press . ISSN 1359-8546

Introduction
Many firms have shifted their practices from vertically integrating activities within their supply chains to focusing on core competencies (Prahalad and Hamel, 1990; Quinn and Hilmer, 1994). While the benefits of outsourcing have provided many firms a competitive advantage in the marketplace, there have been corresponding increases in the level of corporate exposure to uncertain events with suppliers. The transpiration of significant and/or disappointing failures with in-bound goods and services is supply risk. An extreme example of the ramifications of supply failure would be the shut-down of production lines due the lack of incoming materials from a supplier, which subsequently can result in the loss of business and customer goodwill. Purchasing organizations may or may not be able to exercise some control over supplyrelated risk. For example, purchasing practices such as supplier certification and quality management programs (Smeltzer and Siferd, 1998) can manage supply risk by reducing the likelihood of a detrimental event. However, due to limited resources and the inability to assess all possible risks (Yates and Stone, 1992b), purchasing organizations may not be able to reduce the uncertainties associated with suppliers, and instead construct barriers that buffer against the effects of manifested uncertainties (Fisher, 1997; Newman et al., 1993). The purpose of this research is to understand how purchasing organizations assess supply risk and the actions these firms take in response to that perceived risk. Specifically, this research is an exploratory study that investigates: . the procedures organizations have for identifying and characterizing the risks associated with their suppliers; . if organizations have a systematic way of quantifying, ranking, and/or prioritizing the risks associated with a particular strategy, process, or relationship; and . the actions firms engage in to deal with supply risk.
The authors would like to thank Jim Moyer, Todd Syckes, John Castro, and Lisa Ellram for their contributions to this research.

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Purchasing organization involvement in risk assessments

George A. Zsidisin, Alex Panelli and Rebecca Upton

Supply Chain Management: An International Journal Volume 5 . Number 4 . 2000 . 187197

Literature review
There exists an abundance of literature in management and operations research that discusses risk (see Ruefli et al., 1999). However, there is limited research that has explicitly studied risk assessments, contingency plans, and risk management within the context of in-bound supply. The following section will discuss the literature associated with supply risk, provide an example of a firm that exemplifies some supply risks that exist and briefly describe risk assessments and risk management. Supply risk Numerous risks can exist with inbound supply. A few of these risks are described in the following passages. Not all risks that may exist with supply are included, but nonetheless, several key supply risks are captured that exist in many organizations. Business risk Business risk is concerned with the financial stability of a supplier (Krause and Handfield, 1999). If a supplier is not profitable, it may not stay in business for very long. Supply risk becomes prevalent when a buyer-supplier relationship is formed and the purchasing organization has some degree of reliance on that supplier. During financial hardships, if the supplier has a parent company, temporary financial set-backs may be weathered (Steele and Court, 1996). Permanent problems can also occur. For example, if the supplier is a privately-owned firm that has one central leader (such as the owner), the absence of that one key person can ruin the entire firm. If the supplier remains insolvent, efforts either by a parent firm or even the purchasing organization may be in vain. Supply risk occurs when those supplies are not available, and alternative and possibly unknown sources must be found. Supplier capacity constraints One of the reasons for products or services not being available is due to supplier capacity constraints. Fluctuations of demand, such as those cause by the ``bullwhip effect'' (Lee et al., 1997; Fine, 1998) may tax a supplier beyond its abilities. A supplier may not have extra equipment, available employees, or the ability to obtain necessary inputs to handle rapid spurts in demand. On the other hand, it may also be difficult for suppliers to utilize

excess ``slack'' (Cyert and March, 1963) during order declines, which makes it difficult to attain profits from excess capacity. Constraints exist that restrict a supplier's ability to make rapid changes to varying demands. Quality Quality-related risks can cause significant detrimental effects on the purchasing organization, with a cascading effect through the supply chain to the final consumers. Each link within a supply chain is dependent on the other links to meet product or service requirements. Quality failures can stem from the failure of suppliers to maintain capital equipment, lack of supplier training in quality principles and techniques, and damage that occurs in transit. Techniques such as statistical process control can detect if processes deviate from meeting quality demands. One requisite for continuous improvement in quality is employee training and a culture that embraces quality principles (Ahire et al., 1996; Choi and Liker, 1995). If a quality focus is not embedded within suppliers' plants, purchasing organizations run a greater risk of obtaining production inputs that do not meet specifications. Even if suppliers ensure for quality, damage can occur during transportation. Service quality that ensures safe, reliable shipments is also necessary for meeting product quality standards. Production technological changes Technological change risk comprises improvements in technology that render current technology and development efforts obsolete (Robertson and Gatignon, 1998; Walker and Weber, 1984). The inability of suppliers to stay abreast of technological changes may have a detrimental effect on costs, competitiveness of products in the market, and lead-times. Purchasing organizations must rely on suppliers' abilities to remain capable and efficient in their production processes through continuous improvement efforts. Continuous improvement efforts may yield changes that reduce suppliers' total costs, and subsequently, reduce the total cost of the purchasing firm's final products or services. Product design changes Customer demands are dynamic. Firms constantly make product design changes that

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Purchasing organization involvement in risk assessments

George A. Zsidisin, Alex Panelli and Rebecca Upton

Supply Chain Management: An International Journal Volume 5 . Number 4 . 2000 . 187197

attempt to best meet their customer requirements. Changes in products or services can mandate that the suppliers also make the appropriate modifications for their raw materials or sub-assemblies. Supply risk can become prevalent when suppliers are unable to make those product design changes, as well as production process modifications, to meet purchasing organization requirements. Disasters Many risks to supply are outside the control of the purchasing firm or suppliers. Disasters such as floods, hurricanes, earthquakes, tornadoes, blizzards, fires, accidents, and illnesses sometimes occur. For example, the fire that destroyed Toyota's brake supplier plant in 1997 stopped Toyota's production lines and was estimated to cost Toyota approximately $40 million per day (Nelson et al., 1998). Disasters and accidents that occur at suppliers' facilities or with shipments intransit can have rippling effects on the purchasing organization and throughout the supply chain. Organization example of supply risk Supply risks can be specific to a firm due to its unique organization characteristics, industry nuances, and the supply chains to which it belongs. Zsidisin and Ellram (1999) have reported an example of the supply risks assessed in a US high technology electronics firm. Supply risks analyzed in this firm include design, quality, cost, availability, manufacturability, supplier, legal, and environmental, health and safety (see Table I). Each of these risks is evaluated by a team for its possible impact on anything that either impedes the introduction of a new product, or an event which could disrupt production. Within each of these seven general risk categories are additional issues that comprise that risk classification. These issues are then ``rolled-up'' to form an overall evaluation for each of the seven general risk categories. Additional risks specific to either a class of supply or a respective supplier may also be evaluated as necessary. Supply risk assessment and management There is limited research specific to risk assessment and management on in-bound supply. However, previous studies have delved into risk assessments in general. Prior

Table I Organization example of supply risks Design Design's ability to complete the design, follow design for manufacturing goals, validate the design, assess the materials interactions, and manufacture the item Quality Quality means that the direct and indirect materials, service or product consistently meets requirements and that supporting processes are in place to ensure control Cost Competitive cost risk is determined by target costs from the customer, industry benchmarking, should cost models, and make-or-buy decisions where appropriate Availability Assessing the risk of the sourcing, unit volume requirements, and the material tooling Manufacturability Risks associated with manufacturing's ability to produce when material specifications are met. If the material has not yet been received, this may entail anticipating potential future problems Supplier Supplier risk means assessing and choosing suppliers of good financial health and manufacturing in politically stable or low-risk natural disaster areas. It also refers to instances when our firm may become too large for a supplier's business, either through capacity or corporate revenue Legal Legal means risks associated with the substantive legal status of the material, product, or service, such as import/export restrictions and tax issues Environmental, health and safety Environmental, health and safety risk is associated with issues such as the handling and use of hazardous materials and compliance with EPA, OSHA, and other governmental agency policies by suppliers as well as this firm

research in supply risk management has focused on inventory levels and using multiple suppliers, with limited effort on studying methods that specifically reduce uncertainty. Supply risk assessment Yates and Stone (1992b) noted that a general process for risk assessment can involve establishing loss potential, identifying potential losses, understanding the likelihood of potential losses, assigning significance of losses, and appraising overall risk. An overall risk assessment, along with other considerations, dictates the risk taker's behavior. Perceived risk can be extended beyond the individual to effect organization actions. Engineered groups, such as the Delphi

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Purchasing organization involvement in risk assessments

George A. Zsidisin, Alex Panelli and Rebecca Upton

Supply Chain Management: An International Journal Volume 5 . Number 4 . 2000 . 187197

method and Nominal Group Technique (NGT), attempt to structure group interaction so that a consensus is reached without undesirable by-products. Groups provide a means of assessing supply risk, and may lead to decisions that best manage that risk. Therefore, it is possible to identify supply risk factors. Supply risk management Understanding supply risks through assessments can permit purchasing organizations to take actions in response to that risk. Activities that manage supply risk may be segregated into process improvement and buffer strategies. Process improvement strategies focus on reducing the chance that manifested risk occurs. Activities such as forming strategic alliances (Smeltzer and Siferd, 1998) and developing suppliers (Krause, 1999) increase the level of communication between the purchasing organization and select suppliers. Increased information flows and joint efforts to achieve similar goals allow two distinct organizations to enjoy improved business relations. One result of these endeavors may be the reduction of risks in transactions from improved supply processes. Even though supply risks can be reduced from improved processes, risk cannot be completely eliminated. Business environments inherently have some degree of risk. Events can occur that are beyond the control of buying and supplying firms, such as economic downturns and accidents. Even though the uncertainty can be reduced, organizations still need to take actions against unforeseen events (Fisher, 1997; Yates and Stone, 1992a). Inventories and alternative sources of supply, for example, need to exist for most purchasing organizations to shield themselves from risk. Therefore, management techniques appropriate to reduce and guard against risk include process improvement and buffer strategies.

has previously been unexplored (Ellram, 1996). Techniques such as examining documentation and conducting interviews with purchasing professionals provide insights into the ways in which these firms assess supply risk, create contingency plans, and subsequently manage supply risk were utilized. Participants were selected from a purposive, convenience sample of manufacturing firms[1]. As suggested by Eisenhardt (1989) and Miles and Huberman (1984), firms that represent exemplar instances of either significant awareness of supply risks, or those with minimal involvement, were targeted for the study in order to better illustrate supply risk, its assessment, and management. Semistructured, open-ended interviews were employed to gain an understanding of how purchasing organizations conduct supply risk assessments and incorporate contingency plans. During the interviews, most respondents also indicated what actions their organizations engage to manage supply risk. All of the people interviewed serve in managerial positions in the purchasing area of their respective organizations. The interviews focused on understanding purchasing organizations' methods for risk assessment, and any subsequent contingency planning or actions that may be implemented in response to that risk. Construct validity is addressed by having external reviewers verify that the analysis was consistent with the case study method (Yin, 1994). A categorization of these interviews is found in Table II.

Synopsis of findings
Company A Company A performs risk assessments on outsourced products that are identified as critical to profitability. Risk assessments are also performed on certain items that are purchased in abnormally large quantities or that require a significant cash outlay. Risk assessments are qualitative in nature and are performed on an informal basis by the commodity manager or sourcing team. If Request For Quotes (RFQs) from potential suppliers for a critical item are being sought, the sourcing manager may choose to include risk assessments for ensuring supply as a weighted variable in the criteria selection.

Research methodology
Semi-structured interviews were conducted with purchasing professionals in nine manufacturing plants. Qualitative research methods, such as conducting in-depth interviews, are an appropriate research technique for building theory in an area which

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Table II Summary of findings C Communication wire and cable Small x Qualitative (A,B,C Method) Qualitative by supplier, technology, functional risk factors Methods used vary from supplier to supplier Very detailed and specific; carried out by commodity teams On-going process at a strategic level by commodity managers x ``risk dilution'' x formal, written plan is in process Medium Large x Small x Informal, done at the buyer's discretion and varies from buyer to buyer Multiple sources for strategic items Control products Control products Computer hardware Semiconductor equipment D, Division 1 E F G H Communications D, Division 2

Company

Industry

Semiconductor

Aerospace

Medium x

Large x

Computer hardware, software, and services Large x

Small x Qualitative (A,B,C Method)

Purchasing organization involvement in risk assessments

George A. Zsidisin, Alex Panelli and Rebecca Upton

Relative sizea Performs risk assessment Risk assessment method used

Qualitative

Qualitative and quantitative using formal models

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x

Methods used to mitigate risk on strategic parts

Multiple sources/ work with suppliers

Work with suppliers to find ways to mitigate risk

Multiple sources for strategic items

Medium Not performed consistently Various qualitative and judgmental methods at discretion of buyer Multiple sources for strategic items Pass this responsibility down to suppliers Extremely formalized; company would not divulge more information than this Diffuse technological risk, use common platforms

Performed by supplier commodity teams

Supply Chain Management: An International Journal Volume 5 . Number 4 . 2000 . 187197

Uses risk assessments to form formal contingency plan Informal contingency plan Future plans for a formal contingency plan

Contingency plans are implemented by a cross-functional team

Alliance relationships Safety stock Well stocked pipeline

Notes: a Size is based upon reported company revenue for 1997: small < $1 billion; medium = $1billion to $10 billion; large > $10 billion

Purchasing organization involvement in risk assessments

George A. Zsidisin, Alex Panelli and Rebecca Upton

Supply Chain Management: An International Journal Volume 5 . Number 4 . 2000 . 187197

One category of risk that is assessed is natural disasters that can interrupt supply. For example, a supplier in Japan would need a disaster recovery plan that effectively dealt with the possibility of an earthquake severely damaging its manufacturing facilities. Business risk is another category that is evaluated in the risk assessment process. This takes into consideration the financial stability of a potential supplier. A third category of risk is the possibility of losing a supplier's operating capacity to a competing firm. When evaluating a potential supplier, Company A finds out who its customers are and what percentage of the supplier's business each customer accounts for. If, for example, it is discovered that 75 per cent of one supplier's capacity is filling another firm's orders, this supplier would be considered risky in terms of providing a reliable source of supply. If another customer demanded more product from the supplier in the future, Company A may find itself without an adequate source of goods. Risk mitigation plans are created that attempt to deal with any supply risk identified independently for a critical component. The plans are detailed and specific in nature, and they identify a secondary source of supply if something happens to their main source. For example, one risk mitigation plan created for a French supplier required a local back-up supply of goods to offset the risk of being shut down due to a supply interruption. One year later the product was spoiled at the French factory due to an infestation of fruit flies. Company A was able to serve its fabrication plants from the back-up inventory created as a result of the risk mitigation plan, thereby avoiding a shut down in production. Company B Company B has a manager of supplier development and product transition whose main responsibilities involve the identification of suppliers at risk and subsequent implementation of action plans to mitigate that risk. The analysis is done for all key suppliers through the use of a model that attempts to demonstrate supplier capacity performance for a specific product family. The main goal of the analysis is to understand potential performance and to predict how future demand will effect that performance. The only category analyzed by the manager interviewed is capacity. Financial, quality,

and process risks are studied by other functional areas. However, it was not discussed how they were coordinated. The assessment is quantitative in nature. There are field managers who visit the suppliers and they use more qualitative measures such as product flow, backlog, and the effect the supplier's other customers have on Company B. A common theme stressed by Company B is that it is still learning about and improving upon risk assessments and contingency plans. The firm does not want suppliers to feel threatened to divulge confidential data, but it also needs to get an accurate picture of the internal situation of its suppliers. Therefore, obtaining knowledge to mitigate supply risk, and requesting sensitive supplier information, must be carefully balanced. Risk assessments are not part of official supplier evaluations, which are done by procurement managers. Based upon the results of risk assessments, contingency plans are created when needed and are shared with the suppliers. A crossfunctional team consisting of field managers is used to ensure these plans are implemented. However, the purchasing manager interviewed believed that these teams could be more proactive in their identification of potential risk areas. Company C Company C performs informal contingency risk planning through products, but does not have a formal rating system. Supplier product ratings are conducted using the ABC system, with ``A'' products being considered critical. The company has approximately 1,200 suppliers, 50 of which supply ``A'' products. Contingency plans are performed for only these 50 strategic suppliers. ``B'' products are considered ``somewhat important'', such that if they are not received, the result will not be a loss of operations. ``C'' products are not considered to be critical. Company C has numerous single-source suppliers and has developed contingency plans in case these suppliers are unable to deliver materials. The first step consists of setting up contracts with back-up suppliers in case problems arise with single-source suppliers. If the primary supplier is unable to deliver the necessary materials, then the backup suppliers are utilized. Company C has had to use this option in the past. When contingency suppliers have been utilized, total

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Purchasing organization involvement in risk assessments

George A. Zsidisin, Alex Panelli and Rebecca Upton

Supply Chain Management: An International Journal Volume 5 . Number 4 . 2000 . 187197

product costs rose substantially. The firm currently has only one single-source supplier without a back-up supplier. However, this risk has been identified and, at the time of the interview, another supplier was being developed to produce the necessary product and act as a back-up supplier. In summary, Company C's risk planning involves establishing partnerships with strong suppliers of products that are critical to Company C, and then establishing back-up suppliers for them. Strong suppliers are defined as suppliers who produce quality products and are financially sound. There is no formal qualification process of primary or back-up suppliers. Company D Two separate divisions for Company D were interviewed (D1 and D2). The first division interviewed does not perform formal risk assessments of its suppliers or for sourced products. However, the company attempts to have at least two sources for its strategic products. If two existing suppliers cannot be found for critical products, alternative suppliers who are interested in developing those capabilities are sought and assisted. Commodity managers are responsible for finding or developing multiple sources for any ``strategic'' product. Since few of these managers have the time to develop multiple sources due to day-to-day activities, formal risk assessments and contingency planning have become a low priority. Any type of risk assessment done is qualitative and judgmental. Company D1 has more of a ``shoot from the hip'' strategy when it comes to contingency plans. Company D1 claims to have not had to shut down production due to a lack of material from suppliers. There have been times, though, where one strategic item has been in short supply and nearly ``shut down the line.'' Due to the high quality and technology involved in producing the item, no other companies have been found that have the capabilities of producing this item. Company D1 is now looking to help one of its existing suppliers develop the capability to manufacture this product. Company D1 has no formal contingency plans. The purchasing group finds a second supplier, regardless of cost. The belief is that cost is no object if they truly need the product.

The other division of Company D does not engage in formal risk assessments for the components it outsources. The division relies on its current supply base to identify alternative supply sources if a supply interruption occurs. Many of the division's suppliers will make their own contingency plans and share them to assure that there will be no interruption in the flow of outsourced components. Many suppliers will identify outsourcing alternatives that they can turn to in the event of an emergency, thus ensuring that Company D2 would not have to shut down production for a significant period of time. However, suppliers are not required to create contingency plans. Instead, it is an issue brought up by the company only when it feels there is a need to identify alternative sources of supply. Company E Risk assessments at Company E are considered as a high-level, strategic activity within the organization. The company has a department that specifically deals with the risks associated with outsourcing that focuses more on risk mitigation than contingency planning. Diffusing technological risk is Company E's first risk mitigation objective. One common way risk reduction is accomplished is through the establishment of industry standards early in new product development. Industry standards relieve Company E from having to rely on proprietary designs from its suppliers. Another method that is used to reduce outsourcing risk is to rely on common platforms for multiple products. The goal is to base assemblies on common ``building blocks'' that are simple, flexible, and easily available. Finally, Company E demands direct access to the ``brainware'' of its suppliers, those people in the suppliers' organizations that have a deep understanding and technical knowledge of the product design. The second objective sought is to share financial risk with suppliers in new product development. This is done for two reasons. First, Company E attempts to minimize its financial exposure to projects that may fail. Second, financial risk in new product development ensures a commitment by both customer and supplier. Risk assessment is an on-going process done at a strategic level by commodity

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George A. Zsidisin, Alex Panelli and Rebecca Upton

Supply Chain Management: An International Journal Volume 5 . Number 4 . 2000 . 187197

managers. The commodity managers set up specific supply plans, prepare for ``what if'' scenarios, award business to the suppliers, and manage relationships with suppliers. Commodity managers assess strategic-level risk, such as market and economic risk, into consideration when they award business and set up annual commodity plans. Company E has tactical buyers located at plant sites. The buyers deal with tactical risk issues such as day to day fluctuations and supply line slow downs. In the event that a detrimental event occurs, buyers are tasked with locating the required item at another company location or directly contacting the supplier. If problems persist with the supplier, buyers would then request that commodity managers intervene and bring the issue to a higher level within the supplier's organization. Company F One division for Company F performs risk assessment plans for its outsourced components that come from sole-sourced suppliers. Components that currently have multiple sources are not formally evaluated for supply risk issues. The risk assessments performed are qualitative in nature. The division has not created any quantitative rating systems that represent the severity of the supply risk for a particular commodity. The process of assessing risk, however, is a formal procedure conducted by each respective commodity team. The format of the assessment is consistent for all items and follows a routine procedure. Company F has three categories of risk that are analyzed: (1) technology risk; (2) supplier risk; and (3) functional risk. Technology risk considers the overall availability of the technology in the supply base, while supplier risk assesses the stability of the current supplier. Functional risk evaluates how long the part will serve its function for the company's products. There is no formal ranking or weighting of these three risk categories. Contingency plans are created to mitigate the risks identified by the commodity teams. Contingency plans are detailed and specific in nature, with the goal of making them clear and specific to the extent that someone not

familiar with the commodity would be able to pull it out of the file and enact it if an emergency situation arose. These plans are reviewed and updated annually by the commodity teams to ensure that the plan is current and relevant. Contingency plans are not shared with suppliers. Company G One of Company G's groups is a relatively new participant in the fast-paced semiconductor equipment industry. Over the past three years the company has enjoyed an extraordinary 55 per cent increase in consolidated net sales. Company G believes that its ability to achieve this degree of success is directly attributable to its strategy to outsource the production of every part in its final assemblies. In fact, the company has actually gone to a second level of outsourcing where it now contracts with companies which do nothing else except receive parts from suppliers, build modular subassemblies, and ship these subassemblies to its final assembly floor. Risk assessment in the procurement function is done informally. The 100 per cent outsourcing strategy has focused the company on what it believes is its core competency: new product development (in terms of both speed to market and quality of product). Its core competency has made them essentially a technology centre that drives the design of all parts in its assemblies. This strategy has virtually eliminated reliance on supplier proprietary designs. The risk assessment process varies from buyer to buyer, with no formal direction from management. Risk assessment has been essentially relegated to a peripheral, non-strategic operation conducted at the buyer's discretion. Risk assessments are not quantitative in nature, except for the use of supplier on-time delivery and defect rate numbers as a general indicator of risk. The corresponding importance of the part supplied in the final assembly is not quantified, making any risk assessment more of a qualitative, ``gut feel'' type of analysis. Company G's contingency planning process ensures a relationship is maintained with at least one other supply source that has the ability and capacity to fabricate the same item, even though the company does singlesource some parts. The company does not single-source any of its subassemblies, but instead, maintains a dual source strategy. By

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Purchasing organization involvement in risk assessments

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Supply Chain Management: An International Journal Volume 5 . Number 4 . 2000 . 187197

relying on the dual-sourcing methodology, the company may be sacrificing some economy of scale benefits and may not be acknowledging certain risks that cannot be adequately covered by its strategy. Company H Company H does not have a formal contingency plan in place, but instead performs risk assessments of their top 18 suppliers. The items received from these 18 suppliers are considered ``A'' products (vital strategic), and cover approximately 80 per cent of dollars purchased. Buyers are responsible for keeping abreast of any changes in the supplier's business (financial and operational), know who the supplier's other customers are, and are aware of the performance of second tier suppliers. Inventory counts on vital strategic items are done daily and must be 100 per cent accurate. The buyers need to have a consistent pipeline of these ``A'' parts flowing with a minimum two-week supply in the pipeline. Buyers are required to know how much is in the pipeline at any time. Company H's ``A'' products have a four to six week lead-time. Due to the existing two-week supply in the pipeline, Company H has at least one to two weeks of lead time to find a solution if a problem arises. Company H is not able to have more than one supplier for many of its purchased parts because they are specialized. Therefore, the firm maintains close ties with these top 18 suppliers. When an emergency or risk situation occurs, the suppliers have been known to go to extreme measures to keep supply going. Some suppliers even call their other customers and negotiate excess parts from them to send to Company H. In sum, Company H's risk contingency plan is to ensure they have at least a one to two week supply available at all times in the supply pipeline and to maintain close relationships with suppliers.

attained, some companies help existing suppliers develop the needed competency. While many companies engage in some type of risk assessment, the approaches vary. Management techniques in response to assessed risks were also uncovered in the interviews. Specifically, the various process improvement activities found in this study to reduce supply risk are: . forming alliance relationships (working with suppliers on mitigating risk); . having suppliers responsible to develop risk mitigation plans; . maintaining common platforms for products; . direct access to ``brainware'' of suppliers; . establishing industry standards. Buffer activities that purchasing organizations use to circumvent supply risk are: . developing multiple sources for strategic items; . holding safety stock; . a well-stocked supply pipeline. A general theme common in the interviews is that risk assessments, contingency plans, and supply risk management techniques are generally acknowledged by the purchasing professionals interviewed as important functions. However, most of those interviewed stated that they did not do enough to mitigate supply-related risks. Seven of the nine companies in this study consistently perform risk assessments, with most of them being qualitative in nature. Supply risk assessments are conducted by teams as well as individual buyers. The rigor of these assessments also ranges from formal models to that of ad hoc, unstandardized methods. Of the purchasing professionals interviewed, only three (Companies B, E, and F) have a formal contingency planning process. Company F was the only firm that strives to make the plans specific and clear to the extent that someone not familiar with the commodity can react to an emergency situation. Even though the chance exists of an undesirable event occurring that would halt operations, the time and resources necessary for purchasing to plan ahead was not perceived as being important for several of the firms. Only three of these companies have informal contingency plans, and only one plans to eventually have a formal, written plan in place. These interviews reveal a puzzling dichotomy. Most of these purchasing

Discussion of findings
Seven of the nine companies examined in this research perform some type of risk assessment. The assessments range from formal quantitative models to informal plans. The most common method employed is multiple sources for strategic parts. In situations where multiple sources cannot be

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Supply Chain Management: An International Journal Volume 5 . Number 4 . 2000 . 187197

professionals reported that their organizations wanted greater involvement in risk assessment, contingency plans, and supply risk management. However, many of them invest little time or resources pursuing these activities. At this point, we can only speculate the reasons why this conundrum exists. Reasons for limited activity may be due to the return on investment, lack of knowledge in these activities, and experience. If a risk never materializes, it becomes very difficult to justify the time spent on risk assessments, contingency plans, and risk management. The probabilities of many of these events occurring can be difficult, if not impossible, to derive with any precision (Yates and Stone, 1992a). Therefore, the cost/benefit analysis derived can have significant flaws, and traditional return on investment calculations may not justify involvement in dedicating resources that lower the chance of supply failure. However, in conducting this type of analysis, the measures must incorporate a ``total cost'' outlook for supply risk and performance (Ellram and Siferd, 1998). The total cost of an undesirable event occurring needs to be evaluated in comparison to the benefits that are realized from having strategies in place that significantly reduce the chance and/or effects of detrimental events with supply. Another reason for this dichotomy can stem from purchasing management's familiarity with addressing supply risk. Purchasing professionals may be more willing to work on activities that they have greater familiarity with, and are not as comfortable in spending time on evaluating ``worst-case scenarios.'' Risk assessments and contingency plans for purchasing are rarely discussed in detail in business courses. If this topic is not covered at universities, in corporate training, or elsewhere, then most managers will not be familiar with how supply risk can subsequently be managed. Top-level management must serve as the catalyst for initiating supply risk management, and have employees trained to implement these activities. Otherwise, supply risk assessments, contingency plans, and management would fall into the category of ``nice things to do'', and never garner purchasing's attention until it is too late. Purchasing organizations that have had a significant supply risk become a reality may be more likely to have greater involvement in

conducting risk assessments and contingency planning than firms that have not experienced such problems. Manifested risk can have a lasting effect on an organization's awareness in evaluating supplier risk. Unfortunately, some firms do not have the chance to learn from their first experience if that event is catastrophic.

Conclusion
Risk assessments, contingency plans, process improvements and buffer strategies are executed to reduce uncertainties and avoid supply risks. With the increased awareness of purchasing as a value-added function and the widespread implementation of processes such as just-in-time production, firms are more frequently forming single sourcing alliances with suppliers with the hopes of reducing costs and enhancing profitability. However, with such sourcing strategies, companies are exposing themselves to increased levels of risk. For example, if a single supplier is unable to deliver the required materials, the buying company is left without the material needed to produce its product or create the service. Because of the imminent threat supply risks may entail, some companies are realizing the importance of assessing risks, contingency planning, and managing supply risk. Even though companies are becoming increasingly aware of risks associated with supply, many do not take the required actions to mitigate it. For those companies that do attempt to mitigate risk, many use buffer strategies that are generally more expensive to maintain and usually do not reduce the chance of detrimental events from occurring in the supply base. The analysis conducted in this paper suggests that firms implementing supply management efforts, such as single sourcing and just-in-time deliveries for production, should be aware that the potential benefits may also heighten their exposure to risk. Companies need to be aware of this risk and manage it accordingly through specific management techniques. Process improvement activities such as forming alliance relationships and quality audits recognize and attempt to prevent or minimize the chance of poor supplier performance occurring. Buffer activities do not directly reduce the chance of undesirable incidents with suppliers from occurring, but can ``buy

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Purchasing organization involvement in risk assessments

George A. Zsidisin, Alex Panelli and Rebecca Upton

Supply Chain Management: An International Journal Volume 5 . Number 4 . 2000 . 187197

time'' for the purchasing firm to come up with a solution to their incoming supply problem.

Note
1 Given the commercial sensitivity of the information collected, the names of the participating firms must remain confidential to the authors.

References
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