Interim Report INVESTIGATING THE RELATIONSHIP BETWEEN RISK MANAGEMENT IN LOGISTICS AND FIRM COMPETITIVENESS USING SIMULATION Final Year Project
By:-
Engineering and Applied Science School
Report Produced For: 9th December 2016
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TABLE OF CONTENTS 1.0 Introduction....................................................................................................................4 1.1 Aims and Objectives..................................................................................................6 2.0 Progress to date..............................................................................................................7 3.0 Summary of Literature Review.....................................................................................7 4.0 Future plans...................................................................................................................8 REFERENCE LIST.............................................................................................................9 APPENDIX A: Gantt Chart...............................................................................................12 APPENDIX B: LITERATURE REVIEW & ASSOCIATED REFERENCES..................14 1.0 summary......................................................................................................................14 2.1 Definition of terms...................................................................................................15 2.1.1 Risk management..............................................................................................15 2.1.2 Logistics............................................................................................................15 2.2 Types of Risks in Business......................................................................................16 2.2.1 Operational risks...............................................................................................16 2.2.2 Compliance risks..............................................................................................16 2.2.3 Strategic risks....................................................................................................17 2.2.4 Reputational risks.............................................................................................17 2.3 Strategies involved in risk management..................................................................18 2.3.1 Risk avoidance..................................................................................................18
3 2.3.2 Reduction of risk...............................................................................................18 2.3 3 Transfer or share the risk..................................................................................19 2.4 Impact of logistics risk management on competitiveness.......................................19 References..........................................................................................................................21
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1.0 Introduction One of the greatest reasons organizations need to manage logistics is the configuration of the distribution network whereby by the number and location of various suppliers is monitored and maintained effectively. This is important to minimize risks related to logistics and logistics. Furthermore, the configuration manages the distribution centres, warehouses, and customers. Apart from configuration, Logistics Management (LM) plays a key role in conveying a distribution strategy. In this case, LM ensures that there is a working strategy on whether to use decentralized or centralized distribution system or whether to have direct shipment of goods in addition to assessing the applicability of cross docking and the push or pull strategies. In addition to managing distribution by organizations, logistics management, through the coordination of LM and other aspects of the logistic management (SCM), is important to ensure integration of technology system for instance building processes and systems - that ensure sharing of valuable information. This shared information may include forecasts, demand and supply signals and the transportation and inventory cycles. Without a functional logistics management strategy, companies are less likely to gain competitive advantage. For instance, logistics management includes the general scope of logistic, distribution, warehousing and information; an integration of different companies specializing in the manufacture or sale of different types of products (Myerson, 2012) logistic and logistics may be used interchangeably but in essence, logistics refer to the internal supply arrangements of an individual company while logistics is generally external. Rushton, Croucher, and Baker (2014) contend that logistic management when well managed should be able to support and coordinate all the activities that see the movement and storage of unprocessed goods (raw materials), inventory of the work in progress activities and movement and storage of processed goods from manufacturers to consumers. Thus, logistic management involves warehousing (storage) and transportation (movement) logistics (Connelly, Ketchen, and Hult, 2013). This study, in attempt to understand logistics management, borrows more from military science philosophy where the term is associated with the practice of planning and
5 coordinating various
activities
of the logistic including movement, housing
(warehousing) and supplying (Rodrigue, Slack and Comtois, 2013). From this perspective, logistics has also been used to mean the coordination of processes involved in transporting goods from the points of origin (manufacture) to consumers (Lun, Lai, Wong and Cheng, 2014). It is therefore a broad activity involving the procurement, supply, distribution, and maintenance of goods as they await delivery to the final consumers (Rushton, 2010). An easier interpretation is derived from Tee, Chew and Demidenko (2011), who argues that logistics is all that is done to manage the flow of goods between the origin point and the consumption point so that that the goods can meet the needs and requirements of customers or corporates. In this study, logistics is a part of the logistic process that is mainly mandated to manage the flow funds, goods, and information between suppliers, intermediaries such as shippers and final consumers. This study is conducted to investigate the relationship between risk management strategies in logistics and logistics, and the performance of a firm in terms of competitiveness. A case study of John Lewis is used to conceptualize logistics/logistic risks and firm’s competitiveness. John Lewis is a type of chain store that operates in Great Britain owned by John Lewis and other partners. It was first established in 1864 in London, Oxford Street. Since 1925, the chain has been operating on its policy of Never Knowingly undersold. Currently, the chain store operates about 43 stores based in Wales, England and Scotland and additional 10 stores are operated locally. The largest store in the chain is that in Cardiff and is operated through partnership in the outskirts of London. The chain store performs significantly well and has attracted attention from English authorities. For instance, in 2008, the store at the oxford street won a Royal award from the queen titled ‘suppliers of haberdashery and house hold goods. Similar awards were won in 2007 as suppliers of household fancy goods. As at the start 2013, John Lewis’ had revenues totalling to £4.060 billion with an operating income of £226 million (John Lewis Partnership, 2012). Being a big company, John Lewis in 2013 had 38,100 employees. A number of renovations have been executed to these stores since 2001 when the new brand name came into effect. Though costly, the renovations have been of competitive
6 advantage. In 2004, the Peter Jones store was renovated at a cost of £107 million while in 2007; the chain at Oxford Street, the largest in the chain was refurbished at a cost of £60 million. The refurbished premises joking referred to as the place to eat was a world class restaurant, bistro and brassiere store. In the design and print software, John Lewis partners with Adobe incorporated company to supply the software to more than 37 countries in the world (John Lewis Partnership, 2012). Away from the case study review, risk management in logistics refers to methods and strategies that firms use in order to identify and eliminate risks before they occur within logistic networks (Lee, 2008). Companies need to establish a methodology in which they can identify and mitigate risks before they occur to maintain their competitive stature. In logistic, risk management should look for strategies to be implemented to manage their daily and exceptional risks. To ensure this occurs, Jüttner, Peck and Christopher (2003) argue that firms perform continuous assessment of risks within the logistic to reduce vulnerability and improve continuity of the system. Wieland (2011) also argues that the objective of logistic risk-management is to make sure that any risks existing in the complex vibrant supply and demand networks are effectively managed. According to Jüttner (2005), risk management in logistics needs a holistic approach involving key stakeholders to identify and analyse any risk that would lead to failure within the chain. In order to handle the risks properly, logistic risk management involves the finance, logistics, and the actual risk management departments with an ultimate goal that would see continuity in every scenario that would interrupt normal business and profitability. The focus of this study is to establish unique risks in logistic networks and discover strategies used to manage them. Besides, the focus is to find out how such management helps the competitiveness of a firm in the business environment specifically using John Lewis case study.
1.1 Aims and Objectives The main aim of this paper is to investigate the relationship between risk management strategies in logistics and firm competitiveness. The specific objectives are indicated below:
7 i. ii.
To find out the types of logistical risks faced by the retail industry in the UK To investigate the logistical risk management approaches by the UK retail
iii.
industry To assess the contribution of logistical risks towards the financial performance of
iv.
the UK retail industry To determine the relationship between risk management approaches and firm
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competitiveness in the retail sector Simulate a logistic and determine in frequency of failure
2.0 Progress to date This study, to investigate the relationship between risk management approaches in logistics and firm competitiveness is based on a positivist paradigm. So far ďźŒ simulate using SimEvents to create a complete logistics process simulation model for John Lewis which is a case study in retail sector in the UK. Data will be collected from official data the to calculate the quantitive time in the whole logistics process. In the simulate process to figure out logistical risk exposure, impact and mitigation approaches.
3.0 Summary of Literature Review A number of scholarly work has been conducted as pertains the impact of logistics risk management on competitiveness. For instance, studies establish that one of the risks in logistics management is failure by the suppliers to deliver goods on the right time. Business firms require inputs in order to be able to run their operations and meet tight deadlines that are set by the clients. Time is of essence especially if has a large customer base to avoid inconveniencing customers (Porteous & Pradip, 2005). For instance, in a manufacturing setup, if a company fails to supply the materials in the right time, there are chances that the manufacturing process will be delayed too and since the operations are interconnected from the logistic to the distribution chain, the goods will delay in reaching the customers. In the event that the customers are not able to get the products in the right time when they need them, they are likely to shift to competitor products and this leads to the company losing revenue hence it is necessary that the risk are well managed to ensure the customers get the required satisfaction (Dorfman, 2007). For instance, the company can manage the risk of late supply by contracting alternative suppliers on temporary basis
8 to ensure customers are not inconvenienced through unnecessary delays. This influences the firm’s competitiveness, as customers are able to get the goods when and where they need them. Another risk that is associated with logistic management pertains to shortage of supply especially when the company expands its scale of operation or when it opens up new branches, which need suppling (Flyvbjerg & Budzier, 2011). Expansion is usually motivated by the availability of larger market or higher demand hence to meet the additional demand, the firm has to scale up its operations. For instance, in a supermarket setup, a supermarket chain decides to open up a new branch; it must be accompanied by increase in volume of supplies to serve the new branch. However, it is not in all cases that the supply will be sufficient, as the supplier will also need time to adjust to meet the new demand as intimated by Hillson (2007). If the supplier was used to supplying 100 tonnes of maize floor, adjusting the volume to 150 tonnes will also imply it expands the factory as well and machines and this requires time for adjustment and increased investment. For the firm to meet the additional demand in the short-term, it may have to hire additional suppliers in order to avoid any shortages causing customer dissatisfaction hence enabling it to remain competitive.
4.0 Future plans In the future, the plan is to organize for finishing up data collection so that data analysis will be followed through the use of simulation method that shall be employed to different random events to evaluate frequency distribution of failure. Once data will be collected, it will be cleaned, sorted and categorized so that interpretation through simulation can follow and later develop a final report research.
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REFERENCE LIST Connelly, B. L., Ketchen, D. J., & Hult, G. T. M. (2013). Global Logistic Management: Toward a Theoretically Driven Research Agenda. Global Strategy Journal, 3(3), 227243. Croom, S., Romano, P., & Giannakis, M. (2000). Logistic management: an analytical framework for critical literature review. European journal of purchasing & supply management, 6(1), 67-83. JĂźttner, U. (2005). Logistic risk management: understanding the business requirements from a practitioner perspective. International Journal of Logistics Management, The, 16(1), 120-141. JĂźttner, U., Peck, H., & Christopher, M. (2003). Logistic risk management: outlining an agenda for future research. International Journal of Logistics: Research and Applications, 6(4), 197-210. Lee, T. Y. S. (2008). Logistic risk management. International Journal of Information and Decision Sciences, 1(1), 98-114. Lun, Y.H., Lai, K.H., Wong, C.W., & Cheng, T.C. (2014). Green shipping practices and firm performance. Maritime Policy & Management, 41(2), 134-148 Myerson, P. (2012). Lean logistic and logistics management (p. 270). McGraw-Hill. Rodrigue, J-P. Slack, B., & Comtois, C., (2001). Green logistics (the paradoxes of). In A. M. Brewer, K. J. Button and D. A. Hensher (Eds.), The handbook of logistics and supply-chain management. Rushton, A. (Ed.). (2010).The handbook of logistics and distribution management. Kogan Page Publishers. Rushton, A., Croucher, P., & Baker, P. (2014). The Handbook of Logistics and Distribution Management: Understanding the Logistic. Kogan Page Publishers. Tee, K. X., Chew, M. T., & Demidenko, S. (2011). An Intelligent Warehouse Stock Management and Tracking System Based on Silicon Identification Technology and 1Wire Network Communication. In Electronic Design, Test and Application (DELTA), 2011 Sixth IEEE International Symposium on (pp. 110-115). IEEE. Wieland, A., Wallenburg, C.M., 2012. Dealing with logistic risks: Linking risk management practices and strategies to performance. International Journal of Physical Distribution & Logistics Management, 42(10). Chan, F. T., & Chan, H. K. (2011). Improving the productivity of order picking of a manual-pick and multi-level rack distribution warehouse through the implementation of class-based storage. Expert Systems with Applications, 38(3), 2686-2700. Chung, S. H., Tang, H. L., & Ahmad, I. (2011). Modularity, Integration and IT Personnel Skills Factors in Linking ERP to SCM Systems. Journal of technology management & innovation, 6(1), 1-3. Cottrill K (2004), Moving the World. Traffic World, Jan 26th 2004, p.1. Fritz Institute (2005), Logistics and the effective delivery of humanitarian relief. Fritz Institute, San Francisco, 12pp.
10 Gunasekaran A, Ngai EWT (2003). The successful management of a small logistics company. Jacoby, D. (2009). Guide to Logistic Management: How Getting it Right Boosts Corporate Performance. The Economist Books (1st Ed.). Bloomberg Press. Jedermann, R., Behrens, C., Westphal, D., & Lang, W. (2006). Applying autonomous sensor systems in logistics—Combining sensor networks, RFIDs and software agents. Sensors and Actuators A: Physical, 132(1), 370-375. Jörg, T., & Dessloch, S. (2010). Near real-time data warehousing using state-of-the-art ETL tools. In Enabling Real-Time Business Intelligence (pp. 100-117). Springer Berlin Heidelberg. Ketikidis, P. H., Koh, S. C. L., Dimitriadis, N., Gunasekaran, A., & Kehajova, M. (2008). The use of information systems for logistics and logistic management in South East Europe: current status and future direction. Omega, 36(4), 592-599. Long DC, Wood DF (2005). The Logistics of Famine Relief. Journal of Business Logistics, Vol. 16 (1), pp. 213-239. Lun, Y.H., Lai, K.H., Wong, C.W., & Cheng, T.C. (2014). Green shipping practices and firm performance. Maritime Policy & Management, 41(2), 134-148 Nagurney, A. (2006). Logistic Network Economics: Dynamics of Prices, Flows, and Profits. Cheltenham, UK: Edward Elgar Power DJ, Sohal, AS, Rahman S-U (2001), International Journal of Physical Distribution and Logistics Management, Vol. 31 (4) pp. 247 – 265. Psaraftis, H. N., & Kontovas, C. A. (2009). CO2 emission statistics for the world commercial fleet.WMU Journal of Maritime Affairs, 8, 1– 25 Rushton, A. (Ed.). (2010).The handbook of logistics and distribution management. Kogan Page Publishers. Tee, K. X., Chew, M. T., & Demidenko, S. (2011). An Intelligent Warehouse Stock Management and Tracking System Based on Silicon Identification Technology and 1-Wire Network Communication. In Electronic Design, Test and Application (DELTA), 2011 Sixth IEEE International Symposium on (pp. 110-115). IEEE. Wieland, A. and Wallenburg, C.M. (2011). Supply-Chain-Management in stürmischen Zeiten. Berlin: Universitätsverlag der TU Wu, H., Diamos, G., Wang, J., Cadambi, S., Yalamanchili, S., & Chakradhar, S. (2012). Optimizing data warehousing applications for GPUs using kernel Croom, S., Romano, P., Giannakis, M. (2006). Logistic management: an analytical framework for critical literature review. European Journal of Purchasing and Supply Management, 6(1), pp. 67–83 Dorfman, M.S. (2007). Introduction to Risk Management and Insurance (9th ed.). Englewood Cliffs, N.J: Prentice Hall Douglas, H. (2009). The Failure of Risk Management: Why It's Broken and How to Fix It. London: John Wiley & Sons. Flyvbjerg, B. & Budzier, A. (2011). Why Your IT Project May Be Riskier Than You Think. Harvard Business Review, 89 (9), pp. 601–603. Flyvbjerg, B. (2003). Megaprojects and Risk: An Anatomy of Ambition. Cambridge: Cambridge University Press Heldman, K. (2005). Project Manager's Spotlight on Risk Management. New York: Jossey-Bass
11 Hillson D. (2007). Practical Project Risk Management: The Atom Methodology. London: Management Concepts Moberg, C.R., Cutler, B.D., Gross, A. & Speh T. W. (2002). Identifying antecedents of information exchange within logistics. International Journal of Physical Distribution and Logistics Management, 32(9), pp. 755–70 Porteous, B.T., Pradip, T. (2005). Economic Capital and Financial Risk Management for Financial Services Firms and Conglomerates. New York: Palgrave Macmillan Power, D. J., Sohal, A., & Rahman, S.U. (2001). Critical success factors in agile logistic management: an empirical study. International Journal of Physical Distribution and Logistics Management, 31(4), pp. 247–6 Proske, D. (2008). Catalogue of risks – Natural, Technical, Social and Health Risks. London: Springer.
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APPENDIX A: Gantt Chart
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APPENDIX B: LITERATURE REVIEW & ASSOCIATED REFERENCES 1.0 summary Risks in logistics management are mainly failure by the suppliers to deliver goods on the right time. Business firms require inputs in order to be able to run their operations and meet tight deadlines that are set by the clients. Time is of essence especially if has a large customer base to avoid inconveniencing customers (Porteous & Pradip, 2005). The associated reference is Porteous, B.T., Pradip, T. (2005). Economic Capital and Financial Risk Management for Financial Services Firms and Conglomerates. New York: Palgrave Macmillan When customers are not able to get the products within the right time when they need them, they are likely to shift to competitor products and this leads to the company losing revenue (Dorfman, 2007). The associated reference is as below: Dorfman, M.S. (2007). Introduction to Risk Management and Insurance (9thed.). Englewood Cliffs, N.J: Prentice Hall
Expansion is usually motivated by the availability of larger market or higher demand hence to meet the additional demand, the firm has to scale up its operations as well. Shortage of supply when a company expands its scales of operation or when it opens up new branches, pauses a potential risk or reduced supplies (Flyvbjerg & Budzier, 2011, 2003). The assoiaetd references: Flyvbjerg, B. & Budzier, A. (2011). Why Your IT Project May Be Riskier Than You Think. Harvard Business Review, 89 (9), pp. 601–603. The other associated reference is: Flyvbjerg, B. (2003). Megaprojects and Risk: An Anatomy of Ambition. Cambridge: Cambridge University Press Supply is not always sufficient in all cases, as the supplier will also need time to adjust to meet the new demand (Hillson, 2007). The associated references are: Heldman, K. (2005). Project Manager's Spotlight on Risk Management. New York: Jossey-Bass
15 Hillson D. (2007). Practical Project Risk Management: The Atom Methodology. London: Management Concepts SimEvents [3] extends Simulink with a DES model of computation. With SimEvents, activity-based models of systems are developed to evaluate system parameters, such as congestion, resource contention and processing delays. It is possible to configure entities with user-defined attributes and then aggregate entities and attributes to model data hierarchy and transport in applications such as packet-based networks, mission planning, supervisory control, real-time operating systems and computer architecture. ďźˆKhazan & Azgomi, 2009  The associated references are: Khazan, G, & Azgomi, M 2009, 'A distributed attack simulation for quantitative security evaluation using SimEvents', 2009 IEEE/ACS International Conference On Computer Systems & Applications, p. 382,
2.1 Definition of terms 2.1.1 Risk management Risk is defined at the possibility of losing or gaining something that has value as a result of some action or inaction. The risk may be foreseen or unpredictable. It can also be defined as the deliberate interaction with uncertainty (Croom et al., 2006). Risk management on the other hand describes the process of identifying, analysing, and mitigating the uncertainty that taking a risk may entail especially in terms of investment. Risk management decisions are often made anytime an investor intends to analyze or quantify the potential for losses that are likely to arise out of investments and then taking the necessary precautionary measures to mitigate the risk’s impact. 2.1.2 Logistics According to Douglas (2009), logistics is defined as the process of planning, executing, and controlling the effective flow of storage goods and services alongside related information from the source to the point of consumption so as to make sure they conform to the main customer requirements and avoid unnecessary delays in the supply of the materials/goods and ensure they are in good condition. Logistics can be inbound or
16 outbound where the inbound logistics and the materials or goods that enter the company while the outbound logistics are goods/services which leave the company.
2.2 Types of Risks in Business 2.2.1 Operational risks Operational risk includes the unanticipated failure that happens in the day-to-day running of operations in a business as a result of commissions or omissions. Hillson (2007) opines that the operational risks may be as a result of technical failure or as a result of actions by the employees or processes. In some instances, a single risk can be motivated by multiple causes. For instance, in a supply management setup, the company can make an error in the volume of goods ordered for (Poske, 2008). For instance, rather than order for 100 tonnes of material, the officer in charge can make an error by adding a zero and make it 1000 tonnes or omit a zero and make it 10 tonnes. This is described as a people failure as it is caused by the officer. Such risks can be prevented or mitigated by having a second officer who verifies such orders before they are sent to the suppliers. 2.2.2 Compliance risks Compliance risks are risks which are related to conformance to the legal and regulatory requirements by the business organization in various operations. While the risk may be associated with not abiding by the existing legal framework, Heldman (2005) posits that another set of compliance risk is associated with possibility of the laws changing in the near future or additional laws being put in place to be complied with. Moreover, businesses may change from time to time in terms of size or line of business and this requires them to abide by additional regulations (Morberg et al., 2002). For instance, for a car dealer who had specialized in the selling and supply of second-hand vehicles in a certain market, the laws might change such that the only second had vehicles that are allowed in the market must be five or ten years old as opposed to over 20 years old. This poses a serious legal risk in the sense that the car dealer will be forced to comply with the new regulation or it risk being fined or banned from operating in the concerned market.
17 2.2.3 Strategic risks Every business organization needs to have a comprehensive plan on how it intends to run its operations in order to remain competitive in the market. Such a plan would entail strategies that the firm hopes would help it outsmart the competitors and offer maximum satisfaction to its customer base (Croom et al., 2006). However, the business environment is never static, it is dynamic and things change from time to time such that the strategies that were applied sometime back may be rendered redundant under the current business setup. For instance, a new powerful brand may enter the market and force the company to improve its strategies so as to be on top of the competition and avoid being overtaken by the new brand. As intimated by Flyvbjerg (2003) this would entail the company spending more on its marketing strategy as compared to before so that it can reach as many customers as possible and it may also find it necessary to reinvent its brand message so as to compete effectively with the new powerful brand. It may also need to invest in R&D activities in order to be able to produce superior goods and services that can withstand stiff competition. 2.2.4 Reputational risks Reputation is very important to any business organization as it enables it to maintain good relationship with its customers and other stakeholders. It also helps the company have a positive perception among the public and this is important in marketing as well (Douglas, 2009). This explains why many companies invest heavily in public relations exercises as a way of maintaining a positive reputation. However, there are instances when the reputation of the company may be damaged either as a result of its own actions or inactions or those of its employees as claimed by Power et al. (2001). For instance, if a company’s products end up causing damages to the customers, it poses a major risk to the sales volume of the concerned firm as customers will shy away from the company and its products while in some cases, the customers may take legal action against the company hence further damaging its reputation. This is what happened to General Motors when the ignition installed on the cars were found to be faulty and the company had to suffer a great deal out of product recalls and court penalties and the firm
18 had to part with significant amount of money and loss of revenue (Flyvbjerg & Budzier, 2011)
2.3 Strategies involved in risk management 2.3.1 Risk avoidance Avoiding the risk is one of the strategies that one can apply to manage a risk. This is preferable especially when the risk is too serious and its impacts would be unbearable. It may involve abandoning the activity in its entirety or seeking alternative approaches that can achieve the same purpose (Dorfman, 2007). For instance, in logistic and procurement, selling supplies to a company that has no credit record or reputation with past suppliers is highly risky especially if it is a new business and in such a case, since the credit worthiness of the firm may not be established, the most effective way of managing the risk would be to avoid supplying goods to the firm. According to Moberg et al. (2002) this approach has a number of advantages in the sense that by avoiding engaging in the activity which might pose the risk, the company also avoids the risks and eliminates chances of incurring losses which could have been prevented. However, since higher risks are usually associated with high returns, the firm is likely to miss out on the potential benefits that it could have gained out of the activity. 2.3.2 Reduction of risk Another approach that can be used in risk management is reduction of the magnitude risk. In this approach, the firm engages in efforts to minimize the negative outcomes that are expected out of the activity or minimize the activity itself. It is touted to be the most commonly used strategy in risk management among business organizations as it is applicable to a wide variety of risks (Poske, 2008). It also allows the firm to take the risk by continuing the activity but at a lesser scale so that should the outcomes be negative, the firm will be able to survive. However, if the mitigation efforts fail to bear fruits, it is likely to result in huge losses as well. For instance, when delivering goods to customers who are fond of late payment of invoices, it is advisable that the firm reduces the volume of goods that it delivers so that the magnitude is minimized.
19 Alternatively, Croom et al. (2006) suggests that the firm can offer incentives to the customer to encourage them to pay in good time such as offering multiple payment modes or offering discounts to make the products more affordable. 2.3 3 Transfer or share the risk In this approach, the business shares the burden of the risks with a third party or the benefits involved. It is the principle under which insurance works. In the business world, most businesses often insure themselves against various risks such that in the event that the risk happens, the burden of the risk will be shared with various parties or transferred to the insurer (Heldman, 2005). However, it must be emphasized that technically speaking, the business that purchases the insurance cover retains the legal responsibility for the risks “transferred� because the insurance cover is a post-event compensation after the risk has been incurred by the business but does not prevent the business from incurring the losses out of the risk. The business often has to pay premium based on which the compensation would be offered. As claimed by Power et al. (2001), it is a type of risk sharing because the firm will bear the risk alongside the insurance company. For instance, if an agricultural-based company insured itself against financial risks that arise out of crop failure, the firm will be able to get income from the insurer to mitigate against the effects of crop failure as crop failure shall have impacted negatively on its scale of production and revenue.
2.4 Impact of logistics risk management on competitiveness One of the risks in logistics management is failure by the suppliers to deliver goods on the right time. Business firms require inputs in order to be able to run their operations and meet tight deadlines that are set by the clients. Time is of essence especially if has a large customer base to avoid inconveniencing customers (Porteous & Pradip, 2005). For instance, in a manufacturing setup, if a company fails to supply the materials in the right time, there are chances that the manufacturing process will be delayed too and since the operations are interconnected from the logistic to the distribution chain, the goods will also delay in reaching the customers. In the event that the customers are not able to get the products in the right time when they need them, they
20 are likely to shift to competitor products and this leads to the company losing revenue hence it is necessary that the risk are well managed to ensure the customers get the required satisfaction (Dorfman, 2007). For instance, the company can manage the risk of late supply by contracting alternative suppliers on temporary basis to ensure customers are not inconvenienced through unnecessary delays. This influences the firm’s competitiveness as customers are able to get the goods when and where they need them. Another risk that is associated with logistic management pertains to shortage of supply especially when the company expands its scale of operation or when it opens up new branches which would need supplies too (Flyvbjerg & Budzier, 2011). Expansion is usually motivated by the availability of larger market or higher demand hence to meet the additional demand, the firm has to scale up its operations as well. For instance, in a supermarket setup, a supermarket chain decides to open up a new branch, it must be accompanied by increase in volume of supplies to serve the new branch. However, it is not in all cases that the supply will be sufficient as the supplier will also need time to adjust to meet the new demand as intimated by Hillson (2007). If the supplier was used to supplying 100 tonnes of maize floor, adjusting the volume to 150 tonnes will also imply it expands the factory as well and machines and this requires time for adjustment and huge investment. For the firm to meet the additional demand in the short-term, it will have to hire additional suppliers as well in order to avoid any shortages that would cause customer dissatisfaction hence enabling it to remain competitive. Added here The financial and economic crisis that erupted in 2007 and 2008, led to a sharp increase in defaults and business failures. All regions of the world and all industries or service activities have been reached. Interconnected companies in a logistic are particularly affected, which absolutely necessary a more developed risk management (Blome and Schoenherr, 2011). All this combined with growing complexity of management of logistics linked to Christopher (2012) for three main reasons: (1) the internationalization of increasingly strong exchanges, (2) a generalization of just-in practices -time, (3) an acceleration of the trend towards outsourcing of certain activities
21 that led to the multiplication of the number of partners to coordinate the logistic. These different reasons explain the sharp rise in risk in logistics (Peck, 2005; Craighead et al, 2007). Management "tightened" the past has therefore emerged as an imperative to develop a competitive advantage, remain profitable (and Talluri Narasimhan, 2009), and minimize the risk of supply disruption (Sarkar and Mohapatra, 2009). Risk management of logistics has therefore challenged to delivery interruptions problems, but also to the defaults, bankruptcies, as recent studies (Hendricks and Singhai, In this article, we propose to take stock of the risk management of a logistic, focusing our attention on the financial problems minimally processed so far in this regard, we will retain a risk classification into two categories: operational risks and financial risks, while recognizing that a more detailed breakdown is possible (see in particular Manuj and Mentzer, 2008; Lavastre et al, 2012). The first part of this work focuses on operational risk, broken down into internal risks (quality defect, delay in delivery, failure of a computer system, etc ...) and external risks to the logistic (natural disasters, restrictions import, strikes, etc.). In a second part,
I The operational risk management at the operational risk management within a logistic has been the subject of abundant literature in recent years, notably described by Tang (2006), Natarajarathinam et al (2009), or more recently by Lavastre et al ( 2012).
I-1 Risk assessment The impact of an incident depends on its nature and vulnerability vis-Ă -vis chain of such events. As say Thun and Hoenig (2011) "... the mitigation and control of vulnerability is the aim of Logistic Risk Management (SCRM) qui is defined as the identification and management of Risks for the logistic through co-ordinated approach Amongst logistic members ... ". In fact, the risk increases from the greater dependence
22 (JĂźttner et al, 2003), and greater integration of the firms in the "logistic". It should in fact it develops a "cross-company approach" in the logistic to estimate the consequences of risks that threaten the whole of the logistic, and to this end,
As regards internal risks (Peck, 2005), we can start by talking about respect alongside "purchase" or "upstream", and can be on quality issues or delivery times of suppliers . Imposed technological developments may also create problems in some suppliers just able to integrate quickly. In terms of downstream or "downstream" activities, carried out demand forecasts may have been inaccurate or incorrect and produce at the distribution bottlenecks, or cause too high inventories.
In addition, external risks may prevail: include the social, political and economic, not to mention natural disasters, armed conflicts, etc. In fact the logistic has little influence on these risks there. The risks of a domestic nature seem to have a much higher probability of occurring as external risks, which still occur exceptionally. However, external risks can be destructive much more important. These accidents are infrequent, but have a strong impact. This is exactly the opposite for internal risks whose manifestation is more common, but the impact appears to be less important in general, with some exceptions.
Some risk factors are aggravating. Thus, firms must offer an increasing number of products to maintain their competitiveness, forcing them to sell on international markets and not only in local markets. Due to the strong inter-connection of companies and close relationships with several logistic networks, not to mention the existence of a justmatched to demand, that is to say, minimizing inventory, the level of overall risk has increased. Too much efficiency can be obtained without increasing the system risk. So there is a good trade-off.
23
I-2 Risk Management The risk of these management tools are preventive or curative nature. The effect of the first is calculated before the event, the effect of the latter is measured after loss. Preventive actions should reduce the level of risk. We will focus the analysis on three aspects: - First of all, prevention includes the selection of suitable suppliers who becomes harder and more strategic than before (Wu et al, 2010), since it must take into account both their reliability, risk, country of the quality of their subcontractors and their location. We can not just decide on the inclusion of a supplier in the logistic based on the finding of a mere reduction in production costs, it was important to you, because you have to consider other aspects such as, potential fluctuations in exchange rates, customs duties or transport costs that can evolve unfavorably. Choosing a provider is also essential in terms of quality of manufactured products, compliance with safety standards, and its ability to change its production level to suit the application of the prime contractor. Of course, the supplier should be consulted and be involved early in the design and development of new products (Khan et al, 2008), that it is certain that supplies and manufacturing will not cause problems once the new product introduced to the market.
- Then prevention includes proper design of the information system. Regarding fashion products such as life cycle is shorter and more volatile demand levels. We must therefore react very quickly. This is why a system that has no access to information directly from the market, and to which access is not possible for all partners, can generate a "bullwhip effect" (Lee et al, 1997) that is to say a variability in order levels in the logistic. This would result in an unnecessary increase in inventory. The sharing of information in sales is essential. However the transparency provided by the system Information may lose negotiating power to distributors or suppliers. Some may even want
24 to keep them for some information identified as confidential so as to retain some independence.
-Finally, Prevention includes establishing some confidence (and Christopher Lee, 2004) within the logistic that can have the advantage of reducing the costs of control, expanding the space of possible cooperation, and to strengthen the initiative. This collective assets "co-constructed" What confidence can be invaluable in a crisis where the immediate mobilization of energy is needed to lessen the consequences of an unexpected shock. It may even help to lower the risk premium required (relationship with the bank), and thus the cost of capital within the logistic. However it also has drawbacks. It sometimes prevents recruit other providers were better partners by creating barriers to entry. These can moreover impair the effectiveness of the disciplinary pressure imposed by the competition. In addition, trust can help delay some necessary adjustments or promote root growth of some leaders.
Curative instruments are trying, meanwhile, to mitigate the negative consequences of events that have occurred. so you have to improve the flexibility of the logistic by building redundant circuits (Rice and Caniato 2003), or by giving the opportunity to go outside the chain to stock. A computer system backups can also be put in place. All these additional costs are then considered as the insurance premium that is willing to pay the logistic to remain in working order, even if significant problem. But as mentioned Wernerfelt (1984) and Calvi et al (2014), the competitive advantage of a company or a logistics chain is its ability to mobilize specific resources that they are within the organization or outside. Recently Pellegrin-Romeggio and Vega (2014) proposed the concept useful dynamic assembly in a severe accident, as to alert a firm "pivot assembly" on the outside of the logistics network, and able mobilize external resources able to provide a new logistic very quickly. In fact the pivot assembly must develop a dynamic ability to integrate resources, and combining them by enabling collaboration, and finally to disable as needed. So this building temporarily logistics
25 according to specific needs (humanitarian aid), and to move from a model 3C to 4C by adding to the design, Conversely, if highly volatile demand, changes in consumer tastes, or to sudden changes in technology, stocks can become unmarketable. The solutions to buy-back contracts that allow the distributor in the event of poor sales back to give orders a certain percentage p (p <100%) of its returns (quantity ordered minus sales) price b <w (with w the price charged by the producer to the distributor) must then be activated. Originally set up to stimulate rising orders from retailers, the system can allow a pooling of negative effects due to the slump in the chain. Note also that the contracts "Revenue sharing" or some contracts "Vendor Managed Inventory" (VMI) allow to alleviate the negative consequences from poor sales (Tang, 2006). Thus in some cases of VMI is the prime contractor remains owner of the stock stored at the distributor, the latter receiving a fee in case of sale. This is actually the producer who manages the stock distributor, while engaging on a minimum stock level, and thereby obtains information directly from the market, allowing it to reduce the global inventory levels.
I-3 for future research Future lines of research should complement to our knowledge, deal with changing demand as prone to "jump" to better appreciate the breaks trends and their consequences. In addition, the time to return to normal operation after an interruption of the logistic could be used as a performance criterion of a logistic. pricing policies (dynamic) and products (substitution) could also provide a fertile area of research and quite innovative. In fact, these policies can be revised and adapted in case of scarcity, choice of consumers being redirected at least partly by the producers. Finally the innovation in processes and inter organizational practices of risk management is also developing (Lavastre et al, 2014). Some (Lu et al, 2014) wonder also as to what extent it would be possible to outsource all or part of the management of the logistic and its risks to specialized service providers Type 3 PL example ( Third-Party Logistics)
26
II The financial risk management Beyond the short-term management of the risk of commodity prices, interest rates and foreign exchange, which is well controlled at the individual or collective level, it remains to deal with the liquidity risk, failure of a supplier, and as investment partners prime contractor. The diversity of these risks leads us to address not only short-term aspects to which attention has focused in recent years (Hofmann and Kotzab, 2010), but also medium-term aspects. Having thus briefly described the interests of the reverse factoring, we will focus on the dynamics of investment and financing of logistic partners.
II-1 The value of a reverse factoring system: the short to medium term A reverse factoring system involves the use of the same IT platform by suppliers, the prime contractor and the factor or the banking institution referent in the logistics chain. Once the delivery has been completed, the invoice is sent electronically to the prime contractor, who will accept (or reject) documenting the sharable data file, and searchable by all. Once accepted bill, the prime contractor specify whether this bill can be an advance payment by the factor. If this is the case, the supplier has the choice: to be or not prepay. If he decides to take advantage of this last possibility, it must receive a discount for early payment the prime contractor,
The ideal in this scheme is that the order giver has a rating in the financial markets much higher than that of its suppliers, ie a cost much lower capital. The customer must order through his bank or its factor finance cheaper suppliers, keeping him for a positive differential rates, even to reduce its operating costs. Thus, the buyer can you have it developed the following system with its factor, and apply it to all suppliers: A discount for early payment within 10 days of 1.5%, given that the deadline the claim is 60 days, and its nominal â&#x201A;Ź 100. If we further assume that the factor bills its services to the
27 instructing party to Euribor + 1.4%, assume, with commissions and margin of 5% factor, it comes with an assumed cost of 12% of capital provider, the following results. The discount for payment in ten days translated to the prime contractor by gainful employment rate (365/50) x0,015 is 10.95%, but corresponds to the supplier at a lower cost of funding that he is undergoing, or 12%. The supplier receives € 98.5 within ten days due to the factor. Moreover, the prime contractor must pay at maturity of 60 days from the factor of a sum of 100 € more 100x0,05x (50/365), or € 0.685, but less the amount of the € 1.5 discount factor it receives from either € 99.185. It can thus reduce operational costs (€ 100 - € 99.185 = 0.815 €). Moreover, given the benefit to its suppliers, he should be able to negotiate a payment greater against them if the law allows (2011/7 European Directive of 16 February 2011 applicable at the latest in March 2013 within the European Union), the time maximum sixty days now being put in Europe. Thus, by helping to pay upfront supplier by the factor without penalizing its own cash, the instructing party favors injecting liquidity into the system, and avoids bankruptcy filings.
The profit made by the prime contractor may then be used to reduce its operating costs, but these advantageous conditions for the buyer might jeopardize the margin obtained by the supplier and make more difficult the accumulation of resources to even him afford to invest later. So there is a "good compromise" to be found between the short and long term, for the system to function, and it is the responsibility of the prime contractor than to implement, and monitor the operation. The model of Logistic Finance (SCF) can indeed be content to manage the short-term aspects of the logistic. Beyond the risk of default in the short term, vendors should consider aspects of longer term including investing. This is fundamental for the adaptation of the logistic to changing technologies, changes in consumer tastes, increased capacity required to the extent that sales are made on the planet. The chain resilience depends, which involves solving long funding problems.
28 II-2 Towards the creation of an "internal capital market" Although it does not act, strictly speaking, a real internal market of the capital, since all the resources made available by the partners are not pooled to finance the investment, the prime contractor may at facilitate obtaining new medium-term loans to those wishing to invest. Pfohl and Gomm (2009) presented as part of the Logistic Finance a model in which a company could obtain a cooperative funding from another company in the logistic, rather than a bank outside the organization. This may be the prime contractor who then finance some of its suppliers to facilitate relationships within the group of partners. Pfohl and Gomm (2009) believe that CFS system should reduce the cost of capital within the logistic by implementing cooperative funding agreements. Assuming that there is an information asymmetry between the inside and outside of the logistic, a partner gets better conditions internally.
Van der Vliet et al (2013) make the assumption that the objective is the maximization of the share price of the prime contractor, knowing he has a network of suppliers and he faces clients, once the manufactured product. In this context, some investments are proving a mutual interest, and some not. Agency problems may then arise if some partners are making investments that impact on the conduct of operations within the chain but that maximize not the only benefit of the firm that undertakes. Thus under investment issues may arise. For example, when a supplier could possibly create value for the prime contractor by reducing manufacturing time, decreasing the size of the production batches, or improving the services, the profitability of additional investments needed to implement such a solution may be too uncertain or inadequate, given the level of capital costs borne by the firm. Similarly if we consider the minimum safety stock level required by the instructing party in each of its suppliers, this level may be too high and inconsistent with profit maximization in a supplier, the cost of capital would be much higher than that of the buyer. It is then possible that the opportunity to losses incurred by the prime contractor exceeds the costs it would bear in agreeing to finance the additional stock. This type of problem can also s' .
29
In a more formalized, one can reason as follows: suppose a vendor F has an investment project can improve its own productivity and contribute to increased efficiency in the logistic. It can directly contact a financial institution that practices a B loan rate rb after assessing the risk inherent in the project. As long as the expected level of profitability of the project remains rp rb exceeds the cost charged by the financial institution, the project is considered as profitable. However if there is a possible financial cooperation among logistic partners, then it is better that it is the prime contractor which borrows the necessary amount to the reference to a bank rd rate, and that she re-lends to its supplier rdf rates. For the system will maximize the value of the whole, it is necessary that the following inequality prevails: rp> rb> rdf> rd. In this case, the removed efficiency of the operation is equal to rp - rdf, and there are value creation.
Using specific contracts, a prime contractor can then help a provider to undertake investments in the operational area that normally alone, it would not be implemented. The CFS system can therefore authorize the supplier to improve efficiency in the medium term, which puts the prime contractor in a position to increase its own productivity. Of course, this approach there CFS system implies that the instructing party is able to generate sizable sums of money to finance the needs of other participants in the chain. Moreover, medium-term orientation of the strategy means that flaw wait longer to benefit from the return on investment. So, So instead of focusing on the financing of working capital requirements, it opens a perspective of longer term where the top of the balance sheet is requested. A comprehensive system of CFS should include these two approaches that complement tent, and thus should contribute to greater resilience in the logistic.
Supplier diversity leads us to consider that there must be quite different costs of capital between partner firms. A thorough knowledge of its partners to the prime contractor may become necessary before investing, which can be very time consuming
30 and resources. This raises the question of whether the investment aid system must be designed to be the same for everyone or should be adapted to individual needs, as they can be specific. A dialogue must engage with vendors, which in some cases do not wish to deliver confidential information on their financial situation. Some may even spread inaccurate information in order to benefit from these subsidies. However, they will be take priority so other customers (who pay more expensive) service level improvements achieved as a result of the investment made. Certain contractual clauses may limit such opportunism.
Finally, from the perspective of the prime contractor, an arbitration must be made between short and long term. If we choose to invest in partner projects, this can expose the buyer to more uncertainty in its investment returns, despite hoped highest values. Future earnings are then discounted at a higher rate, which reduces their value compared with a more dedicated to short-term strategy, and performance safer as a result.
II-3 Future research directions Van der Vliet et al (2013) found that few contractors apply a long-term strategy, and that the vast majority is implementing a policy of immediate return using mechanisms such as reverse factoring. Indeed, it enables them while reducing their need for working capital, to make some operational gains. For investment strategy, so long term prevail, it seems necessary, as in the case Caterpillar (Aeppel, 2010), a high volatility of demand is observed. significant liquidity problems being occurred thus at suppliers, they had to reduce their production capacity and inventory levels. In this situation, the loss to the originator orders due to missed revenue can justify investing in partners. Of course, several circles providers can also be made with different levels of cooperation.
31 For future research, financial integration of logistic partners remains a major challenge. Beyond reverse factoring, reduced working capital needs throughout the chain remains a priority (priority Discounts days of inventory and receivables). This can sometimes involve redesigning the production process within the chain in order to minimize, at each step, the cost of goods sold (Cost Of Goods Sold: COGS) and reduce time while making sure to see more latest possible inclusion in the product of "significant added value" (automobile industry). It should also be at the medium term that are set up collaborative funding. The emergence of
Conclusion The integration of risk management at company level and that the logistic is not yet realized. The logistic represents some form of organization comparable to a vertical integration of activities, operating horizontal interconnections between being few firms. The enhanced integration of the logistic can not, however, by itself, solve all problems. If the trust established in the network can help to get out of certain situations better (and Talib Hamid, 2014), it can do nothing in case of natural disasters or sudden political changes. In addition, the establishment of a real trust within the logistic can lead to delay some adjustments, or not to make contact with new suppliers whose cooperation could be fruitful. However, it is clear that preventive actions are welcome to reduce risk. The careful selection of suppliers and the establishment of an information system accessible to all partners can reduce risk. In financial terms, there is a lag behind progress at the operational level. Integrated management of working capital requirements in the logistic is slow to put in place. If reverse factoring beginning to be used by principals to provide liquidity to the system, no cooperation appears to exist in the medium or long term, that is to say at the record high between the chain partners. Or some partners may have in terms of mediumterm logistic of consequences as bad as repeated interruptions of production or substantial decreases quality investment insufficiency.
32 But beyond these aspects, management of the logistic, according to Christopher and becomes Ryals (2014) more and more that of a "demand chain", and management of risks will require much more multidisciplinary contributions existing ones to date (including in particular aspects of marketing hitherto little treaties).
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Appendix New model: batching_example_new.zip