MPSTME 2012

Research Project On

Retail Logistics and Supply Chain Risk Management in Large-Scale Retail Trade

Presented to MPSTME, NMIMS In Partial Fulfilment of the Requirement for the Degree (MBA-Tech)

By Zubin Bohra 554 2011- 2012 1

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ACKNOWLEDGEMENTS

I take immense pleasure in thanking Prof Yogesh for having permitted me to carry out this project work.

I wish to express my deep sense of gratitude to, Prof. Prasad Chakravarty, Mukesh Patel School of Technology Management and Engineering, NMIMS University, for his able guidance and useful suggestions, which helped me in completing the literature review, in time.

Words are inadequate in offering my thanks to the Project Trainees and Project Assistants, for their encouragement and cooperation in carrying out the project work.

Finally, yet importantly, I would like to express my heartfelt thanks to my beloved parents for their blessings, my friends/classmates for their help and wishes for the successful completion of this Literature review.

Zubin Bohra

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Table of Contents

Tile page .............................................................................................................................. 1 Acknowledgements ............................................................................................................ 2 1. INTRODUCTION ..................................................................................................... 4 Abstract------------------------------------------------------------------------------------- 4 Statement of purpose ......................................................................................... 5 Purpose of study ................................................................................................. 6 Methodology .................................................................................................... 6 Significance of study ......................................................................................... 7

2. REVIEW OF LITERATURE ................................................................................... 7

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Abstract The aim of this paper is to make a framework of retail logistics and supply chain risk management by identifying retail logistics and supply chain risks in large retailers and to illustrate mitigation strategies that could address these risk types. The paper begins by reviewing existing literature on supply chain risk. A conceptual framework of retail logistics and supply chain risks is then presented: risks are categorized into external risks (environmental, supply and demand) and internal risks (operations, infrastructure). In addition to that, generic mitigation strategies that could address most risk types, as well as specific strategies for handling particular risks, are identified. Furthermore, mitigation strategies, actually implemented by Italian firms, are presented. Finally, conclusions concerning the contribution of the framework of retail logistics and supply chain risk management together with possible future research directions are proposed. This study on retail logistics and risk management issues are conducted from the large retailer's point of view. The study seems helpful in creating awareness on supply chain risks and in providing direction for choosing appropriate mitigation strategies. Supply chain risk management attempts to reduce supply chain vulnerability by identifying and analysing the risk of failure points within the supply chain. The aim is to ensure the continuity of supply chain in the event of a failure which could interrupt the normal business and profitability. Keywords Retail logistics, supply chain risk, supply chain risk management

Introduction

An economic system could be outlined as a process divided into three steps: the first one is production, then there is distribution and the last one is purchasing of goods by customers. Distribution is very important and the aim is to minimize the cost and increase the performance. The distribution mission is not a merely physical transfer of goods from manufacturers to consumers rather it involves the need to guarantee goods availability in the right places, in time, in proper quantity and range in order to meet customers' needs. It consists of order processing, warehousing, and transportation. Distribution can be done as selling directly to consumer, or through retailer or on a wholesale basis and the aim is to discuss the risk in retail sector and to describe the strategies for handling risks. Earlier the goods were transferred from manufacturers to consumers by small retailers, who could not influence either buyers or suppliers behaviour. In the last twenty years the the commercial revolution has come into the picture which emphasized the importance of largescale retailers over small-scale retailer. After this profound change large-scale retail trade has become one of the most important players in consumer goods market and of the economic system as a whole. Large retailers sell thousands of items of different kind and have a high number of suppliers (local, national, international). Large scale retailers bears several risks such as less stock-in-trade, more distant suppliers , deterioration in the quality of goods as long as they are not sold out and change in fashion and taste of consumers. To manage this

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efficiently and successfully, logistics and supply chain management play a key role in the management of the firm as a whole. The purpose of this paper is to identify retail logistics and supply chain risks and to investigate mitigation strategies that could address these risk types, in order to develop an integrated framework for large-scale retail trade.

Retail logistics

Logistics play a key role in the management of the firm. Logistics can be defined as the decision and action, related to planning, organising, and management and controlling, targeted to optimize the physical flow of raw materials and goods, from the point of origin to the point of destination. The objective is to satisfy the customers and corporation, by meeting their requirements in the most effective and efficient way. The core business of retailing is the outbound logistics process, which consists of the placement of finished products on consumer markets. Outbound logistics operatively consists in goods receipt, storage and handling, in demand and supply management, and transportation from distribution centres to points of sale. A twofold logistics dimension was identified in our study: one relates to internal firm processes and resources (assets, human resources, practices) and the other concerns relationship with other members of the supply chain (third party logistics providers, suppliers, etc.). In this research both dimensions were considered in order to develop the retail logistics and supply chain risk management framework.
Statement of Purpose

In recent years, supply chain risk managements profile has increased. A 2007 AMR Research report indicated that: Nearly 50% of firms plan to implement or evaluate SCRM technology in the next 12 to 24 months, indicating that penetration is relatively low and interest levels are quite high.

Risk management profile

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The most effective approach is to evaluate which suppliers contribute the most to top-level revenue. From an analytics perspective, a tool is needed that will identify the ultimate parent of each component, then assess the components revenue contribution. Further, the assessment must be deep as well as broad. The assessment cant stop at the contract manufacturer. The assessment must also evaluate components that the contract manufacturer uses. A low risk contract manufacturer that uses high risk sources is still a high risk. This broad and deep analysis requires a tool that provides visibility to the whole supply chain including lower tier suppliers. Once the supply base is prioritized in terms of their contribution to revenue, the risk factors that apply to each supplier need to be assessed. This assessment is typically done against the suppliers that contribute most to revenue first.
Purpose of the study

Demand risk relates to potential or actual disturbances to flow of product, information, emanating within the network, between the focal company and the market (Svensson, 2002). In particular, it relates to the processes, controls and asset and infrastructure dependencies of the organizations downstream. It is the risk associated with a company experiencing demand that it has not anticipated and provisioned for through its chain to enable it to satisfy its customers demands, or those of its customers customers. Also the question of demand risk goes beyond the scope of demand volatility to include, for example, the whole area of new product introductions.
Methodology

As part of our work we have done several case studies related to risk management and its strategic implications for business companies. The research design has involved field survey research as well as case studies of several companies coming from different industries and branches. Measures for the theoretical constructs have been based on past research. A series of qualitative interviews have been conducted. In the empirical part we will describe and analyse one specific company: the Glamox case.

Basic risk matrix

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Significance of study

The most effective approach is to evaluate which suppliers contribute the most to top-level revenue. From an analytics perspective, a tool is needed that will identify the ultimate parent of each component, then assess the components revenue contribution. Further, the assessment must be deep as well as broad. The assessment cant stop at the contract manufacturer. The assessment must also evaluate components that the contract manufacturer uses. A low risk contract manufacturer that uses high risk sources is still a high risk. This broad and deep analysis requires a tool that provides visibility to the whole supply chain including lower tier suppliers. Once the supply base is prioritized in terms of their contribution to revenue, the risk factors that apply to each supplier need to be assessed. This assessment is typically done against the suppliers that contribute most to revenue first.

Supply Chain Risk Sources

Process Control

Review of Literature Supply chain risks

Supply chain risk in our research is about possibility of interruption to the flow of the supply chain. Risks in the supply chain imply the interruption of flows between organisations. These flows are related with information, materials, products and money. An important feature of supply chain risk is that it extends beyond the boundaries of the single firm. Identifying the most important sources of risks is required in order to efficiently manage supply chain risks. The analysis of the supply chain risk involves the identification of the risks, its sources and drivers and their influence on the supply chain. Supply chain risk management develops the mitigation and contingency strategies that describes on how to deal with these risks.

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Several conditions that create risks in a supply chain include product availability, distance from source, industry capacity, and demand fluctuations, changes in technology and labour markets, financial instability and management turnover, and the list could be continued. Therefore different categories have been proposed by scholars, as summarized in Table 1.

A pioneering work by Mason-Jones and Towill (1998) suggests that there are five types of supply chain risks sources: environmental, demand, supply, process and control risk sources. The environmental, supply and demand risks sources are distinguished on one hand, and processes and control are grouped on the other hand.

Environmental risks are external, uncontrollable events beyond the control of company. The risks can impact the company directly or through its suppliers and customers. Environment risks are further classified into four categories:-

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Macro risk includes economic shifts, recession, labour costs, exchange rates Policy risk Actions and sanctions on part of government, and shifts in legislation Completion risk Uncertainty about competitors actions Resource risk Lack of technology, human resource and capital

Examples are risks preventing shipment of products to stores such as port and depot blockades, another could be the closure of an entire business due to fire or chemical spillage. Events such as earthquake, cyclone, volcanic or terrorist activity have a wider impact. These events disrupt the flow of material and may lead to plant shut-down, shortage of high demand items, and price increases. Another example of environment category is economic slumps and many markets have some experience of dramatic reversals of fortune leading to business failures and bankruptcies. The economic shocks of events such as currency devaluations and stock market fluctuations are all environmental in nature. Government actions around taxation and regulation can influence the market or the supply landscape significantly and some areas of business (for example tobacco) have been impacted by changes of this type. Demand risk results from the variation in demand. It is a downstream equivalent to the supply risk and is present on the outbound side of supply chain. It is arises due to the unexpected increase or decrease in the customer demands as a result of which there is a mismatch between the companys forecast and the actual demand. There can be either increase in the customer demand or fail in the customer demand. Depletion of the safety stock, stock-outs, need to expedite are the results of increase in customer demand and increased cost of holding inventory and price reductions are the results of fall in customer demand. Demand risk can also come from dependence on a single customer, customer solvency and failure of the distribution logistics service provider. Supply risks are the risks on the supply/inbound side of the supply chain. Supply risks are mainly due to failure of product availability from the supplier or failure in the process of transportation from the supplier to the customer. Companys suppliers are the main cause of this risk. The risk arises if the companys suppliers are unable to deliver the materials which are required by the company to meet its production requirement. Supply risk is about shortage of materials from the suppliers end, quality and rework issues, poor planning, increased scrap, equipment failure and damaged facilities, hence committing to unreal delivery dates. Supply chain failure results in: (i) loss of output, revenue and profit (ii) customer dissatisfaction (iii) supplier bankruptcy and withdrawal from the market. Supply risk extends as well to third party logistics providers (TPLPs), if a suppliers product is available, but the TPLP is late delivering the product, the company will experience supply variability. Processes risks are the risk arising due to variations in processes. Processes are the sequences of value-adding and managerial activities undertaken by the company. The execution of these processes is dependent on internally owned or managed assets and on a functioning infrastructure. Process risk is risk associated with the variability of a companys operational processes. There is a wide range of potential for failure inside the company in the same way as with suppliers (supply risk) and customers (demand risk).

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Again these risks impact both on the ability to create and satisfy customer demand. A breakdown in the companys processes can be experienced in some or all of the following ways: - variation in manufacturing yields, equipment and hence utilization - quality and rework issues associated with internal manufacturing and technical processes - warehouse operations leading to fulfilment issues - business and supply chain systems failures - Transport failures where the operation is under the control of the focal company. The greatest process risks are commonly associated with introducing new products, technology and customers as well as changes to facilities and operating methods (Cranfield University, 2003). Controls are the set of rules, procedures and system that determines how an organization exerts control over the processes. They may be order quantities, batch sizes, safety stock policies and, the policies and procedures that describes asset and transport management. Therefore control risk is the risk arising from the use or misuse of these rules. It is associated with the companys planning and management activities including the quality, accuracy and reliability of its operating. Control risks could include: - systematic forecast error as a result of flawed or non-existent sales and operations planning - inventory control accuracy - inadequate or unsound scheduling methods that are likely to give rise to inaccurate commitments to customers - accounting and financial control failures ranging from credit control to not securing the capital necessary to continue to fund the company resulting in missing payments to suppliers or employees - information technology control failures due to incorrect algorithms or parameters or processing capacity which impedes the ability of the company to operate - Failure to comply with the regulatory environment leading to external actions to impose fines or closure. Supply chain control mechanisms can either amplify or absorb risk effects. It is suggested that an important feature of the supply chain risk sources is its ability to be linked to the supply chain structure. Supply and demand risk sources are specific to the supply chain and can affect several interdependent parties in the chain. Christopher and Peck (2004) suggested four categories of risks: demand, supply, operational and security risks. Operational risk is the distribution of outcomes related to adverse events within the firm that affect a firms internal ability to produce goods and services, the quality of products and services and timeliness of production, and profits. Security risk is the distribution of outcomes related to adverse events that threaten human resources, operations integrity, and information systems; and may lead to outcomes such as freight breaches, stolen data or proprietary knowledge, vandalism, crime, and sabotage. Tang (2006) introduced two categories: operational and disruption risks. Operational risks are related to the inherent uncertainties such as uncertainties in customer demand, supply, and cost. Disruption risks are related to the risks caused by natural and man-

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made disasters such as earthquakes, floods, terrorist attacks, and economic crises such as currency evaluation or strikes. Sodhi and Lee (2007) take a supply-chain viewpoint and associate risks with supply (suppliers, production and distribution within the company) and with demand (customers including end consumers). These include cultural differences in multinational operations, environmental risk, regulations risk, and exchange rate risk across multiple countries. Cavinato (2004) presented a categorization for identifying risks and uncertainties in supply chain shown as the five sub-chains/networks to every supply chain: a) Physical The actual movements and flows within and between firms, transportation, service mobilization, delivery movement, storage and inventories. Risks here encompass transportation disruption, the destruction or ruination of goods, the inability to access inventories, manufacturing discontinuity, and more. b) Financial The flow of cash between organizations, incurrence of expenses, and use of investments for the entire chain/network. The risks here are through settlement process disruption, improper investments, and by not bringing cost transparency to the overall supply chain. c) Informational The processes and electronic systems, data movements triggers, access to key information, capture and use of data, enabling processes, market intelligence. A longer term risk involves the creation and investment into information systems that are neither fully capable nor efficient for intended purposes and future business needs. d) Relational It includes the efficient linkage between the organization, supplier, and the customers such that it maximizes the benefits and also includes the internal supply matter relationships throughout the organization. e) Innovation The processes and linkages across the firm, its customers, suppliers and resource parties for the purpose of discovering and bringing to market product, service and process opportunities. Chopra and Sodhi (2004) divided supply chain risks in nine categories: disruptions, delays, systems, forecast, intellectual property, procurement, receivables, inventory, and capacity. Delays in material flows occur when a supplier cannot respond to changes in demand. Disruptions are often unpredictable and rare, but often quite damaging. Examples abound of how natural disasters, labour strikes, fires and terrorism have halted the flows. Systems risks are related to the information systems. The more a company networks its IS, the greater the threat that a failure anywhere can cause failure everywhere. Forecast risk is the risk arising due to differences between a companys projections and actual demand. Forecast risks can also result from information distortion within the supply chain. Intellectual property risk has grown rapidly as supply chains become less vertically integrated and more global, and as companies outsource to the same manufacturers used by competitors. Procurement risk refers to unanticipated increases in acquisition costs resulting from fluctuating exchange rates or supplier price hikes.

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Receivables risk is the possibility of being unable to collect on receivables. Inventory risk concerns an excess or scanty inventory, while capacity risk concerns the inelasticity of capacity over the short term. Waters (2007) give a somewhat longer list of risks: - Strategic - arising from strategic decisions made within organizations that directly increase the risks - Natural - arising from unforeseen natural events such as extreme weather, lightning, earthquakes, flood, landslides or outbreaks of diseases - Political - such as government instability, new legislation, regulations, policies, conflicts or wars - Economic - from the broad economic environment, including interest rates, inflation, currency exchange rates and taxes - Physical - risks to buildings and facilities, such as traffic accidents, equipment failure, congestion or limited capacity - Supply - all issues with the movement of materials into an organization - Market all aspects of customer demand - Transport - for all movements of materials - Products - risks arising from product features - Operations - arising from the nature of activities in the organization, type of process, complexity, technology, etc. - Financial all money transactions - Information including availability of data, data transfer, accuracy, security of systems, etc. - Management risks arising from their knowledge, skills, experience, decisions, etc. - Planning risks arising from the design and execution of plans for operations - Human from all the complex interactions between people - Technical and new technology in processes, communications, new products, process designs and reliability - Criminal arising from all illegal activities - Safety to people and facilities - Environment.

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