Operations and supply chain management has become an even more complex affair, given the nature of globalization and the meeting of international markets (Miller 2002). There have been major benefits for suppliers in finding new markets for their goods, producers because of getting cheaper raw materials and cheaper labor, and for the consumer because of the corresponding drop in market prices of the finished goods (Boyer & Verner 2009) .
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However, with the increasing complexity in supply chains, the issues of managing production have also become more difficult to control. The major concerns when working with a supply chain are risk and planning (Jacobs & Chase 2010).
Research Opportunities and Key Issues in Managing Risks Posed by Remote Suppliers
A research opportunity that would be relevant to operations and supply chain risks management is how diversifying remote sources and suppliers can work to help a company in minimizing its risk, and how different systems can be evolved that are suitable to handling different risk factors. This is because in different areas, and different social, political climes, there are factors that pose more risk than others.
More and more, companies depend on third parties to provide the materials for them to build their products .The suppliers are at times continents removed (Ritchie & Brindley 2007). A company, therefore, can do very little to control risk factors that might impact the supplier despite the fact that these factors can devastate the company’s production (Sheriff & Rice 2005).
One of the key issues in OSM risk management, is balancing risk with profitability. There might be high profit potential in a certain area, but it might come with high risk, for example manufacturing in a war-torn country. Labor might be cheap, and resources available locally, but the risk of losing the factory are also high. The debate is always whether to be cautious or to take the risk.
Another key issue is quality management in terms of supply. Since the company might be several times removed from the source, in terms of distance and the number of parties who handle the product, it might be difficult to ensure high quality materials being used in the making of end products. Using a single or fewer suppliers makes it easier to monitor quality control. On the other hand, it means that in the case of a delay or other interruption of the supply chain, then production is severely interfered with.
There are myriad factors that pose risks, such as natural disasters, the supplier going bankrupt, labor disputes in the supplier’s firm or country that might halt operations, war and civic unrest among others (Jacobs & Chase 2010). All these factors are beyond the control of the company.
A company can counterbalance risk by opting to diversify on the number of remote providers instead of having a single-source policy (Cox 1999a). There are drawbacks to both options with the largest drawback of the former being increased difficulty in quality control (Cox 1999b). On the other hand working with a single-source policy can bring the company’s activities to a standstill because there is literally no back-up in case of delays in the supply chain (Chopra and Sodhi 2004).
An example of two companies who were faced with the same problem with different end results as illustrated by Chopra and Sodhi (2004), is the case of Nokia Corporation and Telefon AB L.M. Ericsson, both of whom use a Philips factory based in New Mexico.
When a freak accident burned the factory to the ground, Nokia, who diversify their remote sourcing, salvaged their production by moving to other Philips plants. On the other hand Ericsson who work with a single sourcing policy incurred a 400 million dollar loss and a disruption in production whose impact was felt for months.
In conclusion it can be said that supply chains are growing more complex by the day as interdependence amongst countries all over the globe grows. This means that more and more companies rely on remotely located suppliers who face risk factors that the initial company cannot control. It is therefore important that companies with remote suppliers look for ways in which they can minimize risk in disruption of production in the face of these risks.
A sound practice would be to diversify in remote sourcing so that the risk is spread. However, this has to be balanced with costs and maintaining quality standards. Companies have to find ways in which to adjust to the changes in supply management so as to reap the full benefits of market inter-connectivity (SCMI 2010, SDC 2010).
Boyer, K. K. & Verma, R. (2009). Operations and Supply Chain management for the 21st Century. New York, NY: Cengage Learning.
Chopra, S. & Sodhi, M. (2004). Managing risk to avoid supply-chain breakdown. MIT Sloan Management Review. Web.
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Cox, A. (1999b). A research agenda for supply chain and business management thinking. Supply Chain Management: An International Journal, 4 (4)pp. 209 – 212
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Vandenbosch, M. & Sapp, S. (2010). ‘Keep your suppliers honest’. Wall Street Journal. Web.