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Managing Risks in the Supply Chain using the


AHP Method

Article in The International Journal of Logistics Management January 2006


DOI: 10.1108/09574090610663464

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Barbara Gaudenzi Borghesi Antonio


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The International Journal of Logistics Management
Managing risks in the supply chain using the AHP method
Barbara Gaudenzi Antonio Borghesi
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The International Journal of Logistics Management, Vol. 17 Iss 1 pp. 114 - 136
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IJLM
17,1 Managing risks in the supply
chain using the AHP method
Barbara Gaudenzi and Antonio Borghesi
114 University of Verona, Faculty of Economics, Via dellArtigliere n, Verona, Italy

Abstract
Purpose The aim of the research is to provide a method to evaluate supply chain risks that stand in
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the way of the supply chain objectives.


Design/methodology/approach An analytical hierarchy process model is proposed to identify
supply chain risk factors with a view to improving the objective of customer value. The two phases of
the method are the prioritization of supply chain objectives; and the selection of risk indicators. A case
study is also presented.
Findings The appreciation of the most critical supply chain risks comes from careful evaluations of
the impacts and a consideration of the cause-effect relationships. The involvement of key managers is
essential. In the case study the two most divergent evaluations were from the logistics manager and
the sales manager.
Research limitations/implications Further application in various companies and industry
sectors would be helpful to compare different cases and findings.
Practical implications The model allows for flexibility in using (and the frequent monitoring of) a
panel of indicators by management. The dashboard is composed of only a few indicators and helps in
ensuring a synthesis among different perspectives. For these reasons it gives an useful contribution to
practitioners.
Originality/value The model seems helpful in creating awareness of supply chain risk. The
involvement of managers from different areas is essential in establishing a thorough consideration of
critical issues and interdependencies in determining a complete risk analysis. The method can support
managers in setting up a priority hierarchy for risk treatment.
Keywords Supply chain management, Risk management, Analytical hierarchy process
Paper type Research paper

Introduction
The increasingly risky environment (Zsidisin, 2003) in which companies now operate is
characterized by a number of risk components, factors, sources, and drivers (Borghesi
and Gaudenzi, 2004). The term supply chain vulnerability (Svensson, 2002) has been
used to describe the interdependences and risks that exist among organizations as they
rise to the challenge of better, faster, cheaper.
It is worth highlighting two aspects connected to the risk assessment in supply
chains:
(1) risk exists at various levels, inside the company and at the network level; and
(2) the risk evaluation is inherently subjective, because each analyst has his or her
own concept of what constitutes a risk and of what is the nature of the upstream
The International Journal of Logistics and downstream relationships.
Management
Vol. 17 No. 1, 2006
pp. 114-136 Supply chain risk has been defined as any risk to the information, material and
q Emerald Group Publishing Limited
0957-4093
product flow from original suppliers to the delivery of the final product (Christopher
DOI 10.1108/09574090610663464 et al., 2003a, b). Risk factors can be considered in terms of:
.
what drives the risk; Managing risks
.
where the risk is; and in the supply
.
what the risk is associated with. chain
Supply chain risks and supply chain risk factors can be identified in various
ways depending on the perspective adopted. However, supply chain risk assessment
should be linked to the specific objectives of the supply chain which should guide the 115
selection of risk indicators. In the paper we present a model for assessing risk in supply
chains based on the analytic hierarchy process (AHP). The AHP supports managers in
prioritising the supply chain objectives, identifying risk indicators and assessing the
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potential impact of negative events and the cause-effects relationships along the chain.
A case study is used to show the relevance of the method.

Literature review
Supply chain management
The literature defines logistics in various ways (Perret and Jaffeux, 2002; Slack et al.,
2004) including a functional perspective or a process perspective (Srivastava et al.,
1998; Davenport, 1993; Bowersox et al., 2002; Borghesi, 2005), flows and processes
inside and outside the company (Cox and Alderson, 1950; Bucklin, 1966) and the
processes involved in the chain (Stock and Lambert, 2001: Chopra and Meindl, 2004).
The supply chain has been defined as:
. . . the network of organisations that are linked through upstream and downstream linkages,
in the different processes and activities that produce value in the form of products and
services in the hands of the ultimate customer (Christopher, 1998).
Each organization in the chain has its own internal philosophy and goals, but all
members should share common supply chain objectives with respect to the final
market. In addition, they should all be aware of the nature of the relationships with
other members in the chain (Mentzer et al., 2001). The concept of a supply chain
network structure refers to the branches and roots that need to be managed in the
supply chain tree constituted by the network of customers and suppliers (Lambert,
2001). If the supply chain is a network by its very nature, the concept of supply chain
network structure refers to the horizontal and vertical dimensions of the structure, in
terms of which various partners might form strategic partnerships in achieving
objectives (Gregory and Rawling, 2003; Otto, 2003).
The main objectives of supply chain management can be categorized as:
.
Customer value and customer satisfaction. The organizations within the chain
should share a focus on the end-customer if they are to develop a supply chain
strategy that achieves the highest level of service for the customer (Borghesi,
2001). The organizations can then create value for the customers (and for
themselves) by improving the rate of customer retention and hence
profitability (Christopher and Peck, 2003). For the purposes of this paper three
critical service elements are the components of the perfect order-index.
These are on-time-delivery (the number of deliveries that meet customer
expectations in terms of time), order completeness (the number of deliveries that
are complete), and error- and damage-free delivery (the number of deliveries
that have clean invoices).
IJLM .
Reactivity. To achieve the goal of reactivity supply chains must focus on time
17,1 compression, in order to reduce lead times (Waters, 2003) and achieve pipeline
efficiency (Burton and Boeder, 2003); also in order to adapt to ranges in demand,
supply chains must be flexible enough to cope with the uncertainty of a rapidly
changing environment (Chopra and Meindl, 2004).

116 Time compression can be used to improve product availability through lead-time
management to ensure shorter order cycles (Christopher, 1998). It requires a
synchronization of flows and activities inside the organization and throughout the
chain (Towill, 1996).
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Risk management
The aim of risk management is the protection of the business from adverse events and
their effects (Borghesi, 1985). The risk management process consists of four phases:
(1) risk assessment (which can be broken down into risk analysis and risk
evaluation);
(2) risk reporting and decision;
(3) risk treatment; and
(4) risk monitoring (AIRMIC, 2002).
Recent approaches to risk assessment suggest the drivers of key risk or risk areas
should be identified such as information systems, intangible assets, and safety
(Australian Standard, 2003).
According to the financial management perspective, risk managers monitor financial
risks such as movements in exchange rates, commodity prices, interest rates, and
stock prices and control all the activities that affect revenue. At the same time, they
manage the insurable part of risks with an insurance-portfolio (Dickinson, 2001).
The perspective of enterprise risk management (ERM) is a new approach to risk
management (COSO, 2004). Although it has been called a holistic and enterprise wide
approach (Barton et al., 2002), and although it attempts to manage both financial risks
and operational/strategic risks, its perspective is actually corporate governance
based (Lam, 2003). It is concerned with monitoring and managing risks to provide
reasonable assurance to stakeholders regarding the achievement of company
objectives. Nevertheless, this integrated effort adopts a predominantly financial
perspective (Banham, 2003; Blake, 2003) in that the ERM philosophy takes tools and
methods of managing financial risk and adapts them for non-financial risk (De Loach,
2000).
The business continuity and crisis management perspective (Mitroff and Anagnos,
2001) attempts to integrate the management of risks that are not insurable such as
reputation risk or service-drop risk (Ogrizek and Guillery, 1999). But its role actually
seems to be confined to the effective implementation of strategies related to traditional
contingency planning (Myers, 1999).
Most risk management approaches appear, in many instances, to be
fragmented one group buys the insurance, another administers the claims, and
another handles everything related to safety.
Organizational risk management is an extended perspective (Young and Tippins,
2002) whereby strategic management, risk management, and operations management
are considered as separate, but overlapping, processes. According to this perspective, Managing risks
risk management crosses supply chain management, in order to support them in the in the supply
achievement of their own objectives. In this sense, ORM could be called a
mission-driven process. Following this approach, risk assessment and measurement chain
should be based on specific goals, rather than being adapted from the financial domain
into the business and operational domains.
117
Supply chain risk management
The present paper treats supply chain risk management as a process that supports the
achievement of supply chain management objectives. In this sense, risk management is
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an integral part of supply chain management (Christopher, 2004). With respect to the
various supply chain goals discussed above, it is helpful if risk is understood as a
multi-faceted phenomenon.
For example, from the financial perspective, the management of supply chain risks
involves the management of cash-flow variations that result from operational
activities; moreover, from the perspective of corporate governance (Meulbroek, 2002),
management should monitor the efficacy and efficiency of supply chain operations to
ensure that the level of risk in these areas is within the companys global risk tolerance.
From the perspective of business continuity and crisis management, supply chain
risk management is an integrated management approach along the whole chain (Adams
et al., 2002) with a view to managing the exposure to serious business disruption,
arising from risks within the supply chain as well as risks external to the supply chain.
In this sense, the goal of supply chain risk management is the ability to react quickly to
ensure continuity (Van Hoek, 2003; Rowbottom, 2004). From the reputation
management perspective (ORourke, 2004), organizations manage and mitigate risk
against events that could affect the companys image in the perception of stakeholders.
Another perspective is oriented towards the goal of reliability (Moore, 2002), and the
achievement of the best trade-off between quality controls (through inspections) and
process self-control. In this context, supply chain risk management is a process that
aims to reduce all the deviations from the normal or expected (Svensson, 2002), often
utilising the Six Sigma approach and tools (Eckes, 2001).
Other approaches to supply chain risk management involve the management of
risks affecting:
.
specific supply-chain levels such as the physical, financial, informational, and
innovation levels (Cavinato, 2004);
.
particular systems inside and outside the chain, such as the information system
(Finch, 2004);
.
or specific project (Halman and Keizer, 1994) when the aim is to identify and
manage risks that threaten the projects success (Ramgopal, 2003).

In that case risk factors could be considered to be causes of the project failure
(Spekman and Davis, 2004) and any risk assessment and analysis will be oriented
towards this understanding.
From this brief review it would seem, therefore, that supply chain risk management
may be summarized as . . . the identification and management of risk for the supply
chain through a co-ordinated approach amongst supply chain members (Juttner et al.,
2003) in order to support the supply chain in the achievement of its objectives.
IJLM Supply chain risk measurement
17,1 For the purposes of this paper, a supply chain risk measurement system is seen as a
sub-set of supply chain performance measurement.
Two principles from the performance measurement philosophy should be imported
into the supply chain risk measurement discipline. First, the measurement system
should be linked to the specific objectives of the chain so that the measures used can be
118 focused on their achievement (Neely et al., 2002). Secondly, the measurement system
requires that all members agree on processes, objectives and measures across the
supply chain for example, using the approach of the Supply Chain Operations
Reference model SCOR (Anonymous, 2001), and by the Supply Chain Integrated
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Management Analysis Method SCIMAM (Signori, 2001).


In that sense it is particularly important to engage the support of managers who
work close to the activities and processes under consideration (Demchak, 1996). A set
of tools and techniques has been proposed to assist in the evaluation of supply chain
risk (Christopher et al., 2003a, b). In particular, the Delphi method (Miccolis and Shah,
2000) is worthy of mention as are brainstorming scenario planning, critical-path
analysis, and root-cause analysis.
With respect to risk assessment in supply chains the prioritization of supply chain
objectives is essential to identifying the risks which could affect the achievement of
those objectives. The AHP seems in that sense particularly useful (Saaty, 1990, 1994).
AHP is one of the multivariate analysis techniques that help to reduce the randomness of
subjective evaluations. Its goal is to establish the trade-off required in complex
decision-making situations, such as consideration of different objectives based on
different criteria (Goodwin and Wright, 1998). By involving AHP, management
can define a decision problem and break it down into a multi-level sequence of decision
attributes. Then, the decision elements can be compared with each other and weights
assigned in order to define which are the priorities in the decision process (Zahedi, 1986).
We used the AHP in our case study for creating a prioritization among supply chain
objectives (Millet and Ewdley, 2002) and to assist decision makers who have identified
alternative courses of action to:
.
set up a decision hierarchy;
.
make pairwise comparisons of attributes and alternatives;transform the
comparisons into weights and scores for different options; and
.
perform sensitivity analysis or qualitative analysis.

The AHP method can support managers in a broad range of decisions and complex
problems including supplier-selection decisions, facility-location decisions,
forecasting, risks and opportunities modelling, choice of technology, plan and
product design, and so on (Fariborz et al., 1989).
With respect to the risk measures, as in the field of performance measurement, the
ratios are usually considered from the perspective of a focal company with external
members having their own governance structure and culture (and thus their own
targets). In general, a lack of confidence among members of the chain can limit
informational transparency. In terms of measurement, there is, therefore, potential for a
lack of consistency in the data providing the measures. This discussion reveals the
importance, from a performance and risk perspective, of carefully selecting both
the partners in the supply chain and the shared measurement system.
Looking at the body of the literature, there are several approaches to risk analysis Managing risks
(Harland et al., 2003) in the field of supply chain risk measurement. A recent complete in the supply
assessment approach identified supply chain risk sources and factors and provided
directions to mitigate the effects of such risks along the supply chain (Juttner et al., chain
2003). In addition, risks have been described in both qualitative and quantitative terms
(Christopher et al., 2003a, b), and have been evaluated by techniques that assign to
certain indicators potential impacts and hence importance (Zsidisin, 2004). The 119
quantitative evaluation of supply chain risk can be supported by statistical analysis.
The Six Sigma method, for example, investigates all the events that give rise to
variations in process performance (Eckes, 2001). Another method the failure modes
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and effect analysis method focuses on potential failures in order to assess, prevent,
and eliminate them as early as possible (Sinha et al., 2004). In a relatively stable and
predictable environment a suite of statistical controls can be used in the management
of supply chain risks (Aichlmayr, 2001). In a complex environment, statistical control
tools can still be helpful (Christopher and Rutherford, 2004). However, according to the
lean-agile paradigm (Towill and Christopher, 2003) these should be supported by
other tools. Nonetheless, a wider panel of approaches and points of view in supply
chain risk measurement would appear to be required for two further reasons.
First, in complex networks in which risk monitoring is a difficult challenge
(Braithwaite and Hall, 1999) it is worth looking for a transversal data-base of
information (Harland et al., 2003). Secondly, from an operational and business-based
risk perspective, statistical risk-modelling tools have been identified as being
imperfect because they could expose managers to risks they were trying to avoid
by using the models. Decision-making could thus become risky if they are based on a
one-sided or narrow information base. It has been observed that:
. . . better tools available are structural models of risks that capture cause-and-effect
relationships between risk factors and outcomes (Miccolis and Shah, 2001).
The measurement of damage and defect risks is helpful in achieving the objective
of shrinkage reduction (Chapman et al., 2001) by controlling the average severity
and probability of losses. The physical risk can be further measured in terms of
the potential damages that could be inflicted upon goods in physical spaces (such
as warehouses and production lines). These measures, called physical risk
indexes are derived from inspection procedures by external experts.
Supply chain risk measures are monitored from both the supply chain perspective
and the top-management control perspective (Kirk, 1999). In the supply chain
approach, the objectives are considered in terms of the organizations goals with
respect to the final market. From this perspective, the risk evaluation, in terms of
weights and importance of indicators, should be guided by an awareness of the nature
and importance of the market objectives.

Research design, methodology, and model


For the purposes of the present study, the supply chain was broken down to five
areas involving the flows and processes of the chain both inside and outside the focal
company. Those areas were:
.
transport/distribution;
.
manufacturing;
IJLM .
order cycle;
17,1 .
warehousing; and
.
procurement.

The major supply-chain objective in the model was the creation of customer value.
This was driven by the perfect-order index the critical service elements of which
120 represented the sub-objectives of the supply chain. These sub-objectives were:
.
on-time delivery;
.
order completeness;
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.
order correctness; and
.
damage-free and defect-free delivery.

Risk indicators were identified in each area particularly with a view to achieving the
objective of perfect order improvement (Figure 1). Each area was affected by
different risk factors, depending on the sub-objectives.
The aim of the model was to provide a method to identify a panel of risk indicators
that could be applied at various levels of the chain (at different production or selling
phases). The two phases of the method are:
(1) the prioritization of supply chain objectives using the AHP method; and
(2) the selection and evaluation of risk factors and ratios.

The AHP method has been useful moreover in setting up a priority hierarchy for risk
treatment. That prioritization in managing risks depends on the importance of the
objectives they affect. That importance could be initially defined using the AHP
method.
The theoretical model was tested in an organization that sells (and partly
co-designs) medical equipment for doctors as individual professionals and as
healthcare firms. The companys supply chain had to ensure a high service level
(required by the customers) and had to work with small and fragmented orders (which
were of high value with frequent product improvements). The required agility of the
company thus suited the theoretical context of the model. In addition, the organization
had many indicators of a low/high value, although their impact was, respectively,
high/low because of the strong correlation effect among factors. A careful evaluation
of risk factors thus seemed to be especially relevant.
Four phases were involved in defining the panel of theoretical risk indicators.

ON TIME Transport Manufact - Order Ware - Procure -


DELIVERY / distrib. uring cycle housing ment

ORDER Transport Manufact - Order Ware - Procure -


COMPLETE / distrib. uring cycle housing ment
CUSTOMER
VALUE
Figure 1. ORDER Transport Manufact - Order Ware - Procure -
Supply chain objectives CORRECTNESS / distrib. uring cycle housing ment
and areas: the basis for the
DAMAGE/ Transport Manufact - Order Ware - Procure -
risk assessment DEFECT FREE / distrib. uring cycle housing ment
Phase 1 Managing risks
To prioritize the objectives, the individual evaluations of managers from different in the supply
areas were taken into account. The AHP method was used to prioritize objectives, and
to match these prioritized objectives with different perspectives. The following AHP chain
steps were undertaken:
(1) an assessment of criticalities affecting the objectives in order to assess their
importance; 121
(2) a quantitative evaluation of the importance of each objective, compared with
every other objective; and
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(3) an assessment of the weights for the objectives (and a final check).

Each manager could identify risk factors and problems that could affect his
job-objectives. That evaluation helped in defining and prioritizing the role and
importance of the objectives. Each manager expressed a different perspective in that
evaluation, depending on his job focus. As the first step of the AHP method the
managers defined a set of criticalities in the achievement of the objectives. That
critical points should be used as drivers in quantifying the priority of objectives and
potentially, in the next step, as drivers in risk evaluation. At the second and third
steps of the AHP method the managers expressed their comparison between objectives.
It means they answered the question: which of the two objectives is more important
and how strongly, using a numerical scale? All the comparisons should be
consequently checked in order to assure the consistency and the coherence of the
evaluation. Setting up a panel of weights for the objectives helped in two decisions:
(1) defining which risks were more serious; and
(2) building the priorities in managing risks.

Phase 2
To assess which risk measures describe the risk of not achieving the objective of the
perfect order, three steps were followed.
(1) First, risk factors were identified in each area following different criteria. With
respect to on-time delivery, unforeseen events that afflict the processes, the
nature of the demand, the reliability of the perfect-order cycle, the integration of
suppliers, the concatenation of process phases, and the physical damage index
were all identified. In addition, some ratios that explain bad performance were
considered as potential causes of future bad performance (assuming they were
consistent). With respect to order completeness, risk factors were related both to
the potential for errors (those that derive from the order cycle), and to the
deliberate delivery of an incomplete order (rather than being late with the full
order). In the latter case, the reason for the non-availability of product should be
considered (such as manufacturing, warehousing, or procurement delays or
errors). Risk factors affecting the order correctness related to errors in both
billing and transport. Risk factors affecting the delivery of damage-free and
defect-free orders depended on the quality of products (and, upstream, of
materials) and on handling and transport activities. In this respect, attention
should be paid to the level of damage in internal activities (if it is consistent),
and the extent of quality control.
IJLM (2) Secondly, only measurable ratios were selected. The theoretical panel should be
17,1 adapted to each particular case by the selection of ratios that are objective (not
based on opinions), and relevant (providing appropriate information).
(3) Finally, a panel of indicators that showed the relationships upstream and
downstream along the chain was selected (Table I).

122 Phase 3
In evaluating the ratios, the knowledge of individual managers assists in
understanding the potential impact of various risk factors. The potential impact of
events, and the cause effect relationships inside the organization and along the chain,
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can thus be evaluated. Different managers have different perspectives, and these
should be reconciled. The Delphi method can be used in those evaluations to help
managers in the screening of as many factors as possible.

Phase 4
Finally, in deciding how to represent the data, the risk factors were assessed in terms of
their impact (high medium or low). The dependencies between factors and the
cause-effect relationships can be illustrated with a flow chart (such as an Ishikawa
diagram). The representation of those potential effects and dependencies should be
contextualised in the supply chain in terms of areas and objectives. In this respect, it
is helpful to construct a matrix that takes into account supply chain areas, objectives,
and risk factors.

Empirical results of the case study


Evaluation of objectives
The study involved four key managers of the focal company described above: the
logistics manager, the warehousing manager, the customer-care director, and the
purchasing manager. The company, which doubled its revenue from 1996 to 2004, sells
to Italian and European dental and medical specialists (52 first-tier clients and their
connected clients) through 110 direct sellers and the companys marketing offices.
The company aims to deliver orders within 24 hours with a high level of customer
service in terms of technical, maintenance, and innovation services.
In accordance with the AHP method of ascertaining the prioritization of objectives,
the managers were asked to define the criticalities and risk factors which affect the
supply chain goals. (Figure 2).
Subsequently the managers were asked to rank the importance of various objectives
from their own perspectives. They provided a quantitative prioritization of objectives
comparing the importance of each. Table III shows the preliminary results. No
objective was assessed as being more than three times more important than any other
(only one manager described on-time delivery as being three times more important
than damage-free and defect-free). An example of two different comparisons between
on time delivery and order completeness made by the sales manager and logistics
manager, is shown in Table II. It highlights the significance of the comparisons and
which criticalities they are based on. Finally, Table III shows the results for all the
objectives.
In all the comparisons the two most divergent evaluations were from the logistics
manager and the sales manager, particularly in evaluating order completeness.
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Value Impact
If High, med,
Objective Risk area Indicators Description significant low

On time delivery
Transport distribution Number of not on time deliveries re. carrier The number of not-on time deliveries (not
agreement/total deliveries (outsourcing) meeting the agreement with carriers)
represents potential future delays
Number of not on time deliveries re. customers The number of not-on time deliveries (not
agreement/total deliveries (no outsourcing) meeting the agreement with clients) represents
potential future delays
Delays due to unforeseen events/total delays The unpredictability of delays means a lack of
control and increases the risk of delays
Number of unplanned machine stoppages/total Unscheduled stoppages can affect production
machine stoppages times
(Actual output planned output)/planned Unpredictable variation of production can
output affect production times
(Actual sales- forecasted sales)/forecasted sales Unpredictable demand and forecasting errors
(both in positive and in negative) can affect
production times
Number of linked production phases/total When phases are linked with each other, every
number of production phases delay can increasingly seriously affect the
entire process
Manufacturing 1 (No. of monitored manufacturing The monitoring of phases helps to avoid
phases/total no. of manufacturing phases) delays and to react rapidly to interruptions
1 (quantity of monitored materials and The monitoring of materials helps to avoid
components/total quantity of materials and delays and to understand the nature of
components) problems
Promotional orders/total orders Promotional orders are usually affected by
more unpredictable variations and shorter lead
time
1 (Confirmed delivery windows for In case of a high level of promotional orders,
promotions/confirmed delivery windows) its difficult to respect particularly restrictive
promotional windows
Damages index of plant (physical indicator) A high level of damages represents a potential
risk of future interruptions
(continued)
in the supply

indicators
chain
Managing risks

The panel of risk


123

Table I.
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17,1

124
IJLM

Table I.
Value Impact
If High, med,
Objective Risk area Indicators Description significant low

Late orders/total orders The number of delays caused by order cycle


represents potential future delays
Order cycle 1 (Computerised order cycle phases/total Information integration helps to avoid delays
order cycle phases) and to respond more rapidly; the lack of
integration can be a source of risk
No. of errors in order cycle data input/total The number of errors regarding time-tables
order cycle data input can affect delays
1 (Vertical time/horizontal time) Specifically referring to on-time delivery,
safety stock (stock-time related to added-value
times) helps reduce delays
No. of machine stoppages due to lack of The lack of particular materials can cause
materials/total no. of machine stoppages stoppages and affect the process time
No. of machine stoppages due to defective Defective materials can cause stoppages and
materials/total no. of machine stoppages affect the process time
Ware housing Damaged goods/handled goods Damage levels during handling activities can
cause potential stoppages or defects
Handling time/warehouse processing time Handling times can slow down the process
(this depends on the process structure and
phases relations)
Warehouse damage index (physical indicator) A high level of damages represents a potential
risk of future interruptions
1 (On time orders/total orders) Supplier delays (in terms of time-performance)
can represent a risk trend
1 (Complete orders delivered/total orders Incomplete deliveries from suppliers (in terms
delivered) of completeness) can represent a trend risk
1 (correct orders delivered/total orders Incorrect deliveries from suppliers can
delivered) represent a trend risk
Procurement No. of urgent orders/total orders Urgent orders to suppliers are exposed to the
risk of beeing delivered later then normal
orders
Either 1 (No. of new suppliers/total A high supplier-turnover could help to achieve
suppliers) flexibility and responsiveness
(continued)
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Value Impact
If High, med,
Objective Risk area Indicators Description significant low

OR (No. of new suppliers/total suppliers) A high supplier-turnover could represent less


collaboration and short-term relations
1 (No. of electronic interchanged data/total A lack of information integration can cause a
interchanged data) lack of visibility
Completeness
Incompleteness
Order cycle No. of order data input errors/total order data Number of errors caused by the order cycle can
input affect delivery completeness
Manufacturing No. of incomplete orders due to manufacturing Manufacturing delays can lead to delivery of
delays/total incomplete orders incomplete orders
Warehousing No. of incomplete orders due to warehousing Warehousing delays can lead to delivery of
delays/total incomplete orders incomplete orders
No. of incomplete orders due to stock-out/total Stock outs of products or raw materials can
incomplete orders lead to delivery of incomplete orders
Procurement No. of incomplete orders due to supplier Supplier delays of products or raw materials
delays/total incomplete orders can lead to delivery of incomplete orders
Correctness
Incorrect billing
Order cycle No. of orders with billing errors/total orders Billing errors (actual number in the reference
period) can affect order correctness
Orders with data entry errors/total orders Input errors (actual number in the reference
period) can affect order correctness
Incorrectness due to
transport
Transport No. of incorrect deliveries due to carrier Careless carriers and/or incorrect routes can
mistakes/total orders affect the delivery integrity
Order cycle No. of orders with destination errors/total Destination errors caused by the order cycle
orders can affect order correctness
No. no-correct deliveries due to database Errors caused by Information System can
errors/total orders affect order correctness
(continued)
in the supply
chain
Managing risks

125

Table I.
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17,1

126
IJLM

Table I.
Value Impact
If High, med,
Objective Risk area Indicators Description significant low

Damages and defects free


Transport Products damaged in transit/total products The number of transport-damaged products
delivered delivered to clients can affect delivery integrity
Manufacturing Defective products due to manufacturing/total The number of defective products delivered to
products clients (in terms of outbound) can affect
delivery integrity
1 (Quality Control Scrap rate) Outbound control helps to avoid defective
deliveries (even if requested times should be
carefully monitored)
No. defective packaging/total packaging The level of defective packaging can affect
dispatched delivery integrity
Ware housing Obsolete stored products/Total stored The number of obsolete stored products can
products affect delivery integrity
Damaged products/total handled products Damage level due to warehousing operations
can affect delivery integrity
Procurement 1 Monitored inputs in Quality Control/total Inbound control helps to avoid defective
warehousing and manufacturing inputs deliveries; the absence of controls presents a
risk
Defective inputs in quality control/total The level of discovered defective inbound
monitored inputs in quality control materials can represent a potential
defective-delivery risk
Upstream relations
1 (Supplier retention rate) A lack of supplier retention can represent (or
can cause) a lack of integration
1 (No. of suppliers integrated with an explicit High levels of informal cooperation can
agreement/no. of stable suppliers) represent a risk of poor service-levels
Upstream integration 1 (Total fulfilled unplanned orders/total The number of non-fullfilled unplanned orders
unplanned orders) can represent a potential lack of upstream
responsiveness
1 (No. of suppliers with order visibility/total The number of unintegrated suppliers in terms
no. of suppliers) of visibility can cause a low level of flexibility
(continued)
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Value Impact
If High, med,
Objective Risk area Indicators Description significant low

jAverage delivery time optimal delivery This deviation (in positive and negative
timej/optimal delivery time values) represents an upstream weakness in
terms of timeliness
Downstream relations
1 (No. of process data shared with A lack of visibility with distributors represents
distribution/process data suitable to be shared) an unused source of integration
1 (Trade-marketing campaigns co-planned A lack of shared t.m. campaigns can represent
with distrib./total trade-marketing campaigns) a lack of downstream integration
Downstream integration 1 (Product innovations shared with A lack of shared innovations can represent a
distributors/product innovations suitable to be lack of dowstream integration
shared)
No. of sales renegotiations with A high level of re-negotiations can represent a
distributors/total negotiations lack of downstream integration
jAverage order time optimal order This deviation (in positive and negative
timej/optimal order time values) represents the distance between
capacity and requested service
in the supply
chain
Managing risks

127

Table I.
IJLM on time damage/
Completeness
17,1 objectives delivery defect free

128 narrow number of lack of lack of transport


intermediate intermediate providers'
suppliers suppliers' visibility integration

lack of final -
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low lack of
intermediate product suppliers' integration with
suppliers' visibility final-product
integration supplier
transport
short life time providers' high level of
products fragmentation service
Criticalities : required by
criteria for lack of customers
warehousing
setting the outbound and production damages in
importance of effectiveness interruption transport
the objectives
and drivers for customer customer no transport
evaluating risk fragmentation fragmentation solution
factors
high level of different level of alternatives
service service required
required by by different
customers customers

serious forecasting errors


forecasting for some products
errors
different lead times for
short lead different products
times
linked phases in linked phases in
Figure 2. manufacturing manufacturing
An example of criticalities
identified using the AHP stock driven lack of information
method supply chain transparency between logistics
and marketing

On the left hand side of Figure 3 are shown the results of the prioritization by the AHP
method. On the right hand side of Figure 3 are shown the performances achieved by
the company in terms of the perfect-order components in the period before the model
application. It is apparent that the most-important defined objective, on-time delivery
has a poor performance.
From the theoretical panel of potential measures, managers in the focal company
selected the 63 percent of ratios that were measurable and significant. The assessment
of the value of the ratios and the evaluation of indicators in terms of potential impact
led to the identification of the critical risk factors and their cause-effect relationships.
In the indicators panel, many ratios represent a low value but a high impact. This is
Managing risks
Order completeness
Intensity of Explanation Managers consideration of in the supply
importance criticalities chain
On time 1 (equal Two objectives have the same The logistics managers attribute
delivery importance) importance (risk indicators which equal importance to the objectives.
affect the two objective will That evaluation is driven by the 129
potentially have the same gravity) following criticality: equal
importance of intermediate
suppliers and final product
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suppliers
2 (strong On time delivery is two times The sales manager attributed a
importance) more important than order strong importance to the on time
completeness delivery due to the consideration
of the following criticalities: high
level of service required by all Table II.
customers; clients have different An example of
expectations: they dont perceive comparisons between on
the logistics problems but require time delivery and order
punctuality completeness

On time delivery Completeness Correctness Damage-defect free

On time delivery 1 1-2 0.5-1.5 1.5-3 Table III.


Completeness 1 0.5-1 1-1.5 The comparison of
Correctness 1 1.5-2 objectives, using the AHP
Damage-defect free 1 method

logistics manager sales manager pefect order performance

on time delivery on time delivery


Figure 3.
The objectives
damage/defect free completeness damage/defect free completeness prioritization (left hand
side) and the perfect order
performance (right hand
side)
correctness correctness

due to a correlation effect with the other measures and their likely effect in achieving
the objectives. A consideration of only the value of ratios would, therefore, not be
representative. Some results in terms of calculations are shown in Table IV. The results
from the model in terms of correlations of risk factors are shown in Figure 4.

The managers considerations


In their initial evaluations, managers assessed procurement as being the most risky
area. This was because a lack of integration with suppliers meant that on-time delivery
IJLM
Some significant results in risk measurement
17,1 Risk indicators Ratios

Suppliers out-of-time deliveries/on time 10-25 percent (it depends on each supplier and
deliveries from suppliers products delivered
Suppliers turnover 40 percent (it represents short-term relations and
130 lack of integration)
Incomplete orders due to suppliers delays/total 50 percent
incomplete orders
Warehouse damaged goods/handled goods 20 percent (high value and critical goods)
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Unplanned machine stoppages in 10 percent


warehousing/total stoppages
Warehouse damage index 5 percent (all the interruptions)
Unplanned machine stoppages in 3 percent
production/total stoppages
Number of linked production phases/total 50 percent (high impact along the chain)
number of production phases
Unplanned outputs variations/planned outputs 13 percent
Forecastings errors/total forecasts 5 percent (high impact along the chain)
Products damaged during transport/products 15 percent
delivered
Number of incorrect deliveries due to carrier 3 percent
Table IV. mistakes/total orders
Results in risk indicators Transport delays 7 percent

DAMAGE
DEFECT
TRANSPORT FREE
WAREH. DELAYS
DAMAGE
INDEX

WAREH. LINKED UNP. MACHINE ON TIME


DAM / DEF PHASES STOPPAGES DELIVERY
GOODS

MANUFACT
INTERMEDIATE MATERIALS
SUPPLIERS DELAYIES
DELAYS
FINAL PRODUCTS
FORECAST'S
DEVIATIONS

Figure 4. FINAL PRODUCTS TRANSPORT


The correlations of risk DELAYS ORDER
COMPLETENESS
factors
high impact low impact

could not be ensured when orders were urgent or changeable. Managers complained
about missed deliveries, the risk of stock out in the processes, and incomplete
deliveries. Because they lacked confidence, managers maintained high quality control
in order to avoid machine stoppages or defective deliveries to clients. For these
reasons, managers were in the habit of increasing control of inbound materials, and
selecting a small number of suppliers to integrate.
Warehousing, with its short process time, was perceived to be efficient taking
account of timeliness as a critical objective for the company. Transport providers were
considered reasonably efficient and prompt, although the carriers sometimes cause Managing risks
damages to products. Because of this, managers were in the habit of transferring to in the supply
carriers, by contractual agreement, the risk of returned product from the clients and the
cost of reverse logistics. chain

The model results


With respect to the most important sub-objective, on-time delivery, supplier service 131
had a significant impact on delays particularly for inbound final products. The impact
of inbound raw materials on stoppages or process delays was less significant. The
impact of delays or damaged handled goods in warehousing was, nevertheless, higher.
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These different impacts became apparent from an evaluation of the number of orders
that were missed due to each stoppage or delay, as a result of warehousing or defective
materials. Moreover, the warehousing and manufacturing phases were linked with a
direct effect in terms of overall impact. Even if the ratios were not high in value, the
impact was very high in terms of missed orders. Further observations revealed that the
high level of inbound quality control sometimes slowed down the warehousing process
with deleterious effects in terms of delays.
In addition, a deviation of actual sales from those forecast, even if only as little as 5
percent, created a high level of risk along the chain because orders were often urgent
and unpredictable. The impact of the ratio was nevertheless high thus affecting
relationships upstream.
The transport providers directly caused 7 percent of the delays to clients as an
average ratio among the three providers. Even allowing for the fact that the objective
of damage-free and defect-free deliveries was not the most critical, the effects in terms
of poor services for key clients are often relevant especially if damage occurred to
high-value goods destined for important clients. The strategy of a contractual risk
transfer with respect to the return cost thus seems to have been ineffective.
In terms of damages, warehousing also had a critical ratio in term of obsolete
stored products and damages.

Conclusion of case study


The managers initial evaluations and the results of the model are compared in Figure 5,
and represented in the supply-chain areas. An appreciation of the most critical areas
comes from careful evaluations of the impacts and a consideration of the cause-effect
relationships (Figure 4). For example, with respect to forecasting activities, managers
in the focal company initially considered that the low level of deviations between actual
and forecast demand was irrelevant. This actually obscures unsatisfactory time
planning and a lack of visibility downstream. This, in turn, has an adverse effect on
relationships upstream by a sort of bullwhip effect.
Even if the initial risk landscape suggested that the primary need was for the
creation of an integrated program upstream, the improvement of visibility downstream
(and a shorter forecasting horizon) would appear to be more important.

Conclusion and directions for further research


The research goal was to develop a model to assess risks in the supply chain and to
involve the AHP method in the definition of decision priorities. From the results of the
case study, the model seems helpful in creating awareness of supply chain risk factors.
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area
17,1

132
IJLM

Figure 5.
The risk landscape by
Managers' perceptions Model's results

TRANSPORT
TRANSPORT

ORDER CYCLE
ORDER CYCLE

PROCUREMENT
PROCUREMENT

WARE HOUSING
WARE HOUSING

MANUFACTURING
MANUFACTURING

ON TIME ON TIME

COMPLETENESS COMPLETENESS

CORRECTNESS CORRECTNESS

DAMAGE/DEFECT DAMAGE/DEFECT
FREE FREE

high level of risk medium level of risk high level of risk


The involvement of managers from different areas is essential in establishing a Managing risks
thorough consideration of critical issues and interdependencies in determining a in the supply
complete risk analysis.
The model allows for flexibility in using (and the frequent monitoring of) a panel of chain
indicators by management. For this reason the dashboard is composed of only a few
indicators. They should nevertheless be carefully evaluated to ensure that synthesis
among different perspectives results in the most critical activities being assessed. 133
The application of the AHP method seems to be particularly helpful in order to
support the prioritization of objectives and the overall impact analysis.
The model could be developed in two directions. First, it could be oriented towards
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the supply chain objective of reactivity by a consideration of the timeliness


paradigm. Secondly, the model could be extended to more indicators of integration
upstream and downstream within the supply chain.
Developments in the model should nevertheless be considered only if there is an
effective capability to manage the cause-effect relationships among indicators. The
identification of too many indicators can result in a difficult evaluation of
interdependences. This, in turn, can result in an inaccurate evaluation and ineffective
decisions.
Finally, further application in various companies and industry sectors would be
helpful in collecting information about different supply chains.

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About the authors


Barbara Gaudenzi is Assistant Professor of Economics and Enterprise Management at the
University of Verona, Italy. Barbara Gaudenzi is the corresponding author and can be contacted
at: barbara.gaudenzi@univr.it
Antonio Borghesi is Professor of Economics and Enterprise Management at the University of
Vernona, Italy. E-mail: antonio.borghesi@univr.it

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