Research on the Internal Control and Risk Management in Supply
Chain Operations
HE XueFeng, CHENG QiDeng
The Key R&D Center for Finance of Chongqing, Chongqing Institute of Technology,Chongqing ,
400050, China.
Library of Chongqing, Institute of Technology, Institute of Technology,Chongqing , 400050, China.
hxf@cqit.edu.cn
Abstract: Supply chain management (SCM) is the process of planning, implementing and controlling
the operations of the supply chain as efficiently as possible.There have been a few changes in business
environment that have contributed to the development of supply chain networks in the 21st century. To
ensure that the organizational objectives stand a better chance of being attained, the internal control
system becomes necessary to gain a full understanding of all the developments and uncertainties that
could emerge at any point in the supply chain. With the emphasis on controls, what better time for us in
SC to build a case for obtaining those resources, systems, and tools to help us become more effective
SCM organizations.
Keywords Supply chain management (SCM); the Sarbanes-Oxley act ; Risk Management; The internal
control system
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1 Introduction
Supply chain management (SCM) is the process of planning, implementing and controlling the
operations of the supply chain as efficiently as possible( Kashik K.D., & Cooper, M., 2000). In the 21st
century, there have been a few changes in business environment that have contributed to the
development of supply chain networks. Supply Chain (SC) is a functional network composed
by suppliers manufacturers, vendors and retailers who make producing and delivering of
products(Halldorsson, A., Kotzab, H., Mikkola, J. H., Skjoett-Larsen, T. , 2007). SCM is a
cross-functional approach to manage the movement of raw materials into an organization, certain
aspects of the internal processing of materials into finished goods, and then the movement of finished
goods out of the organization toward the end-consumer. Kethen Jr., G., & Hult, T.M. (2006), Kashik K.D
et al. (2000) also reported similar results.
The essential idea of SCM is to better control the information flow, physical flow and capital
flow through this relations on the chain so that the companies on the SC could reduce their costs and
quickly respond the demands of customers( Kashik K.D., & Cooper, M., 2000).The review and
evaluation of internal accounting control systems hasalways been a major task to auditors and
management due to the professional,legal, and economic concerns.
According to Robert (2006), the Sarbanes-Oxley act (SOX)section 404 specifically requires that
companies create and maintain viable controls. The SEC has determined that controls beyond just
Financial Controls are necessary and the following are specific supply chain issues that should be
addressed by supply chain organizations(Robert J. 2006 .In recent years, the popular management
mode of the “horizontal integration” enables the formation of a chain connecting all the enterprises from
the provider to the manufacturer and then to the distributors among each enterprise. The enterprises of
neighboring nodes on the chain present a supply and demand relationship and form the supply chain
management (SCM). The internal control system is the SCM Leader’s opportunity to achieve SCM
Excellence for their department. With the emphasis on controls, systems, and streamlined processes,
what better time for us in supply chain to build a case for obtaining those resources, systems, and tools
to help us become more effective SCM organizations(Robert J. , 2006 .
The internal control system problems in the enterprise under the background of the SC
management should be handled well. According to the perspective of COSO, five factors related to each
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other are included in internal control framework, namely the environmental control, the risk assessment,
the activity control, the information and communication as well as the supervision. In the internal
control system of the enterprises in the SC management mode, the focus should be extended from
aiming at the single internal control system of the enterprises to paying attention to the whole internal
control system of SC, compared with the internal control system in the management mode of the
independent enterprises in the past. And among the five factors of the internal control system, the risk
factor, especially the risk from SC, should arouse attention of the management in enterprises particularly.
The emergency and the risk of SC seem to be unavoidable. Therefore, how to minimize the risks from
SC becomes the tough problem perplexing the senior management of enterprises in SC. If SC risks are
assessed and paid close attention to from the origin where the risks generate, the SC risks really are not
uncontrollable completely. The risk assessment and management in SC can be carried out through the
following processes:
Although used to be neglected, logistics field began to show its glorious charming. It
servers in different kinds of trade activities and runs through purchasing, producing, sales and other
departments. To be both an advanced kind of organization pattern and a technique of management,
modern logistics has been changed a lot in its range and significance.
In early August of 2007, Meitai toys & grafts industry co.ltd. In America recalled 967 thousand
children toys with the lead content exceeding the provided standard. The batch of products was
produced by some toy company in Foshan of China. The problem lied in the paint after test. The
provider boss had been the friend of the company’s boss for many years and no problems had ever
existed in the paint provided by the provider boss. Under the condition of urgently lacking of the yellow
toner, the paint provider found a toner factory and purchased 250 kg of toner on line. At that time, The
paint provider did not test the toner due to the urgent time without realizing that both the leadless
certificate and the authentication certificate provided by the toner factory were fake, thus leading to the
safety problem of the toys. The event not only made the boss commit subside and died, but also resulted
in trust crises on the toys made in China by the world. The toys recalling event can be viewed as the
typical case of the enterprise out of control internally under the background of the current SC
management.
2 Internal Control and Risk Management in Supply Chain Operations
2.1 Identifying and recognizing relevant supply chain risks
In order to assess and control the risks from SC, what kinds of emergencies or risks existing in SC
should be known first. The emergencies of SC are mainly in three classes: the first class is the urgent
situation in operation, including the equipment fault and the system collapse, the interruption of supply,
the bankrupt, the cheat or the strike; the second class is natural disasters such as earthquake, hurricane
and storm; the third class is terrorism or political turmoil. September 11 Event in America is a good
example. If willing to work out strategies in advance to reduce the risk caused by the terrorism, the
enterprises should know who the chief criminal is, what motivation is, what the next attack plan is, and
when the attack launches, etc. In fact, we can not obtain the information at all, so it is extremely difficult
to formulate the precautionary measures in advance. Furthermore, according to people’s reaction after
the occurrence of the natural disaster like the hurricane in New Orleans as well as the technical accidents
like the explosion case in Chernobyl nuclear power plant, the public and large companies do not worry
before the events and only after the events happen, they are willing to adopt the precautionary measures.
After the disasters happen and many years pass by, the worry will disappear slowly. If people have not
experienced the flood or the earthquake for successive years, the relevant insurances are usually
withdrawn. Since the SC emergency is hard to take precaution in advance, the key of reducing the SC
risks lies in that the company should know about the weak point of SC where the company is. The
company should determine and assess the impact on the global SC of different emergencies through
studying weak points of SC so as to further determine and assess the impact on the company. No matter
what the origin of the risk is, the foremost step in the process of risk assessment of the enterprises is to
study the overall weak points and then the weak points of SC and the risk of the company caused by the
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weak points of SC. From the case of the toy company in Foshan, we find an obvious weak point existing
in SC management of the company that is the company excessively trusts the provider so as to give up
the quality inspection of the goods. Therefore, the weak point at last hurts the company deadly.
2.2 Determining the SCRM strategy and actions
After recognizing the risks existing in SC, the company should also work out the emergency plan
to prepare for all the emergencies. Knowing the weak points of the company and the holistic risk
situation of SC can help the company to work out the right emergency plan. In March 2000, the factory
of Phillips Corporation located in Albuquerque suddenly caught fire and the factory was the provider of
the wireless radio frequency chips for two mobile phone tycoons of Nokia and Ericsson. After the
factory was swallowed by the conflagration, the two companies lost a key link in SC at once. According
to the report, on one hand, Nokia immediately established a “commando group” for compressing Phillip
and demanding that the Phillip Cooperation should put the productivity of other factories into producing
needed wireless radio frequency chips; on the other hand, Nokia redesigned the wireless radio frequency
chips rapidly so that the companies in other places could also produce these kinds of chips. The design
had a quite desired effect and due to the fast action, Nokia realized its production target and even
increased its market share from 27% to 30%. Ericsson realized the supply problems after several weeks,
but its capability of meeting the customers’ requirements had been on large discount. What’s more, as
the factory in Albuquerque was the only wireless radio frequency chip provider for Ericsson, Ericsson
found that it could not obtain these key elements at all. The loss of the company in that year reached up
to 1.7 billion US dollars. The handling ways to the SC emergency of he two companies above become
the emergency management textbook for dealing with SC emergency nowadays. The two handling ways
also admonish people that the disaster can be turned into the competitive strengths as long as the correct
ways are adopted. The enterprises in SC should pay close attention to the emergency plan highly. The
aims of the SC management include: agility, strong adaptation and capacity of coordinating each party’s
benefits. SC with upstanding agility should rapidly deal with the sudden change of supply and demand;
SC with strong adaptation is required to trace the change in the economic situation in time; SC being
able to coordinate each party’s benefits should enable each party to promote the whole achievements of
SC to the maximum degree and at the same time realize the maximization of the cooperation requital.
The companies can not realize the above aims without working out perfect emergency plan.
3 Executing and implementing actions
The keys of the SC risk management are being good at finding problems and coming up with the
solutions.First, the products and the product lines of the companies should be subdivided and which
products have relatively high demand for time should be known; how to protect SC or enable SC to
possess stronger adaptation should be considered; the enterprises should start from the products or
processes with the requirement that time is everything. Next, by aiming at these products, all the links of
SC are assessed in detail to determine the highest risk origin and work out the solving proposal. For
example, overfull stock should be avoided; the transportation channel in support should be found out,
etc. The enterprises should work out the proposal in support for these key systems. After working out
the proposal in support, the enterprises should make clear how many precautionary measures to adopt,
which is determined by service profit of each enterprises as well as the price that the enterprises pay
after the failure. When the layout of the proposal in support is carried out, usually, the traffic transport
link is viewed as the key object needed to be considered, but it’s not easy to work out the traffic
proposal in support or the transport flexibility proposal. For instance, if 50 cargo boats wait for
unloading at the port while the goods are put in one of the cargo boats, the selections of the proposal in
support are greatly restricted. The key of risk management in SC is fully realizing risks which different
services of the company are faced with, then adopting a set of precautionary measures to take precaution,
and regularly auditing the SC plan and key points of the risk assessment. The bottleneck of SC should
be identified, as it will destroy an enterprise in the occurrence of the emergencies. Perhaps it’s hard to
achieve the demands above, but the real situation is that the enterprises are unnecessary to do everything
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perfectly and they only need to surpass their corrivals. If able to discover the emergencies which will
rise in the industry earlier than others, the enterprise will have many choices. The following similar
situation often appears in the occurrence of the emergencies: UPS and Federal Express are the corrivals
in the same industry; if some enterprise finds that the problems may exist in the transport provider UPS
in SC and the enterprise takes the lead to ask Federal Express Corporation for help, it’s no doubt that the
favorable response will be obtained from Federal Express Corporation. If the enterprise is the 5th or even
the 15th to ask Federal Express for help after the occurrence of the emergency, it’s Federal Express’s
turn to have problems, for they have been operated with the full load. And this point can be proved by
the above case of Nokia and Ericsson. Nokia hadn’t worked out any standby plan in advance, but it was
the first to find out the problems and take action compared with the corrival. Therefore, it won the
competition. Monitoring can offer essential information to continuously evaluate and improve your
SCRM-strategy and -actions.
4 Conclusions and implications
The implementing of SCM is bound to be integrated with information flow, physical flow and
capital flow. Logistics management is the core of SCM. The performance of LM will be absolutely
influenced given that the companies on SC didn't cooperate well enough and it will surely increase
logistic costs. Well performance of logistics is the basic assurance of the optimization of SCM.
Market competition in the future is between the supply chains instead of companies as it was before.
We are going to conduct logistics management based on the whole SC. The idea of SCM has changed
the way of logistics management. It made companies planning and improving logistics management
inside the company and integrated with other companies outside the company as well.
For the enterprises in our country, the management of SC is the largest defect obstructing the
development. An important reason lies in the imperfection in the internal control system of the
enterprises in our country. From the above analysis, we can get the following enlightenments:
(1) The administration structure of the company should be perfected and the enterprise culture
should be cultivated. The administration structure in its true sense not only includes the institutions like
perfect board, commission on audit and so on, but also contains the deep enterprise culture, which
provides a stable control environment for the SC management. However, at present, many domestic
enterprises are ruled by the voice of one man alone, in other words, in a colossal enterprise group, the
decisions are made by one person alone. This kind of control environment is extremely unstable. The
enterprises in our country should find a balanced road adapting to the development of their own based
on establishing the administration structure of the company in true sense so that the rights are checked
and balanced.
(2) The risk assessment should be emphasized. Compared with the foreign companies which take
precaution in advance through the risk assessment, the domestic enterprises always adopt remedy
measures after the occurrence of the emergency. Thus, the enterprises not only suffer great loss, but also
experience the interruption or even stop of production of SC easily. Therefore, the enterprises in our
country should establish a set of reasonable risk-avoiding system.
(3)The control link and programs in the information system should be strengthened. Many
domestic enterprises do not established the basic dispatching system of the SC plan and do not possess
supporting control programs, which causes the total cost of the physical distribution and the stock cost
to be much higher than that of the enterprises in the same industry in the world.
(4) The range of information communication should be extended. Nearly every domestic enterprise
only establishes the self-centered information distribution and collection system and hardly takes the
cooperation partners into account. If wishing to establish the global SC, the enterprises should inevitably
learn to carry out wider information communication with other enterprises.
(5) The SC infrastructure should be operated well. The SC infrastructure mainly includes
establishing the information system with rapid reaction, emphasizing to strengthen the physical
distribution infrastructure in the internal enterprise and the distribution infrastructure between the
enterprises and other enterprises. The domestic enterprises generally neglect the infrastructure and at last,
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a set of perfect and scientific SC management system can not be established.
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