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PALGRAVE
STUDIES
IN LOGISTICS
SUPPLY CHAIN MANAGEMENT
SERIES EDITORS: MARTIN CHRISTOPHER · EMEL AKTAS
Strategic Sourcing
Approaches for Managing
Supply Chain Risk
George A. Zsidisin · Barbara Gaudenzi ·
Roberta Pellegrino
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Palgrave Studies in Logistics and Supply Chain
Management
Series Editors
Martin Christopher, School of Management, Cranfield University,
Cranfield, Bedfordshire, UK
Emel Aktas , School of Management, Building 32, Cranfield
University, Cranfield, Bedfordshire, UK
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Logistics and supply chain management has always been critical to business success and to the efficient running of economies and the well-being
of the societies they serve. In recent years, however, the importance
of these activities has been highlighted by geopolitical challenges and
uncertainty that have threatened global supply chains.
The series will provide an opportunity to explore in-depth and
with rigour topics such as digital transformation, supply chain risk and
resilience, sustainability and the circular economy, and the future of global
supply chain design and management. Entries in the series will be international in outlook, providing fresh and innovative approaches to pressing
issues in logistics and supply chain management.
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George A. Zsidisin · Barbara Gaudenzi ·
Roberta Pellegrino
Strategic Sourcing
Approaches for Managing Supply Chain Risk
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To my sons Nick, Lucas and Blaise for your love and support throughout
the years
—George A. Zsidisin
To my daughters, Emma and Vittoria, with love
—Barbara Gaudenzi
To my beloved children Salvatore and Laura
—Roberta Pellegrino
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Foreword
It was another morning when I got this call from my business copilot
Bernd Emig when he informed me. “One of our suppliers is under water.
This time it is serious. I think you should take a closer look.” Immediately,
I asked to inform our management board about the status and what we
knew up to that moment. Such same-day information is what helps you to
calm down the management team as in my experience. It is particularly
effective when you follow up with daily management information until
the crisis is under control.
We find ourselves in the reality show of supply chain risk management
in a worldwide operating industry supplier.
The following weekend after Bernd’s Friday call and the water impact
at our supplier, Bernd analyzed the weather and tried to answer why the
water came so fast and at these high levels. The result was clear. One
of those 500-year events that are not supposed to occur but do occur
more frequently than in the past. As many of you know, 2023 will be the
hottest year since mankind started to measure and write down weather
data. According to Dr. Florian Imbéry from the Deutscher Wetterdienst,
the German Weather Service, this extreme weather is (1) not unexpected
and (2) will continue to be around and will get more severe in the future.
Ok. But what does it mean for us? Before I try to answer this question,
I will give you some more information about the specific case mentioned
above.
vii
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viii
FOREWORD
On August 4, 2023 our supplier was flooded with 1.3 to 1.8m high
water levels everywhere in the plant. The supplier was physically protected
against high water levels, but this time it was simply too much water.
The rain clouds in the mountain valley did not move as they would have
usually done. Heavy rain continued for days, filled the rivers. Small rivers
became big rivers, finally the water overcame the dams and ran toward the
valleys. Our supplier only had a few minutes to evacuate. Thankfully no
casualties, but a whole plant filled with water, mud, wood, extra vehicles
that have not been there before the flood, an extra house in front of the
plant, missing cars of the workers, and damage everywhere. On Monday
after the impact, my management team and I called the ownership family
of our supplier. They have cried many tears over the phone. Silence in
my office. Nobody could say a word. Three days later we have been onsite with a first technical expert team to assess the damage. Our team
diagnosis: All machines are sunk; no machine had survived the flood. Not
a single one.
In the following days and weeks, a team of experts together with the
employees of the supplier and hundreds of firemen were on-site at the
supplier to bring the machines back to life. The only chance was to
clean and to repair. As a result, almost everything has been repaired.
All available and not available resources were activated from suppliers
to customers, employees, community, family, government, and last but
by far not least the customers of customers. 87 days of consecutive and
hard work until the affected supplier could rest for two days. The miracle
was done. Someone said to me: “It is like the moon-landing. It seemed
impossible in the beginning, but finally we made it.”
Of course, we asked ourselves what we would learn from this
event.First of all, we learned that extreme weather will be there. Therefore, you need to identify hotspots not limited to weather, but also
including earthquakes, cyber risks, and financial risks and see if you have
suppliers there. If so, identify suitable measures to protect your suppliers
and yourself. In case the deep impact cannot be avoided, make sure that
you form a strong crisis team that has the black credit card, because
on-site you will need to purchase things that you have not packed nor
foreseen that you would need. I call this ensuring your on-site emergency
purchasing and execution capabilities.
Second, for the suppliers identified as being in risk areas, communicate the required time for and the price tag of a second source to your
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FOREWORD
ix
customers. However, the value of a current second source can be overrated if it does not have the ability to ad hoc cover the full capacity of the
supplier at risk. Therefore, I suggest to rather think and act in the dimensions time to second source and money to second source. What I mean is that
you should ask yourself for all your specific suppliers at risk, how much
time you would need to install an alternative supply route from the same
supplier, but from a different plant, or from another supplier. In addition,
you need to find out, how much money is required in order to install such
a second source in case you really need it. Don’t be too conservative. In
reality, it is much less money that you need than you would think you
would. Production and transportation tools are most of the time enough.
Third, make sure that all your suppliers install data and information
backup, ERP data and other necessary information to run the company,
externally or in a real-time mirrored way. If you do not have a data backup
that is physically located away from the danger zone, you will have a
bigger problem.
Four, move finished goods stock outside of the supplier premises. Only
physically away from the scene, a finished goods stock will help you. The
best practice is to align the finished goods stock with your time to the
second source in the absolute quantity that you really need. Don’t lie to
yourself. I give you an example. If in reality you need three months to
build up a second source with the full capacity line up that you require,
so the time to second source is three months, your safety stock ready to
be used at all times must equally be enough for three months of deliveries.
I repeat, don’t lie to yourself.
Five, a task force team should be defined upfront. Form a team of
friends. I recommend watching again the movie “Armageddon.” Such
kind of team is what you need. The responsibility should be given to
the task force manager and he and the team shall have the full decision
authority within predefined limits. The limits of their actions must be
pre-discussed and released, because once the team is deployed it needs
and has to have full decision authority. Once the team is defined, train and
form its capabilities to perfection. You will need the full performance. You
need a mission control team and a mission control leader to successfully
overcome risk management jobs.
In summary. Risk is absolute. Both, occurring risks, but also identified risks are by no means relative, they are always absolute. As this is
fundamentally the case, I recommend that you prepare yourself. With
this in mind, I can safely say that you chose the best book to get ready
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x
FOREWORD
for Strategic Sourcing Approaches in order to truly Manage your Supply
Chain Risk. In other words, with this book Barbara, Roberta, and George
have hit the nail on the head.
From research we know. The fitter the better. And the fittest will
survive. This is especially true for affected suppliers. So, if a supplier
before the crisis was not fit, the probability that this supplier will survive is
minimal. The same is the case for the focal firm that is buying from such
a supplier. If I shall say it in modern words, supply chain resilience means
that the buying company and its suppliers and respective supply chains
need to work on their efficiency and performance. Only high-performance
companies have a chance to survive a high-impact event.
Another thought before I finish my foreword. Circularity can for sure
increase your resilience and reduce your risk. A circular economy helps
to increase supply chain performance and immanently reduces absolute
risk. In the context of Strategic Sourcing Approaches to Manage Supply
Chain Risk, I also recommend forgetting about artificial intelligence for a
moment. It is most of the time about basic instinct that will help you to
understand and mitigate your risks.
And don’t forget: Mankind is good at reacting, but are we also good
at acting?
Enjoy the reading of this great book!
Lauf, Germany
Prof. Dr.-Ing. Florian Schupp
Head of Purchasing and Supplier
Management
Division Automotive
Technologies, Schaeffler Group
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Preface
Our knowledge of supply chain risk, its assessment, management, and
how firms can attain supply chain resiliency has rapidly advanced during
the past 25 years. However, there are very few publications or books
providing a holistic perspective of the myriad tools and approaches firms
can consider in assessing and managing supply chain risk. This book
was written to inform practice and research as to how firms can assess
and manage supply risk as early as possible during the strategic sourcing
process in order to help organizations facilitate resilience in their supply
chains.
St. Louis, USA
Verona, Italy
Bari, Italy
George A. Zsidisin
Barbara Gaudenzi
Roberta Pellegrino
xi
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About This Book
This book provides a high-level overview of how firms can identify,
assess, and manage supply chain risk during the strategic sourcing process.
Chapter 1 provides an overview of how supply chain risk can detrimentally affect organizations and the need for addressing risk as early
as possible during the strategic sourcing process. Chapter 2 summarizes
prior research and practice of supply chain risk analysis and management
approaches that have evolved during the past 25 years. Managing supply
chain risk requires assessment in order to appropriately allocate resources
for its management. The purpose of Chapter 3 is to examine various qualitative and quantitative data analysis approaches that provide insight to
supply chain professionals when identifying threats that can create disruptions or other manifestations of risk. Building from the first three chapters,
the purpose of Chapter 4 is to offer and summarize various approaches
and strategies firms can employ during the strategic sourcing process for
managing supply chain risk. Chapter 5 describes the importance of buyer–
supplier relationships in managing supply chain risk, as well as insights
association with sustainability and Industry 4.0 in conclusion.
xv
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Praise for Strategic Sourcing
“In recent years supply chain risk management has moved much higher
up the agenda in corporate boardrooms around the world. Of the many
sources of risk that surround the business today one of the most critical
lies in the firm’s supply base. This timely book addresses the challenge of managing upstream risk through a more strategic approach
to sourcing and provides practical guidance on how better to manage
supplier relationships – there are important messages here for all business
leaders.”
—Dr. Martin Christopher, Emeritus Professor of Marketing & Logistics,
Cranfield University, UK
“An up-to-date and practical guide for understanding and actively
managing the myriad of supply chain exposures and risks on an end-toend basis. The authors have created a great risk management tool for
veteran sourcing and supply chain managers as well as young professionals
just getting started in the business.”
—Mr. Tony Cabot, President, CPCU Society Europe Chapter;
Independent Insurance Advisor
xvii
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xviii
PRAISE FOR STRATEGIC SOURCING
“Understanding how to identify and mitigate risk in today’s highly
complex environment is a key competency. The authors provide an excellent resource for informing practice and research on how firms can assess
and manage supply risk as early as possible during the strategic sourcing
process.”
—Dr. Wendy Tate, McCormick Endowed Professor of Supply Chain
Management, University of Tennessee
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Contents
1
2
Strategic Sourcing as an Enabler of Supply Chain Risk
Management
1.1 Introduction
1.2 What Has Changed?
1.3 Strategic Sourcing Approaches for Managing Supply
Chain Risk
1.4 Putting the Pieces Together
References
Supply Chain Risk and Organization Vulnerability
2.1 Introduction
2.2 Global and Organizational Risks: A First View
2.3 Supply Chain Risk: Toward a Definition
2.4 Risk Management
Risk Identification
Risk Analysis
Risk Evaluation
Risk Treatment
The Cost of Risk (CoR) Indicator
2.5 Supply Chain Risk Management
Identifying Key Actors in the Supply Chain
Defining Key Goals
2.6 Summary
References
1
1
2
6
8
9
11
12
12
18
19
22
22
23
24
26
27
27
28
34
35
xix
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xx
CONTENTS
3
Decision Analysis Techniques in Supply Risk Assessment
3.1 Importance of Assessing Supply Chain Risk
3.2 Supply Chain Risk Assessment Techniques
3.3 Qualitative Approaches
Delphi Method
Interpretive Structural Modelling (ISM)
3.4 Quantitative Approaches
Failure Mode Effects Analysis (FMEA)
Analytic Hierarchy Processing (AHP)
Bayesian Networks (BNs)
Total Cost of Ownership (TCO)
Real Options Valuation (ROV)
Monte Carlo Simulation (MCS)
3.5 Classifying Supply Chain Risk Assessment Techniques
3.6 Importance of Risk Assessment Techniques
References
4
Managing Supply Chain Risk During the Strategic
Sourcing Process
4.1 What Is Strategic Sourcing?
4.2 Techniques for Managing Risk During the Strategic
Sourcing Process
Contracting/Escalation Clauses
Early Supplier Involvement
Flexible Manufacturing Systems
Multiple Supply Sources
Strategic Alliances and Relationship Management
Requiring Suppliers to Hold Inventory
Supplier Development
Business/Supply Continuity Planning
Target Costing
4.3 Influencing Factors
Power in the Relationship
Spend Level
Importance of the Purchase
Purchasing’s Status in Organization
4.4 Summary
References
37
38
40
41
41
42
46
46
47
49
49
50
54
56
57
58
63
63
64
65
67
70
71
73
75
76
78
79
80
81
84
85
85
86
87
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CONTENTS
5
Beyond Strategic Sourcing
5.1 The 5 P’s of Risk Management
5.2 Buyer–Supplier Relationships
5.3 The Benefits and Challenges of Industry 4.0
5.4 Beyond Strategic Sourcing
References
Index
xxi
93
93
95
96
98
100
103
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About the Authors
Dr. George A. Zsidisin
is the John
W. Barriger III Professor at the University
of Missouri—St. Louis. Professor Zsidisin is
one of the leading global scholars on supply
chain risk, disruptions, and commodity price
volatility management. He has published over
80 research and practitioner articles and eight
books, including Supply Chain Risk: A Handbook on Assessment, Management and Performance; Managing Commodity Price Volatility:
A Supply Chain Management Perspective;
Handbook for Supply Chain Risk Management:
Case Studies, Effective Practices, and Emerging
Trends; and Revisiting Supply Chain Risk. His
research has been recognized with numerous
awards, such as from the Institute for Supply
Management, Deutsche Post, the Council of
Supply Chain Management Professionals, and
the Decision Sciences Institute. Further, he
is one of the founding members of the
International Supply Chain Risk Management
(ISCRiM) network, teaches and leads discussions on supply chain management and risk
xxiii
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xxiv
ABOUT THE AUTHORS
with various Executive Education Programs
and numerous companies in the United States
and Europe, is co-editor Emeritus of the
Journal of Purchasing & Supply Management
and serves on the Editorial Review Board for
several academic supply chain journals.
Barbara Gaudenzi Ph.D., is Associate
Professor in Supply Chain Management
and Risk Management at the Department
of Management at the University of Verona,
Italy. She is Director of RiskMaster and
LogiMaster at the University of Verona.
Her research interests are, in particular,
Supply Chain Management, Supply Chain
Risk Management, Resilience and Cyber
Risk in Supply Chains. She has published in
several leading international Journals, such as
Industrial Marketing Management, Journal
of Purchasing and Supply Management,
Supply Chain Management: an International
Journal, International Journal of Production
Economics, European Management Journal,
and others.
Roberta Pellegrino Ph.D. is Associate
Professor in Management Engineering at
Politecnico di Bari (Italy). Her main research
interests are on Public-Private Partnership
(PPP), Supply Chain Risk Management, Real
Options Theory and other topics in the field
of economic-management engineering. She
coordinates and is involved in research projects
with companies and other private/public organizations. She is a member of the ISCRIM
network (Supply Chain Risk Management
Network) and has been a member of European
project European Cooperation in the field of
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ABOUT THE AUTHORS
xxv
Scientific and Technical Research—COST—
“Public Private Partnerships in Transport:
Trends and Theory” since 2010. She has been
a teacher for several master courses or Ph.D.
lecturers on the themes of risk management,
PPP and Real option theory. She has been a
visiting scholar at Columbia University (New
York, USA). She is the author of more than
50 publications in international journals and
books, and more than 70 papers presented at
international and national conferences.
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List of Figures
Fig. 2.1
Fig. 2.2
Fig. 2.3
Fig. 2.4
Fig. 2.5
Fig. 2.6
Fig. 2.7
Fig. 2.8
Fig. 3.1
Fig. 3.2
Fig. 3.3
Fig. 3.4
Fig. 3.5
Fig. 3.6
Fig. 3.7
Kloman Spectrum
Global risk according to WEF—report 2023 (World
Economic Forum, 2023)
Risk Barometer 2023, most significant organizational risks
(Allianz, 2023)
Risk Barometer 2023, most significant organizational
by different world regions
Key steps of risk management process (ISO 31000:2018)
Risk matrix example
Risk treatment techniques
Linking supply chain risk with performance
Example of categorization of supply chain risks (Pfohl
et al., 2011)
Example of ISM of supply chain risks (Pfohl et al., 2011)
Example of a MICMAC matrix
FMEA description
Example of FMEA template
Monte Carlo simulation
Elements of the Monte Carlo simulation
13
15
16
17
21
25
25
28
44
44
45
47
48
54
55
xxvii
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List of Tables
Table 2.1
Table 3.1
Table 3.2
Table 3.3
Table 4.1
Table 4.2
Table 4.3
Table 4.4
Classification of supply chain risk
Qualitative versus quantitative risk assessment approaches:
strengths and drawbacks (adapted from Tran et al., 2018)
Cost elements of commodity purchases under various
commodity price risk mitigation approaches (Gaudenzi
et al., 2021)
Matching supply chain risk assessment and analytic
techniques with risk indicators
Strategic sourcing steps
Strategic sourcing step descriptions (based on Smeltzer
et al., 2003)
Risk management approaches in the strategic sourcing
process
Questions to address in supply continuity planning
20
41
51
56
64
65
66
79
xxix
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CHAPTER 1
Strategic Sourcing as an Enabler of Supply
Chain Risk Management
Abstract The risk of supply chain disruptions and other forms of failures, such as sudden price shifts, has and continues to create challenges
for firms managing their supply chains. Fortunately, we do not need to
reinvent the wheel for managing risk and ensuring supply chain resilience.
Many of the approaches and tools used in the strategic sourcing process
can also be used to manage risk. This introductory chapter provides the
basis and grounding for subsequently identifying various sources of risk,
utilizing an array of analytic tools for assessing the significance of risk,
and subsequently employing well-established approaches in the strategic
sourcing process for managing risk and facilitating supply chain resilience.
Keywords Supply chain disruptions · Strategic sourcing · Supply chain
risk
1.1
Introduction
There is no question that risk exists in supply chains, and that it presents
never-ending challenges for businesses, governments, and non-profit
organizations. The effects of the COVID-19 pandemic, from ensuring
1
G. A. Zsidisin et al., Strategic Sourcing, Palgrave Studies in Logistics
and Supply Chain Management,
https://doi.org/10.1007/978-3-031-52592-6_1
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G. A. ZSIDISIN ET AL.
the health care of individuals to the continued operation of critical industries, have shown us the fragility existing in many supply chains, as well as
the importance of supply chain management for sustaining the needs of
society.
Risk in business, let alone supply chains, has existed ever since individuals and organizations have bartered goods and services. For many
years modern business firms have sought to insulate themselves as much
as possible from risk external to their organizations, primarily through
holding buffer inventory, ensuring multiple sources of supply were available, and extending lead times to customers. The research investigating
supply chain risk management solutions was mostly focused on mathematical approaches for deriving appropriate inventory levels given targeted
service levels (stock out rates) and the efficacy of when and how many
suppliers to use for a purchase category. These classic approaches to supply
chain risk management provide temporary buffers for organizations from
shocks that can occur in the supply chain, but are costly to maintain and
fail to get at the root causes of supply chain disruptions or provide long
term solutions to the changing dynamics and uncertainties that define
modern supply chains.
1.2
What Has Changed?
A confluence of significant events creating widespread supply chain
disruptions, evolving technologies, and changing business practices in
terms of globalization and lean practices changed the perspective individuals and firms have in assessing and managing risk in order to
facilitate supply chain resilience. Supply chain (logistics/transportation/
production) disruptions have always existed throughout history. There is
no shortage of reminders in history as to the failures that occur in supply
chains, such as the numerous cargo ships still sitting at the bottom of
oceans and lakes from storms and piracy from centuries ago. Supply chain
disruptions continue today, and are arguably more profound given the
complexity and interconnectedness of today’s supply chains. Numerous
instances of supply chain disruptions in recent years highlight how supply
chain risk can detrimentally affect firms and societies.
Significant regional and global events have likewise brought supply
chain risk and resilience into prominence. From an individual firm
perspective, the significant supply chain disruption caused by a lightning
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1
STRATEGIC SOURCING AS AN ENABLER OF SUPPLY CHAIN …
3
storm at a Phillips radio frequency chip manufacturing plant in Albuquerque, New Mexico on March 17, 2000, highlights the devastating
effects of supply chain risk. This highly publicized event cost Ericsson
divisional annual losses of $1.68 billion, a 3% loss of market share and
corporate operating losses of $167 million (Mukherjee, 2008). From a
regional perspective, one of the first significant supply chain disruptions
creating the impetus for organizations rethinking supply chain risk and
resilience concerned the foot and mouth disease outbreak in the United
Kingdom starting in February 2001 (Bates, 2016), resulting in over 6
million cows and sheep being slaughtered to halt the disease. Shortly
afterward, on September 11, 2001, terrorist attacks on the World Trade
Center and Pentagon in the United States resulted in the loss of thousands of lives and changed the way we think about security forever. From
a supply chain perspective, these attacks resulted in the closing of the
U.S. border to travel and trade, as well as made clear the critical role
information systems serve in our ability to manage supply chains (Kaplan,
2017). With regard to financial risk in the supply chain, the economic
collapse of many European Union countries during the 2008 recession
showed that disruptions do not just manifest with product flows, but also
financial flows that can starve organizations, creating financial hardship
and failure, and eventually resulting in supply chain disruptions (Caniato
et al., 2019).
More recent times have seen an even arguably greater prevalence of
risk occurring in supply chains. On March 23, 2021, the captain of the
Ever Given lost control of the 400-meter-long container ship blocking
the Suez Canal, the most important sea route between Asia and Europe
through which over 12% of world trade passes. Within days, a queue of
300 cargo ships was formed, carrying cargo worth $60 billion. The price
of oil rises by 5% and the producers do not see the goods ordered delivered. Seaways such as the Suez Canal are among the nerve centers of
world trade. Unforeseen events such as those of Ever Given reveal the
vulnerability of international supply chains and the need to optimize them
not only in consideration of costs, but also of risks.
Further, the recent COVID-19 pandemic exposed the vulnerability of
today’s global supply chains to such an extent that supermarket and electronic store shelves were empty with products even in the most developed
countries due to port closures in Yantian, China, the 4th largest container
vessel port in the world, in relation with a COVID-19 outbreak in June
2021. This incident had even more far-reaching consequences for global
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G. A. ZSIDISIN ET AL.
trade and delayed the shipments of 160,000 40-foot containers. In its
aftermath, worldwide product and transportation prices increased, and
deliveries were delayed.
Additional issues challenge supply chains today. Cybersecurity breaches
have challenged multiple government organizations and private businesses that lost critical intellectual property due to failures in the supplier
ecosystem. The war in the Ukraine has caused significant challenges and
disruptions in a multitude of industries, to include agriculture and automotive (Simchi-Levi & Haren, 2022). The UAW strike in the United
States during October 2023 resulted in overall economic costs more than
nine billion dollars (Dumas, 2023). All of these examples, among a multitude of others, highlight how our supply chains are vulnerable and that
risk continues to plague organizations, thereby creating the need for firms
to proactively manage threats to their supply chains.
The rapid ascent of technologies provides organizations unprecedented
visibility into the supply chain, including threats that can disrupt the flows
of goods and services among firms. Overall, these evolving technologies
and changing business practices have and continue to drastically improve
supply chain effectiveness and efficiency. Current technologies, starting
with computers and Electronic Data Interchange in the 1960s and 1970s,
and evolving to the Internet, Enterprise Resource Planning, and Industry
4.0 today, provide us tools never previously imagined to help firms assess
and manage supply chain risk (Zsidisin & Henke, 2018). However, these
technologies expose firms to other forms of risk, such as those associated with Cybersecurity, theft, and corporate reputation. Data breaches
and cyberattacks with firms such as Target (Popken, 2014) and Colonial
Pipeline (Tidy, 2021) provide a testament to this newer form of risk exposure and the devastation it inflicts. As reported by IBM (2023) the global
average cost of a data breach in 2023 was USD 4.45 million, which is a
15% increase over 3 years.
Beyond technology, changing business practices focusing on quality
and lean operations and supply chains have likewise had an influence
on the way we conceptualize supply chain risk and resilience. During
the 1980s we noticed the success of Japanese business practices focusing
on managing quality and reducing waste and redundancies in production processes and supply chains. The classic book “The Machine That
Changed the World” by Womack et al. (1990) provided evidence as to
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STRATEGIC SOURCING AS AN ENABLER OF SUPPLY CHAIN …
5
how lean practices and quality management programs can provide superior performance and financial returns. More recently, quality management and lean practices have also been found to have a significant
influence on resilience (Ahmed & Huma, 2021).
Although many firms and industries have benefitted from implementing lean operations and supply chain strategies, these practices do
reduce “buffers” or “slack,” such as inventory levels and backup supply
sources that were implemented to offset uncertainties such as demand
volatility and late shipments. When traditional buffers in terms of inventory and multiple sourcing were no longer implemented, unexpected
shocks and disruptions resulted in disruptions and financial losses for
firms. For example, when a tsunami devastated parts of Japan in March
2011, firms such as Toyota and Honda, with their reliance on lean and
Just-in-Time systems, halted or significantly reduced production rates for
many of their models (MotorTrend, 2012). By no means are we criticizing the advances that quality management and lean have contributed
toward helping many firms improve operational and financial performance. However, we are pointing out that fewer organizational buffers
exist in many industries today, thereby necessitating proactive approaches
for ensuring supply chain resilience as early as possible, including during
the strategic sourcing process.
Another factor important for consideration is that the global business
competitive landscape has significantly expanded during the last several
decades due to, in part, the opening of China and subsequently other
regions in Asia and other parts of the world. This emergence of markets
has heightened competition in many industries. The voice of the customer
has likewise become stronger, in part due to the Internet facilitating nearly
instantaneous feedback and widespread dissemination of perspectives and
experiences. In conjunction with the exponential growth of technological
developments, firms are almost forced to shrink new product development
times and live with shorter product life cycles, resulting in more turbulent
supply chains.
As can be seen from these arguments, the business environment is
dynamic and ever-changing. There is a reason for the popularization
of the term VUCA (Volatile, Uncertain, Complex and Ambiguous) to
describe today’s competitive business landscape (Bennett & Lemoine,
2014). Firms continue to create new tools and approaches, and adopt
philosophies oriented toward improving performance. These efforts
arguably both decrease and increase exposure to risk and the ability to
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G. A. ZSIDISIN ET AL.
ensure resilience in the supply chain. What is germane, however, is the
criticality of identifying and mitigating these issues as early as possible.
Hence, the importance and leverage of a robust strategic sourcing process.
The Volatile, Uncertain, Complex, and Ambiguous environment we
live in today has created an unofficial mandate and impetus for firms
to enact strategies that foster resiliency. Hence, the need for creating
processes that identify and manage supply chain risk as early as possible—
such as during the strategic sourcing process. In some ways this is
congruent with established quality management practices, and specifically
with regard to the four costs of quality (CoQ)—prevention, appraisal,
internal failure, external failure (Feigenbaum, 1956). Preventing and
appraising quality failures are touted as being significantly less costly than
experiencing internal and external failures. In a similar fashion, identifying and managing supply chain risk as early as possible, such as during
the strategic sourcing process, is significantly less costly to organizations
than the costs of recovering from a supply chain disruption or failure.
The famous quote from Benjamin Franklin rings true in today’s supply
chains—“An ounce of prevention is worth a pound of cure.”
Identifying, assessing, and managing supply chain risk is an everevolving and necessary process for business survival today. However, the
process itself does not necessarily have to be intimidating or onerous.
Many established supply chain practices today can be implemented during
the strategic sourcing process to fulfill this task.
1.3 Strategic Sourcing Approaches
for Managing Supply Chain Risk
The purpose of this book is to provide a high-level overview, grounded in
prior research and industry practice, for analyzing supply chain vulnerabilities and determining appropriate practices during the strategic sourcing
process that firms can consider in managing risk and ensuring supply chain
resilience. Techniques embedded in the strategic sourcing process can
serve as a mechanism for reducing supply chain risk exposure and ensuring
organizational resilience to uncertainties in the supply chain. Strategic
sourcing directs and aligns sourcing activities toward opportunities that
enable organizations to attain their long-term operational and organizational performance goals (Kocabasoglu & Suresh, 2006). Due diligence
in the strategic sourcing process can help identify those threats through
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STRATEGIC SOURCING AS AN ENABLER OF SUPPLY CHAIN …
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assessment and provide guidance for supply chain professionals in creating
a robust supply chain.
Supply chain risk affects firms in a multitude of ways. The detrimental results of failing to manage supply chain risk include but are not
limited to, disruptions that lead to the inability of firms to meet customer
requirements, increased costs due to holding excessive inventory, paying
employee overtime, and expediting orders, experiencing financial losses
due to increases in commodity prices and unfavorable exchange rates,
and tarnishing firm reputation due to poor performance. Although
supply chain risk can detrimentally affect firms in many ways, there are
approaches organizations can implement for identifying, assessing, and
managing risk in order to foster resiliency. The principles outlined in
this book provide the reader insight into strategic sourcing and risk
management approaches for attaining resilience.
The primary orientation of this book focuses on strategic sourcing
approaches for identifying, assessing, and managing supply chain risk.
Most of the steps in the strategic sourcing process occur before an agreement (contract) is established with a supplier. The crux of the book will
link various activities in the strategic sourcing process with established
risk assessment and management approaches for helping to ensure supply
chain resilience.
Risk exists throughout supply chains, stemming from raw materials
extracted from natural resources through numerous distribution channels
to the consumer, and even back upstream in the supply chain via reverse
logistics processes. Since risk exists throughout most supply chains, the
principles from the book can be applied at all echelons, from retailers
providing products directly to consumers, original equipment manufacturers designing and producing products and services, as well as the
myriad number of component suppliers, service-based industries, and raw
material producers that constitute today’s supply chains. Therefore, even
though the focus of the book is oriented toward the supplier-facing
perspective of the supply chain, the principles discussed in the book
are applicable to most industries and address challenges throughout the
supply chain.
Kraljic (1983) was one of the first authors to identify the importance
of risk in supply (chains) by creating a classification process segmenting
purchases by their profit impact in conjunction with supply risk. Over a
decade later Smeltzer and Siferd (1998) were one of the first to introduce
the concept that many of the strategic sourcing activities implemented by
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G. A. ZSIDISIN ET AL.
organizations can also be utilized to reduce risk exposure from the supply
base. Scholarly and practitioner publications have since examined many
facets of supply chain risk, its assessment, management, and how firms
can attain supply chain resiliency. However, there are no publications or
books that we are aware of providing a holistic perspective of the myriad
tools and approaches firms can consider in assessing and managing supply
chain risk during the strategic sourcing process.
1.4
Putting the Pieces Together
Our overall intention of this book is to be a “one-stop shop” integrating
insights from industry practice and research findings in supply chain risk
and its management for supply chain professionals to ensure resilience
in their firms and supply chains, as well scholars and students interested in learning more about this nuanced perspective of the strategic
sourcing process. To attain this objective, the next chapter will delve into
greater detail as to what supply chain risk is and how it creates vulnerability that, both in the short and long-term, can detrimentally affect
profitability, and, in extreme cases, bankruptcy and insolvency. Chapter 2
as well will provide some perspective on established supply chain risk
management and resilience paradigms and frameworks from prior research
and practice. The third chapter shifts to providing an overall array of
analytic approaches, both qualitative and quantitative, used for assessing
the sources and significance of supply chain risk. Not all risk is the same.
Given that no organization has unlimited resources for managing supply
chain risk, the analytic approaches described in Chapter 3 provide the
reader perspective as to how to prioritize mitigating those threats identified during the strategic sourcing process in order to create organization
resilience. Chapter 4 then provides a high-level overview of tools firms
can consider for reducing the likelihood and/or affect supply chain risk
can have on their firm. Chapter 5 provides a summary of the key insights
from the book, managing risk beyond the strategic sourcing process, as
well as proposes prognostications of future developments in supply chain
risk management and resilience.
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STRATEGIC SOURCING AS AN ENABLER OF SUPPLY CHAIN …
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