Supply Chain Risks: A Review of the Concept and Some Theoretical Considerations in the Context of a Moroccan Retail Supply Chain
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Introduction
Supply chains, which play a crucial role in the smooth functioning and control of a company, have entered into a logic of permanent change. Indeed, globalization and technological advances, especially the unpredictability of markets, have led to an increase in the complexity of the supply chain, creating new sources of risks. In other words, the supply chain, which has to adapt to a constantly changing environment, is forced to fundamentally rethink its practices to deal with any potential disruptions that could have a serious impact on the entire chain concerned.
«At a time when global competition is intensifying and supply chains are becoming longer and more complex, the likelihood of not achieving the desired supply chain (SC) performance increases, mainly due to the risk of SC failures» (Tummala & Schoenherr, 2011). Faced with their words, we may wonder about the challenges facing companies while focusing primarily on the risks of the supply chain. As known, these risks typically manifest in the form of incidents or events that have the potential to create anomalies in the flows of the supply chain. Companies exposed to such risks thus experience unfavorable repercussions. The idea, therefore, holds significant importance as these risks have the potential to negatively impact the entire supply chain.
This suggests the vital importance of preparing for these supply chain risks, mitigating their potential repercussions, and ensuring the continuity of supply chain activities. In practice, this issue is much more delicate. In fact, not only companies cannot comprehend all the risks involved. As a result, they are obliged to make a selection of the main risks in the light of the present circumstances and, above all, to assimilate the need to discern the sources of the risks they face to establish appropriate means for their management.
It is important to specify that the risks generally manifest in different forms, including (1) the difficulty of responding to customer expectations and needs and (2) an imbalance between satisfying the customer’s needs and optimizing the logistics flow. In other words, adopting a specific risk level to achieve customer satisfaction can sometimes lead to logistical inefficiency. By assuming careful risks being valued to respond to any specific requirements that clients may have, particularly in terms of reduced delivery times, the optimal management of logistics phases can deteriorate and lead to additional costs or malfunctions in the supply chain. 3| The inability to fully exploit the full logistics potential: Faced with such risks, a company may be forced to adopt restrictive measures, limiting its potential to fully exploit available resources and strategies to optimize all logistics operations.
From the above, it remains for us to emphasize that the possibility of risk occurring can emerge at all levels of the supply chain, consequently impacting various links in the supply chain (procurement, purchasing, transportation, and delivery, among others). In the most adverse circumstances, risks can have repercussions on the entire supply chain, sometimes even affecting operations specific to reverse logistics.
Faced with abundant writing and discussions on this topic, this article aims to highlight the main key risks inherent in the supply chain that can compromise the performance and profitability of companies. Drawing on theoretical considerations and especially relevant case studies, our effort is primarily focused on deepening our understanding of the various specific risks faced by Moroccan retail brands, especially those in the large-scale distribution sector.
Literature Review: Concept of Supply Chaine Risk
By going back in time, it has been observed that the term risk has always existed, but the level of risk was negligible and more easily controlled. Indeed, given the scope of this point, such observations can be explained by the fact that the companies were engaged in manufacturing in their factories, acquired the raw material on local markets, and engaged in direct sales in particular. Later, companies found themselves facing an ever-changing environment where new opportunities were emerging. However, those opportunities do not come without risk, highlighting new vulnerabilities that companies may face. It is partly for this reason that risk management has become increasingly important in recent decades, generating strong interest within companies.
Lavastreet al. (2012), to name but a few, seem to agree that the question of risk is not only a current issue in management but is especially experiencing gradual growth in the field of supply chain management. To clarify this point, researchers assume that the reality of supply chains remains particularly difficult. They remain vulnerable due to unexpected circumstances, which can cause disruptions to all the physical flows and information flows considered fundamental in a supply chain. Supply chains are intimately interconnected, with interdependent relationships between different actors. However, according to Kungwalsong (2013), any disruption from internal or external factors can have a negative consequence not only for the involved company but also for the entire network. Adding to this, we add Thorsten and Wolfgang’s (2006) main idea, which postulates that “increased complexity of a system generally leads to the emergence of new or the aggravation of existing risks” (p. 4).
What is a risk? The formalization of the term risk, highly appreciated in literature, covers several key concepts. Three of the most common are Risk factors, criticality, and vulnerability (Maders & Masselin, 2009).
- The notion of “risk factor” refers to an element that presents a causal relationship significantly higher than a simple correlation (Maders & Masselin, 2009). By its very definition, the risk factor acts as a source that significantly affects the probability of the occurrence of risk. This notion first emerged in the writings of William B. Kannel in the 1960s (Kannelet al., 1961).
- The notion of “criticality” holds great meaning in risk management. It is specified by considering both the gravity of risk or its potential impact and its probability of occurrence (Maillard, 2011). For Jokung Nguena and Mondo (2020), obtaining criticality involves a multiplication of gravity and its occurrence The basic idea is simple. Generally, high criticality of risk is primarily caused by a combination of critical severity and significant occurrence. Technically, this is a major risk. Similarly, the combination of low severity associated with a reduced probability of occurrence contributes to an overall minimal level of risk, which may result in relatively limited disruptions.
- The notion of “vulnerability” is distinguished by the losses resulting from an unpredicted event affecting a company’s resources (Maders & Masselin, 2009).
Risk is examined in a multidisciplinary manner that encompasses a variety of fields or fields of study. Many authors have tried to shed light on this point. For example, Dufour (2008), in his book titled ‘Risk in its Diversity: A Multidisciplinary Approach,’ explores the concept of risk in different disciplines such as health, marital relationships, economics, international law, computer science, and management sciences, each with its distinct definition. More specifically, the authors formulate a definition of risk based on the primary constituent elements of each respective field of study.
Due to the diversity of definitions relating to the concept of risk, we will focus on the two definitions mentioned above that seem important to us. The focus will now be on risk in the context of the supply chain. We elucidate this notion by focusing on relevant studies.
A classic, somewhat simplistic definition of the notion of “supply chain risk,” taken from Chopra and Sodhi (2004), highlights the disruptions or potential problems that may arise due to variations in information and product flows. Generally speaking, risks related to variations in information flow variations can refer to various data errors concerning products, including price, information related to customers, suppliers, as well as distributors, or any communication gaps that may lead to difficulties in the supply chain. From a broad perspective, risks related to variations in product flows can be associated with various potential disruptions occurring during the movement of products throughout the chain, from the supplier to the end customer. According to their interpretations, “the risks are due to the variations of the information and flows of the products, which start from the supplier and lead to the delivery of the finished product to the consumer” (Chopra & Sodhi, 2004).
To provide further clarification on supply chain risk, we also relate our analysis to previous literature of Wagner and Bode (2006), who defines it as “the negative deviation from the expected value of a certain performance measure, resulting in negative consequences for the focal firm” (p. 303). Bogataj and Bogataj (2007), in the same vein, use the term “supply chain risk” to refer to the potential for variation in outcomes that exerts a significant influence on the reduction of value-added within all entities in a chain.
Another way to describe supply chain risk is to present the observations made by Sodhiet al. (2012), who propose a conceptualization of supply chain risk by symbolizing it as a butterfly-shaped representation. From the authors’ point of view, this metaphor is to be evaluated in light of the sensitivity of complex systems to slight disturbances. However, it should be noted that its disruptions can spread rapidly in the supply chain, often with significant adverse consequences on overall performance and the achievement of the company’s objectives. In a sense, even the smallest risks can have serious consequences and must be taken into consideration.
We could go on and cite other authors illustrating this term. Waters (2017), for his part, proposes to define that risk in the supply chain is materialized by any hazard capable of disrupting the flows of the logistics strategy. However, what can be said is that, in such unexpected events, the consequences often extend much further. Upon reflection, it becomes apparent that, for example, a risk of a supplier’s failure in terms of product quality, availability, and delivery deadlines can lead to additional delays and potentially impact the smooth execution of other operations. Similarly, supplier failures can disrupt the supply chain, leading to delays in delivering products to customers. In addition—and this is the most important—such a failure can lead to loss of revenue and, above all, additional costs by having to quickly prospect for other suppliers.
According to many authors, indeed, the major concern of procurement managers resides in the risks inherent in the supply chain (Liet al., 2023). This is suggested by authors like Zsidisin (2003) to define risk specifically in a supply chain context. Explaining in a few lines that:
“Supply risk is the probability of an incident associated with inbound supply from individual supplier failures or the supply market occurring, in which its outcomes result in the inability of the purchasing firm to meet customer demand or cause threats to customer life and safety.” (Zsidisin, 2003, p. 222).
These are potential incidents that could occur during the supply of raw materials or goods. To illustrate the various causes of this risk, let’s consider the two suggested in the definition: the failures of external suppliers to deliver the desired quantities or quality issues. Furthermore, imbalances in the flow of goods can disrupt the entire supply market.
Obviously, this situation can weigh on companies. By talking about supply risks, we want to make it clear that the risks that a company may face in its supply chain mainly concern the relationship it maintains with its suppliers. Despite what has been said, it is evident that suppliers play a crucial role throughout the entire supply chain. Upon reflection, we’ll see that suppliers have a considerable influence on key indicators in the QCD (quality-cost-delivery-time) triplet, such as the cost of acquiring goods, product quality, and delivery times. This last point explains the contribution to complexity that suppliers make to the supply chain.
Supply Chain Risks in the Modern Retail Industry
To complete our study, we started with definitions of supply chain risk. Above all, we noted the diversity of perspectives that shed light on this complex concept, thus forging a deep understanding of its involvement within the supply chain. By consolidating their knowledge, we are now able to extend our exploration to the different types of risks that weigh on the supply chain.
More generally, two disciplines are gaining increasing interest from a large number of researchers: firstly, the classification of risks, primarily focused on categorizing different types of risks and their sources. Secondly, risk analysis mainly focuses on the process involving the identification of risks, evaluation, and monitoring, as well as corresponding mitigation actions for each identified risk. However, it must be acknowledged that a great deal of work has been undertaken to verify the considerable extent of the different types of risk associated with the supply chain. These typologies appear crucial at this point. To this end, this section is developed with the aim of outlining the main types of risks related to the logistics chains of large-scale distribution, conceptualizing them, and carefully detailing the related research.
Given the breadth of the subject, it is important to emphasize that our goal is not to provide comprehensive and sufficiently detailed coverage of all types of risks in our document. Nevertheless, from the perspective we are focusing on, at least four major types of risks related to the supply chains of large-scale distribution can be highlighted.
External Risks
Starting with a definition, we consider that external risks, also known as disruptive risks, can manifest generally in the areas of (1) economic, (2) social, (3) political, (4) regulatory, or (5) environmental factors. This definition is widely used in the field of corporate risk management and has been the basis for much research.
- Economic risks: These are risks related to the economy, such as market fluctuations, financial crises, exchange rates, inflation, and other economic factors.
- Social risks: Social risks involve various societal changes that pose significant challenges and have the potential to disrupt the smooth functioning of businesses.
- Political risks: Just as fundamental as the previous ones, political risks include risks associated with political instability, new administrative measures or decisions issued by government authorities, major geopolitical problems and conflicts, and various others whose impact could significantly affect operations and the company’s long-term viability.
- Regulatory risks: From a general point of view, it should be remembered that regulatory risks, in the broadest sense, can arise from changes in regulatory operations, laws, and standards that may result in additional constraints and additional costs for the company.
- Environmental risks: To put it as simply as possible, they are the dangers and perils associated with the occurrence of natural events or phenomena, including climate change, natural disasters, and many others.
The perception of “nature-related risk” is influenced by environmental considerations or natural phenomena. With this in mind, its origin is expected to be primarily external to the company. The notion of “risk in nature” proposed by the author already has two facets, which we will come back to later: natural risks such as storms, floods, natural disasters, etc., and ecological or biological risks.
To better understand the term, it is necessary to use another definition: the one developed by Tapiero (2008) is a good illustration of this. By its very definition, the author emphasizes that external risks are embodied in unexpected incidents over which a company has little control. These uncertainties arise from factors external to the company, which the company is often forced to anticipate and manage such risks (Tapiero, 2008).
Supply Risks
There is a shortage of literature dedicated to the definition of risk in the context of the global supply chain. Supply risk refers to anomalies in the physical and information flows from supplies to each link in the supply chain. Meulbrook (2000) proposed a definition of supply risks, which has since been considered the most advanced in many research studies. For him, the term “entry risk” is like an alternative way of describing supply risk. This definition immediately highlights several sources of supply risk that can arise from supplier and market failures: for example, supplier performance, suppliers’ obligations and commitments to others, quality defects or problems, inability to meet demand in terms of quality and lead time, etc.
As for reflexes in the narrow sense of the term, supply risks manifest themselves when it comes to the movement of materials from suppliers to the hired company, such as the unreliability of suppliers. Zsidisin (2003) puts forward a similar line of reasoning, profoundly questioning supplier-related factors in the context of the definition of supply risk, which would designate:
“Supply risk is when there are suppliers whose failure would affect our company’s ability to achieve its objectives.”
“Supply risk is the uncertainty associated with suppliers’ activities and obligations and, more generally, their relationships.”
“Supply risk comes from individual supplier failures, and these failures relate to issues such as quality, delivery, relationships, and price.” (Zsidisin, 2003, p. 221).
These simple definitions, which we can see in Zsidisin (2003), allow us to situate precisely the fact that the failure of a supplier represents a major cause of risk in the procurement context. In other words, a supply risk arises when a supplier is unable to deliver the agreed service, and its failure could put in doubt the achievement of objectives, in particular by disrupting the supply chain.
Demand Risks
Demand risk, in its most basic definition, lies in forecasting customer demand and the ability to adapt to current developments and new market trends (Jüttner, 2005). In this definition, demand risk is also reinterpreted in a narrower sense according to a traditional definition that implies risks that arise during the distribution of products between the firm and the customer (Ritchie & Brindley, 2007).
These risks can arise from a variety of factors, including fluctuating market demand that can have a significant impact on operations and significant pressure on the retail supply chain, leading to significant challenges such as overstocking and understocking. Indeed, during periods of strong seasonal demand, managers may increase their stock levels to meet demand. However, this practice carries the risk of leading to overstocking after high demand, which can ultimately result in significant losses or expenses linked to storage costs, including obsolescence costs.
In addition to the above challenges, there are consumer trends that can result in sudden changes in consumer preferences. Examples we have come across include the rise in popularity of fresh or organic healthy raw foods, with protein-rich products and low-fat dairy products gaining in popularity because they were perceived to be healthier. In this context, the question often arises about whether changes in consumer preferences or new consumption trends would enable large-scale distribution retailers to review and, more importantly, adjust their stocks to meet the growing demand for healthier food products.
Moreover, this duality implies various elements that retailers prioritize emphasizing. Primarily, it raises the risk of causing a decline in demand for certain products. A priori, a drop in demand for specific products can lead to a build-up of additional inventory. In this context, retail chains are forced to invest in a storage solution quickly, which can generate additional storage costs and potentially limit the storage area for products with higher demand. At the same time, this also implies that this drop in demand for certain products can have an impact on the profitability of the company since retail chains operate with relatively low profit margins on various products. Beyond this, however, there are considerable stakes involved when demand for a specific product decline, as this results in the generation of substantial revenues to cover the expenses associated with management, storage, transport, and—perhaps more difficult—the costs associated with making products available to customers.
Adding to this, there’s the pressure on prices that a decrease in demand for a specific product can generate. Here again, retailers may be forced to significantly reduce prices to sell off their stocks, thus multiplying the potential for a price war, which in the end leads to a reduction in margins and compromises significantly profitability. In fact, this issue goes beyond that; retailers must be aware that it is just a passing trend that can generate heavy and significant pressure on the supply chain.
We can also consider the risks of product obsolescence. Indeed, there is a risk that inventory becomes obsolete if product sales do not reach the expected level or if products do not sell as quickly as expected. Following a similar line of reasoning, it is possible to take into consideration the rapid changes in technology, including seasonal changes or consumer preferences, which prevent products from selling out quickly and thus becoming obsolete. So, it seems that obsolescence risks are associated with potential threats that could affect the value or effectiveness of a company’s products.
Additionally, forecasting errors, overstocking and understocking, and quality issues, particularly in the physical distribution of products to the end customer (several examples are related, resulting in disruptions in transportation, poor coordination and lack of logistical flow, and so on), must be added. These factors can lead to improper utilization of available resources.
It is clear, in particular, that any undesirable element of a negative nature, such as the unreliability of suppliers, can potentially have significant repercussions on the various activities of the company. The perception of supplier unreliability is based on the fact that the regular delivery of inferior quality, inadequate quantities, and often accompanied by deficient timelines. At the same time, these providers seek to maximize their profits by offering very high prices. Generally speaking, supplier unreliability can manifest itself in a variety of ways, including:
- Delivery delays can be a major concern within a company’s supply chain, which can lead to major disruptions. Such delays can lead to lower production rates, stock-outs, additional costs, and so on.
- Inadequate quality of finished products or raw materials can lead to product recalls, unhappy customers, and returns, and most notably, it can jeopardize the company’s reputation. In sum, low quality can lead to a series of difficulties for the company, involving a variety of costs, growth, annual turnover, and long-term viability.
- Price variability can also weigh on companies. Unreliable suppliers can lead to additional costs since they have the ability to drive price increases, which can cause disruption to the company’s profitability. In addition, this situation can potentially make management and budget planning complex.
- Non-compliance issues can arise when some suppliers fail to meet standards and contractual obligations, exposing the company to potential damages.
The increasingly good relationship with providers increases their vulnerability to risk, and any dysfunction can generate considerable effects on the overall business. It can thus be said that the exclusive dependency on a single supplier is commonly perceived as a source of substantial risk. This said if this supplier faces one or several obstacles, the company that depends on it could be subject to significant disruptions.
Process Risks
Process risks refer broadly to operational risks that can disrupt internal supply chain operations (production, warehousing, handling, distribution, and transportation within the company). Indeed, most definitions seem to agree that risks related to internal processes refer to undesirable events that may occur in the company’s operational activities.
In order to reconcile the specific process side risks of the supply chain, those are some which we will briefly outline below: A limited and inadequate storage capacity of products, leading to significant delays, could result in significant costs, including stock management problems and time management. Other researchers have worked more specifically on the inadequate positioning of stocks, which can lead to operational inefficiencies. For example, an inappropriate position of high-demand products can lead to a potential loss of sales. In addition, the logistical issues and problems related to transport can present the risk of compromising the availability of products, especially in particular regarding the challenges associated with the allocation of goods, which can generate dissatisfaction among customers as well as additional costs.
A second aspect, related to risks related to internal processes, refers to the short-term repercussions associated with undesirable situations caused by inadequate procedures, information technology failures, human errors as well as a lack of personnel likely to impact the smooth running of the company’s activities. These can include, for example, lack of experience or other difficulties such as setting up a new team, adding social and managerial risk and their consequences for the company’s internal capacity.
Conclusion
So far, this point has been extensively developed, and we will insist on it one last time. Indeed, this has often been pointed out in this article; risk is now integrated as an essential component, giving its management a crucial position within companies. Moreover, it seems certain that these risks can manifest themselves at various points in the supply chain, taking on different forms that may vary according to the factor at the origin of their emergence. It’s worth noting that supply chains are constantly evolving, and their effective management is vital to the long-term viability of the entire network. Nevertheless, in today’s fast-moving world of sudden change, combined with the growing complexity of the chain’s components, a climate of uncertainty is developing, with potentially damaging repercussions. Faced with these tensions, companies need to pay particularly close attention to this major issue.
This work is related to the work on supply chain risks and vulnerabilities, which has recently gained significant interest among practitioners and researchers. However, unlike these studies, we address the specificity of challenges faced in the supply chain within the retail sector. Otherwise, this work is complementary to the work carried out in supply chain management, which mainly highlights the identification of the various risks that endanger the supply chain. Their reflections fall within the framework of theoretical as well as empirical considerations relating to the functioning of the supply chain, the resulting risks, and the measures to be taken to deal with the uncertainty in today’s competitive environment.
From the discussion as documented in this article, two very important conclusions emerge. The first relates to lessons learned from the importance of studying risks related to the supply chain, which could inform future research. The second involves the general categorization and various types of risks that can arise in the retail sector’s supply chains. On the first point, it could reasonably be argued that the presence of a great deal of uncertainty in the business environment forces companies to constantly adapt their activities in response to unstable conditions. Categorizing the types of risks is proving difficult as supply chains become more complex, leading to a significant increase in associated vulnerabilities.
Considering the crucial role of categorization, this approach will better strengthen the company’s ability to face challenges and facilitate its prevention and management through effective risk management in the supply chain. In addition, supply chain risk management builds and maintains an organizational culture oriented towards the achievement of results and continuous improvement. Understanding the potential risks implement a specific strategic initiative to provide additional operational robustness. As a result, this approach has been shown to be a strategic and important investment in order to ensure better growth and optimal performance within a competitive environment that is constantly evolving.
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