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Supply chain
Supply chain risk management risk management
dimensions in Indian dimensions
automobile industry
A cluster analysis approach 1023
Satyendra Kumar Sharma and Anil Bhat Received 10 November 2012
Revised 28 February 2013
Department of Management, Accepted 18 March 2013
Birla Institute of Technology and Science (BITS) Pilani, India
Abstract
Purpose Globalization and outsourcing have rendered Indian automotive companies more
vulnerable to supply chain (SC) risks. Consequently, companies adopt different supply chain risk
management (SCRM) strategies to mitigate SC risks. The purpose of this paper is to explore SCRM
strategies in Indian automobile industry and to classify automobile firms based on SCRM dimensions.
Design/methodology/approach A survey instrument on SCRM dimensions was designed and
data were collected from 79 automobile firms. Principle component analysis (PCA) was performed on
the collected data to derive the factors underlying SCRM dimensions. Further, cluster analysis using
extracted factors as a clustering variate was performed to identify strategic groups from the given
set of firms.
Findings PCA derived seven factors, namely: avoidance, supplier development, flexibility,
risk pooling, redundancy, integration and control strategies. The surveyed firms were classified into
two clusters as low and high SCRM level.
Research limitations/implications A limitation of this study is that data were collected from
a single industry and in a single country.
Practical implications Understanding of SCRM dimensions shall increase the use of these
dimensions and firms can mitigate negative effects of SC risks. The detailed operationalization of
SCRM strategies highlights the importance of three strategies: avoidance, integration and supplier
development. Managers understanding of SCRM strategies will improve the firms performance and
business excellence.
Originality/value This research empirically validates SCRM strategies and investigates how these
create differences among firms.
Keywords Competitive strategy, Factor analysis, Operations management, Survey,
Strategic evaluation, Cluster analysis, Strategies, Supply chain risk
Paper type Research paper
1. Introduction
Supply chains (SCs) are becoming more complex and interdependent. Recent trends
such as market globalization, reduced product life-cycle, reduced supply base,
necessity to be lean, excessive use of outsourcing and off-shoring have all contributed
to increased risks to SCs ( Juttner, 2005; Manuj and Mentzer, 2008; Craighead et al.,
2007). The event study conducted by Hendricks and Singhal (2005) indicated that SC
disruptions affected SC performance negatively by 8 percent. Therefore, it is vitally
important to support SCs, so that the rate of disruptions can be minimized and Benchmarking: An International
recovery time from SC disruptions can be improved. Companies across the globe Journal
Vol. 21 No. 6, 2014
have started to pay attention to supply chain risk management (SCRM). SCRM is pp. 1023-1040
r Emerald Group Publishing Limited
a coordinated process among SC members which reduces the likelihood of risky events 1463-5771
and reduces the negative consequences on business after occurrence of risky DOI 10.1108/BIJ-02-2013-0023
BIJ events (Kleindorfor and Saad, 2005). The SCRM process may be viewed as a business
21,6 continuity plan, and it also entails the generic steps of risk management processes,
such as risk identification, risk assessment, risk mitigation plans and continuous
monitoring (Tummala and SChonehherr, 2011). SCRM is the management of risks in
such a way that entails both strategic and operational horizons for the long and short
term (Lavastre et al., 2012). So, SC risk mitigation is a critical element in SCRM.
1024 A recent survey by the Aberdeen Group (2012) describes how business organizations
do not have a fair understanding of SC risk mitigation strategies. They also do not have
the metrics or methodology for the selection of the right kind of SCRM strategies.
SCRM literature discusses the various SC risk mitigation strategies and typologies, but
it lacks information regarding how these strategies determine SCRM best practices.
Different companies adopt different strategies to mitigate their SC risks. Firms can
adopt risk management strategies which they use in a single organization in the
context of their SC. Risk mitigation strategy selection is based on a supply and demand
environment which may be characterized by low and high uncertainty.
In this paper, the second section presents a comprehensive review of SCRM
strategies. Companies gain a competitive advantage by having a SCRM strategic
perspective (Christopher and Lee, 2004). Companies in the same industry, exhibiting
the same strategic perspective, need to be investigated, and this should be linked to
company performance. The purpose of this paper is to uncover clusters in the industry
with the same SCRM position, so that firms can begin to understand their strategic
position with regard to SCRM, and can plan how to move to a higher SCRM level.
In the third section, the research methodology used to answer the mentioned
research questions has been presented. In the fourth section data analysis results have
been presented, then through a discussion of the findings, the managerial implications
have been drawn and presented. In the last section of the paper conclusions and future
scope of research have been provided.
2. Literature review
The objective of SC management is to consider the whole SC and maximize value to the
end customer (Lambert and Cooper, 2003). Any disruption at any stage of the SC may
affect the ultimate objective of the SC itself. Identifying SC risks and then finding their
probability and assessing their impact on the business is quite difficult. Therefore,
managers underestimate the importance of SCRM strategies and avoid investing in
them ( Juttner et al., 2003). Once the risks are assessed, a number of strategies can be
used to manage risks. These include: transferring risk, taking on the risk, eliminating
risk, reducing risk and subdividing risk (Hallikas et al., 2004).
Next we describe the various types of SCRM strategies suggested by various
authors.
Tang (2006) suggested that robust SC risk mitigation strategies could enable firms to
deploy their associated contingency plans efficiently and effectively when faced with
a disruption. Authors presented various topologies of SC risk mitigation strategies. The
topologies suggested by SCRM authors depend on the SC and the environmental context
of the focal firm. For example, Manuj and Mentzer (2008) suggested six SCRM strategies
for global SCs based on different supply and demand side environments. These
strategies are postponement, speculative, hedging, control, security and avoidance.
Table I displays the SCRM strategies suggested by various authors.
Unfortunately, there is no unanimity among researchers in classifying SC risk
mitigation strategies. Instead, managers need to gain a greater understanding of
Author SCRM strategies
Supply chain
risk management
Chopra and Sodhi (2004) Excess capacity, redundant suppliers, responsiveness, flexibility,
aggregation, more customer accounts, increase capability
dimensions
Cucchiella and Gastaldi Various real options like defer, stop resume. Explore, lease, outsource
(2006) and alter
Tang (2006) Postponement, product management, and product substitution
Goldsby et al. (2006) Leagile supply chain strategies
1025
Peck (2005) Avoidance, cooperation, control, flexibility
Manuj and Mentzer Postponement, speculation, hedging, share/transfer control, security and
(2008) avoidance
Ji and Zhu (2008) Supply mgmt., demand mgmt., product mgmt., and information mgmt.
Thun and Hoeing (2011) Proactive strategies and reactive strategies
Lavastre et al. (2012) Provided a long list of actions required for supply chain risk mitigation,
not specific set of strategies
Table I.
Source: Authors SCRM strategies
SCRM strategies for a given risk or situation. An analysis of the impact of various
mitigation strategies on various risks clearly shows that each risk mitigation strategy
has limitations and there is a need to identify specific strategies for specific risks
(Chopra and Sodhi, 2004). Most researchers are unanimous in their belief that input and
output market uncertainties are important risks to consider when designing modern
SCs (Lee, 2004). SCRM literature predominantly highlights the two ways of reducing
SC risk: reducing the frequency of occurrence of risky events (proactive strategies) and
reducing the negative consequences of risky events after their occurrence (reactive
strategies).
The following subsections presents the SCRM strategies.
3. Research methodology
A survey instrument was designed to measure seven SCRM strategies derived from
the literature review: namely, avoidance, control, supplier development,
integration, flexibility, redundancy and risk pooling. An exhaustive literature
review was conducted in the areas of operations management and SC management
to identify relevant constructs and operational definitions of constructs. To measure
SCRM strategies, suitable items were chosen from the literature, which has been
discussed in the literature review section. We adapted existing questions to measure
avoidance (three item scale developed by Miller, 1992), supplier development (three
item scale developed by Smeltzer and Siferd, 1998), control (three item scale developed
by Hill, 1990; Willamson, 1986), SC integration (five item scale developed by Frohlich
and Westbrook, 2001), flexibility (five item scale developed by Nordahl and Nilsson,
1996), redundant resources (three item scale developed by Sheffi and Rice, 2005) and
risk pooling (four item scale developed by Carr and Lovejoy, 2000). A questionnaire
was created for each measured variable of SCRM strategies in a seven-point
Likert scale, where 1 means completely disagree and 7 means completely agree.
The questionnaire was operationalized in the Indian automobile industry. In
the subsequent stage of scale development, interviews with five industry experts in the
area of SCM and three academic persons were conducted. The content validity of
the questionnaire was assured through prior data collection. The language of certain
questions was modified. This data were not enough for statistical reliability and
validity tests. The main survey was conducted in a conference, where Indian auto SCM
professionals met and discussed automotive SC issues, challenges and solutions.
This was the perfect setting for data collection for this study because of the executives
knowledge sharing mood. More than 300 automobile SCM professionals participated in
the conference. A short presentation about SCRM research was given to all participants
and attendees were requested to participate in the survey. The net response was
79 after cancelling multiple responses from the same company. The Indian automobile
industry comprises 44 OEMs, 46 auto suppliers (turnover more than 500 core) and
76 logistics service providers (whose turnover is more than 500 core). In the population
size of 166, the companies net sample of 79 firms is fairly representative, when
all the sampling units belong to same industry in this case the automotive industry.
We also included three important elements in our sample. The returned questionnaires
were tested for their completeness.
A brief profile of returned questionnaire is as follows (Table II).
The Data collected through the questionnaire survey were compiled in an
excel sheet. SPSS version 19 was used to analyze the data, and missing values
were inserted with the average value of that particular variable. Data collected from
the questionnaire survey was tested on reliability (Cronbachs a) and validity
BIJ No. of Companies
21,6 Sales ($)
100 million under 250 million 18
250 million- under 500 million 22
500 million and above 39
No. of employees
100 under 500 15
1028 500 under 1,000 35
1,000 under 5,000 20
5,000 above 09
Category of respondents
Table II. Supply chain/logistics 30
Profile of surveyed Production 17
companies Purchasing/procurement officers 32
(factor loadings calculated using principal component analysis) by using SPSS version
19. Exploratory factor analysis (EFA) using principal component analysis method was
used to test the convergent validity of SCRM strategy constructs. Cronbachs a and
factor loading scores are shown in Table III.
Cluster analysis has been used to classify a set of objects into two or more groups
based on the similarity of the objects for a set of specified characteristics (Everitt
et al., 2001; Hair et al., 1984). Hierarchical agglomerative clustering method using
Wards method was used in this research. Clustering variables selection is crucial
because irrelevant variable selection may distort useful cluster analysis.
Agglomeration coefficient method was used to determine the appropriate number
of clusters. Cluster analysis has been criticized from a validity perspective due
to its high reliance on the researchers judgment. In this research, the criterion
validity (relationship with external variables, not used in the clustering process) was
used to establish cluster solution validity. Later on, emerged clusters were profiled
on several exogenous variables which have not been included in clustering or
criterion validity.
EFA using PCA extracts the seven major factors from the SCRMS data set. Table III
shows that the measures included in this study are satisfactory for testing the
hypotheses. Research by Thun and Hoeing (2011) classified SCRM strategies into
preventive and reactive instruments. Zsidisn and Wagner (2010) studied the
moderating role of flexibility and redundant strategies on disruption occurrence.
There is no study in the literature that classifies SCRM strategies in a more
comprehensive way. This research classified the SCRM strategies by seven major
factors. Mean factor scores for SCRM strategies were calculated for further analysis.
Hierarchical clustering using Wards method was applied on seven SCRM factors.
Resulting clusters were described based on scores of SCRM strategies.
The quantitative data were clustered according to seven factors of theoretical
framework and mean SCRM strategy score is shown in Table IV. Agglomerative
cluster analysis revealed two cluster solutions. Statistical significant differences exist
between two clusters on five factors except flexibility and risk pooling. This analysis
describes how companies differ on SCRM strategies and how they can move from
one cluster to another cluster (low SCRM level to high SCRM level). This will be of
particular interest to the practitioners who can identify better practice guidelines when
working with SCRM. The dendogram has been shown in Figure 1.
Table IV shows results obtained from hierarchical cluster (performed in SPSS
version 19).
BIJ High SCRM Low SCRM
21,6 level level
(cluster 1) (cluster 2)
Cluster label
Mean cluster SCRM strategy score 4.43 3.56
No. of member relationship to cluster 42 37
1030 Cluster dimensions Mean levels of dimensions
Avoidance strategy 4.65 4.14
(Avoid unreliable suppliers, choose robust Suppliers with high quality)
Supplier development strategy 4.78 2.82
(Invest in supplier development involvement of supplier in product
design)
Integration 3.64 1.85
( Joint efforts to share risk related information)
Flexibility 4.69 4.38
(operate efficiently at different output levels multiple sourcing)
Redundancy 3.44 2.34
(excess capacity prod./storage, excess inventory)
Table IV. Risk pooling 4.37 4.30
Mean values of SCRM (Revenue management through dynamic pricing, insure against losses)
strategy factors Control 5.41 5.11
for each cluster (Enforce tight security plans and contracts with suppliers)
Two tailed t-test on the mean strategy score shows a significant difference ( p 0.000)
between two clusters. There is statistically significant difference between two cluster
means on all SCRM strategies except Flexibility and Risk Pooling strategies. t-Test
was performed to test the statistical significance of difference between two clusters on
different SC risk mitigation factors that were used in clustering. t-Test results have
been shown in Table V.
From the interpretation of results shown above, companies in Indian automobile
industry measured on SCRM strategies appeared to fall in two major clusters:
Companies having high SCRM level, and Companies having low SCRM level.
Cluster 1: this cluster contains 42 companies out of 79 surveyed companies. This
cluster scores a high value of SCRM strategy. Mean values of all its factors are also high.
On certain factors like supplier development, integration and redundancies mean score
for this cluster is quite high. Cluster1 companies scored high value on all SCRM
strategies. We can name cluster 1 as companies using high level SC risk management
because this group companies are scoring high on both preventive and reactive strategies.
Cluster 2: this cluster contains 37 companies out of 79 surveyed companies. This
cluster scored low values in comparison to cluster 1, on all clustering variables. These
companies use all strategies but the differences on avoidance, risk pooling and
flexibility are not as high as compared to other factors.
Two tail test provides the statistical significance of difference between two clusters
on seven SC risk mitigation strategies. There is statistically significant difference
between means of two clusters for avoidance ( p-value 0.007), supplier development
( p-value 0.000), integration ( p-value 0.000), and redundancy ( p-value 0.000).
Mean value difference of two strategies namely flexibility ( p-value 0.175), and risk
pooling ( p-value 0.767) is not statistically different. It means that flexibility and risk
pooling have become standard industry practice. Every firm in the dataset is following
Supply chain
risk management
Dendrogram using Ward Linkage
Rescaled Distance Cluster Combine
dimensions
0 5 10 15 20 25
80
79 28
78
77
76
33
30
21
1031
75 43
74 41
73 40
72 78
71 7
70 29
69 39
68 77
67 22
66 52
65 56
64 10
63 37
62 24
61 12
60 14
59 71
58 23
57 4
56 5
55 6
54 16
53 31
52 32
51 73
50 26
49 27
48 8
47 20
46 25
45 35
44 36
43 34
42 49
41 74
40 48
Y
39 50
38 75
37 55
36 53
35 54
34 17
33 66
32 68
31 15
30 72
29 19
28 58
27 64
26 18
25 67
24 69
23 62
22 79
21 38
20 60
19 57
18 61
17 1
16 2
15 45
14 46
13 42
12 47
11 11
10 59
9 65
8 63
7 51
6 76
5 13
4 70
3 9
2 44
1 3
0 Figure 1.
Dendogram showing
cluster solutions
BIJ t-Test for equality of means
21,6 T df Sig. (two-tailed) Mean difference
these strategies. Mean scores of clustering variables clearly describes that low SCRM
level companies also use flexibility and risk pooling strategies, that are generally used
as reactive strategies after any disruption occurrence. Companies that wish to move at
higher level of SCRM, need to think about adoption of proactive strategies like
avoidance, supplier development and integration. In other words flexibility and risk
pooling strategies have become the industry practice. By this analysis companies can
know their position on SCRM and design a plan for improving its SCRM level. It does
not mean that each company should try to move from low to high SCRM level. Each
risk mitigation strategy comes with cost and implementation of any SCRM strategy
depends on firms capability.
In order to seek richer patterns and to establish criterion validity, two external
variables were selected that could be used for linking with cluster solutions. There are
strong theoretical evidences that SCRM practices depend on an overall SC risk
exposure score and level of SC risk drivers (Manuj and Mentzer, 2008; Chopra and
Sodhi, 2004). Adoption of risk mitigation strategies depends on SC context, that is
measured by its level of risk exposure and factors influencing risk exposure.
We measured overall risk exposure of firms subjectively on seven-point Likert scale.
Statistical testing on relationship between these variables (exogenous variables, not used
in clustering) and cluster solution was tested. F-test results show statistical significance for
these variables. The results of statistical significance are shown in Table VI.
Cluster Overall mean SC risk score Mean drivers score (complexity and efficiency)
H2. There is an association between position of the firm in the SC and SCRM level.
Further to establish practical significance of these clusters, they were profiled using
addition variables. These results are shown in Tables VII and VIII.
Profiling of two clusters on associated firm characteristics i.e., stage of firm in SC
shows significant differences between two clusters. Significant w2 value supports
the association between SCRM level and stage of firm in SC. Position of the firm in the
Further reading
Norrman, A. and Jansson, U. (2004), Ericssons proactive supply chain management approach
after a serious sub supplier accident, International Journal of Physical Distribution
and Logistics Management, Vol. 34 No. 5, pp. 434-456.
1039