supply chain risk management in the indonesian flavor industry

Proceedings of the 2016 International Conference on Industrial Engineering and Operations Management Kuala Lumpur, Malaysia, March 8-10, 2016

Supply Chain Risk Management in the Indonesian Flavor Industry: Case Study from a Multinational Flavor Company in

Indonesia

Fransisca Dini Ariyanti and Aditya Andika Industrial Engineering Department

Bina Nusantara University Jakarta, Indonesia

[email protected]

Abstract—Supply Chain Risk Management is a relatively new discipline that has the objective of supporting management in handling risks in the supply chain. The objective of this study is to identify the risks in the flavor supply chain and then assess them in order to develop appropriate mitigation strategies. Failure Mode and Effect Analysis (FMEA) is utilized to assess the risks. This study uses a case study approach. The object of the study is a multinational flavor company in Indonesia. This study identified 22 risk factors in the flavor supply chain. Based on the assessment of the risk factors, there are three high priority risk factors: economic downturn, demand fluctuation, and raw materials shortage. Overall, this study identified and assessed supply chain risk factors in the Indonesian flavor industry.

Keywords—supply chain risk management; FMEA; flavor; Indonesia

I. INTRODUCTION

Competitive dynamics and turbulent economic conditions constantly present new challenges to the business environment. Organizations around the world are continuously seeking ways to gain competitive advantage. One of the ways to improve competitive advantage is through supply chain management (SCM) practice. Higher level SCM practices by organizations may lead to the enhancement of their competitive advantage [1].

Organizations currently pursue better ways in their supply chain management practices. One of the ways is by implementing risk management concepts in their supply chain. Managing risk has become an important business issue and has been studied in many business disciplines [2]. SCM is one of the business disciplines that have extensively integrated risk management concepts into its discipline. This integration between SCM and risk management has given birth to the concept called Supply Chain Risk Management (SCRM). Every manufacturing organization must consider implementing SCRM to achieve better supply chain executions by using risk mitigation combined with appropriate strategies [3]. Flavor companies as a manufacturing organization must also consider implementing SCRM.

Flavor companies in Indonesia face various supply chain-related challenges, e.g., raw material shortage, regulations and standards, and demand fluctuation. They have to manage their supply chain very meticulously. Fig.1. describes the supply chain for a multinational flavor company in Indonesia that is studied for this research. The name of the company is withheld for confidentiality reason and will be referred to as “Company X”.

1448© IEOM Society International


Fig.1.Supply Chain of Company X (source: interview)

This study seeks to identify various risks in the flavor supply chain in Indonesia and then assess those risks in order to

develop appropriate strategies to mitigate those risks.

II. LITERATURE REVIEW

A. Supply Chain Management Supply chain management (SCM) is the management of material, information, and financial flows through a network of

organizations with the goal of producing and delivering products or services for the consumers that includes the processes and activities coordination and collaboration across different functions within the organizations network [4]. SCM has the main objective of minimizing the cost and maximizing customer satisfaction [5]. Companies that successfully manage their supply chain will gain several benefits because SCM practices has a positive influence towards operational performance [6] and business performance [7].

B. Risk Management Risk is defined in [8] as “… a chance of danger, damage, loss, injury or any other undesired consequences.” Risks need to

be managed. The process of managing risks is called risk management. Risk management is the process in identifying and assessing risk and then reducing the risk to an acceptable level through various methods [9].

C. Supply Chain Risk Management Supply Risk is defined in [10] as “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.”

Supply Chain Risk Management (SCRM) is the process in managing risks in supply chain through coordination or collaboration between supply chain partners to ensure profit and continuity [11]. SCRM in [12] is defined as “the identification and management of risks for the supply chain, through a co-ordinated approach amongst supply chain members, to reduce supply chain vulnerability as a whole.”

D. Failure Modes and Effects Analysis (FMEA) FMEA is a methodology that is used to identify potential failure modes before problem occurs [10]. Risks in FMEA method are evaluated in three components: severity (S), occurrence (O), and detection (D) [11]. The components of risk in the FMEA method is similar to the dimensions of risk defined by [13]: likelihood of occurrence of a particular event or outcome; consequences of the particular event or outcome occurring; and causal pathway leading to the event.These three components are used in calculating the Risk Priority Number (RPN). FMEA uses the RPN to determine the risk priorities of failure modes [14].



RPN is calculated with this formula:

RPN = S x O x D (1) Failure modes are prioritized based on the RPN values. Failure modes with higher RPN values are given higher priority than those with lower RPN values [15]. In addition to RPN, several researches also used Risk Score Value (RSV) in the FMEA methodology, such as [16], [17], [18]. The formula of RSV:

RSV = S x O (2) The formula of RSV in [16], [17], [18] is in line with the formula of Risk in [19]. Reference [19] defined the Risk Formula as:

Risk = Probability (of the event) * Business Impact (or severity) of the event (3)

III. METHODOLOGY

This study uses a case study approach. Data is collected through questionnaires and interviews. The sampling method used is judgment sampling. Judgment sampling is a sampling method where study participants are selected based on their expertise in the subject investigated [20]. Three supply chain management-related managers of Company X were asked to participate in this study. They were chosen to be the study participant because they were considered as supply chain experts by both the authors and the management of Company X. All of them agreed to participate.

To identify the risk factors in the flavor supply chain, this study developed a questionnaire that contained a list of risk factors that were identified in several studies [16], [17], [18], [21]. The study participants will be interviewed by using the questionnaire in order to identify which of those risk factors are relevant to the flavor supply chain and to add other relevant risk factors that have not been included in the list. The risk factors are categorized into five categories: demand risk, supply risk, technology risk, environment risk, and logistics / operational risk.

To assess the priority of the risk factors in the flavor supply chain, this study uses the FMEA approach. The study participants will be interviewed to determine the values of the severity (S), occurrence (O), and detection of each risk event (D). The range of score for each of the values is 1 – 10.

The following is the sequence of the research: 1. Interview the managers using a questionnaire to identify risk factors in the flavor supply chain and then assess the

priority of those risk factors by determining the severity, occurrence, and detection values of each risk event. 2. Analyze the questionnaire and interview results. 3. Finalize the severity, occurrence, and detection values of each risk factor with the managers. 4. Calculate RPN value and RSV value of each risk event. 5. Determine the critical value of the RPN and RSV. 6. Develop RPN-RSV Matrix in order to assess which risk factors are high priority risk factors. 7. Conduct group discussion with the study participants to develop risk mitigation strategies for high priority risk

factors.



IV. RESULTS AND DISCUSSION

A. Research Results There are 22 identified risk factors that are relevant to the flavor supply chain. Those risk factors can be seen in TABLE I.

TABLE I. INTERVIEW QUOTES REGARDING RISK FACTORS

Risk Factors Quotes from the Interview

Demand Risk

Changes in customer taste Food and beverage taste has trend and life cycle; need good communication, collaboration and business intelligence to capture trend.

Demand fluctuation Due to weaken global economic condition, the majority of our customer demand has fluctuated over past few years. Except key customer, forecast accuracy from non key customer is less than 50%.

Order cancelation We have a procedure that is strong and impenetrable to the order cancellation.

Substitutive alternative Customer request on stronger flavor but cheaper version.

Supply Risk

Raw material shortage Raw materials from overseas are more vulnerable than local raw material; it has longer lead time.

Supply quality risk Global climate change has an impact on natural raw materials & food ingredient.

Procurement risk Important to choose sustainable supplier for business continuity.

Supplier communication and collaboration failure To reduce supply chain risk, we build a good relationship and collaboration.

Technology Risk

Infrastructure failure A part of contingency plan, other plants in other countries can help us ensure the continuity of supply for our customers.

Business intelligence Food and beverage taste has trend and life cycle; need good communication, collaboration and business intelligence software to capture big data in order to acquire information regarding trend.

Failure in IT system Implementation of the integrated system throughout the worldwide site plan can be interrupted at any time.

Environment Risk

Economic downturn Over past few years all around the world, customer demand was weaker; demand downturn.

Natural disaster: flood, earthquake, landslide Natural disaster, such as flooding, has an impact on logistics. However, it rarely happened.



Terrorist attack It is unexpected, but we need to prepare it, another site plan will continue supply.

Currency fluctuation Over the past few years, we do currency hedging.

Pandemic It is unexpected thing, but we need to prepare it, another site plan will continue supply.

Logistics / Operational Risk

Internal quality risk We have procedure to monitor quality.

Regulatory compliance Scheduled audit to maintain regulatory compliance

Under-utilized capacity Expand to export market and business segment to optimize capacity

Labor unavailability In peak demand, we do overtime and outsource operators.

Warehouse inadequacies Raw material and some finished products warehousing are handled by 3rd party Logistic company.

The questionnaires and interview results are analyzed. The risk factors are then assessed by using the FMEA approach. The

managers are interviewed again to determine the severity, occurrence, and detection values of each risk factor. Based on the finalized questionnaires, the RPN and RSV values are calculated. The values can be seen in TABLE II.

TABLE II. RISK FACTORS IN THE FLAVOR INDUSTRY

Code Risk Factors RPN RSV

Demand Risk

D1 Changes in customer taste 135 15

D2 Demand fluctuation 252 42

D3 Order cancelation 98 14

D4 Substitutive alternative 48 6

Supply Risk

S1 Raw materials shortage 240 48

S2 Supply quality risk 120 24

S3 Procurement risk 120 15

S4 Supplier communication and collaboration failure 75 15

Technology Risk

T1 Infrastructure failure 168 24

T2 Business intelligence 63 9

T3 Failure in IT system 45 15

Environment Risk

E1 Economic downturn 225 45

E2 Natural disaster: flood, earthquake, landslide 90 9

E3 Terrorist attack 70 7

E4 Currency fluctuation 45 9

E5 Pandemic 24 3



Logistics / Operational Risk

L1 Internal quality risk 175 35

L2 Regulatory compliance 80 16

L3 Under-utilized capacity 45 9

L4 Labor unavailability 18 6

L5 Warehouse inadequacies 18 6

To assess which risk factors need to be prioritized, a critical value is assigned to both RPN and RSV. To define the critical value, 80/20 Pareto Rule is used [16], [17], [18]. The critical value is the product of 80% and the highest value. The highest value for RPN is 252; the critical value for RPN is 202. The highest value for RSV is 49; the critical value for RSV is 39.

Fig.2. RPN – RSV Matrix

Fig.2. shows that most of the risk factors are located on the bottom-left area of the matrix. Since their RPN and RSV values

are below the critical values, these risks should not be a priority. The risk factors that need to be prioritized in terms of mitigation strategies are the ones located on the top right of the matrix: demand fluctuation (D2), raw materials shortage (S1), and economic downturn (E1). These three risk factors have the highest RPN and RSV values among all other risk factors.

50403020100

250

200

150

100

50

0

RSV

RPN

39

202

L5L4

L3

L2

L1

E5E4

E3E2

E1

T3T2

T1

S4

S3 S2

S1

D4

D3

D2

D1

RPN-RSV Matrix

Low High

Low

High



B. Risk Mitigation Strategies

The risks involved in the flavor supply chain of the company case study were identified and assessed. The risks should be treated by determining what will be done in response to the identified risk. The high priority level risks have to be mitigated by using specific supply chain strategies.

The following risk mitigation strategies were developed in a group discussion between the authors and the supply chain-related managers of Company X. Company historical data and past risk mitigation strategies were taken into consideration in the discussion.

The issue of Economic downturn could manage by three mitigation strategies. The first strategy is to expand to the export market. Recently export market area is South East Asia market will expand out of South East Asia, which have similar taste flavors. The second strategy is to expand the business segment. The current business segment is the food and beverage industries. The company could expand to bakery, restaurant, fast food, etc. The third strategy is cost containment. Company can increase efficiency by value engineering or value analyzing.

Demand fluctuation risks could be managed by three mitigation strategies. The first mitigation strategy is to strengthen partnership relationship with customers in order to acquire information regarding their future plans, such as new product launch and market expansion. These pieces of information can be utilized to create better demand forecast. The second strategy is to improve and enhance MRP and ERP system. The last strategy is to strengthen market research capabilities.

Raw material shortage risks exist because most raw materials are imported from overseas. These risks could be managed by several mitigation strategies. The first strategy is sourcing from sustainable supplier. The second is to develop strategic sourcing strategies to manage shorter lead time, competitive price, and sustainable raw material. The last mitigation strategy is to always have a back up supplier as contingency plan to reduce risk if primary suppliers cannot supply raw materials with the right quality at the right time.

V. CONCLUSIONS, RESEARCH LIMITATIONS, AND FUTURE RESEARCH

This research identified and then assessed risks in the flavor supply chain. This research also developed mitigation strategies for high priority risk factors. The FMEA method was used in this study. FMEA provides guidance in making prioritization of the risk factors.

This research found that the high priority risk factors for the flavor supply chain are demand fluctuation, raw materials shortage, and economic downturn. Appropriate mitigation strategies were developed for each of these risk factors.

The results of this study have limited generalization. This research was conducted only at Company X which is a large-sized multinational flavor company in Indonesia. Small to medium-sized companies may have different high priority risk factors and may even have different risk factors. The number of study participant in this research is small because this study only selects those considered as supply chain experts in Company X as study participants.

Future research can be done by involving larger numbers of study participants from flavor companies of all sizes in Indonesia. The purpose is to gain more accurate generalization of the research results and to find whether there are differences in terms of supply chain risk factors between small to medium-sized companies and large companies.

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BIOGRAPHY Fransisca Dini Ariyanti is a lecturer in the Industrial Engineering Department at Bina Nusantara University, Jakarta, Indonesia. She earned her Bachelor of Chemical Engineering from Diponegoro University, Indonesia and Master of Industrial Engineering from University of Indonesia, Indonesia. She has taught supply chain-related courses and published conference and journal papers. Her research interests include supply chain management, performance management, and quality management. Aditya Andika is a lecturer in the Industrial Engineering Department at Bina Nusantara University, Jakarta, Indonesia. He earned his Bachelor of Industrial Engineering from Trisakti University, Indonesia and Master of Business Administration from Gadjah Mada University, Indonesia. He has taught management-related courses and published conference papers. His research interests include knowledge management, performance management, and supply chain management.


supply chain risk management in the indonesian flavor industry

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