RISK MANAGEMENT IN LOGISTICS Michal KORECKÝ ŠKODA TRANSPORTATION a.s., Pilsen, Czech Republic, EU, Abstract The paper deals with the risk in logistics and concentrates especially

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RISK MANAGEMENT IN LOGISTICS Michal KORECKÝ ŠKODA TRANSPORTATION a.s., Pilsen, Czech Republic, EU, Abstract The paper deals with the risk in logistics and concentrates especially on the industrial enterprises. It covers risks in selecting suppliers, timing of material supply, production and warehouses logistics organizing, ERP system using, aspects of quality and reliability of suppliers as well as influence of changes in production planning. It deals with logistics in areas connected with product life cycle - supplier selection, material warehousing, manufacturing, product distribution, product servicing. The importance to respect the mutual relations between these areas is shown as it can contribute to successful risk management. The attention is also paid to the use of ERP (Enterprise Resource Planning) systems or other systems as PLM (Product Lifecycle Management). The risks in above mentioned areas are demonstrated as well as the ways of their managing. Risks in logistics are given into context with the risk management in an industrial enterprise and its projects. The main principles of risk management according to ISO standard are shown as well as the using of risk management in projects and classification of risks into categories or structures. The understanding of risk as an inevitable part of today s business is stressed. The risk is also presented as a parallel existence of threats and opportunities. It is necessary to balance these two sides of risk to the benefit of the company. The paper utilizes the authors experience in risk management in companies that design, manufacture and supply rail vehicles and it also uses come practical examples. Keywords: Logistics, risk, risk management, project 1. INTRODUCTION Logistics plays an important role in today s business as it can provide competitive advantage to the companies especially in cost and time which belong to the most important factors for competitiveness. Due to turbulences in global markets each company faces uncertainties and unexpected changes that bring about risks that can strongly influence the success of their business. It is especially valid for the industrial enterprises that cover wide spectrum of activities beginning from material procurement to the servicing of supplied products. Successful risk management helps to gain decisive advantages over the competitors. Therefore it is important to understand the principles of risk and risk management and to implement it also into standard procedures in logistic. 2. LOGISTICS IN AN INDUSTRIAL ENTERPRISE The logistics in an industrial enterprise covers especially all the activities concerning the material flow in company. These activities include material inflow from suppliers, warehousing, material flow in production packing of goods, expedition and distribution to suppliers. It also contains the transport of material and goods during above mentioned activities. Logistics can be understood as the way of management of these activities that contributes substantially to the efficiency of the enterprise. The proper logistics management can reduce cost in supply chain, manipulation of material, cost of warehousing. The production logistics can shorten the lead time in production. It means that besides shorter delivery time of products which helps the company to be more successful in winning orders it also decreases the volume of material and work in progress that decreases the necessary financing of the company. Generally the logistics is able to contribute to the company competitiveness mainly by reduction in time to deliver the products as well as the reduction of their cost. 3. RISK IN LOGISTICS AND THE PRINCIPLE OF RISK Above mentioned activities are helping the company to be more effective but they also bring about some risks. If we discuss the risk we usually understand some negative event that brings about the loss for the company. But it can be shown on two examples that the risk is usually closely connected with the opportunity to gain some merit and profit. Companies are able to exist only under the condition of creating of profit. The profit can be achieved only by gaining of sufficient order volume. The market is unfortunately not stable and the orders must be accepted even if the production capacities are full at the time when the delivery of products is asked. Even if the company succeeds in winning the order that perfectly fits to its capacity load it can t be excluded that the original delivery time changes. The reasons for it can be very different in case of public tenders there can be disputes over the tender result, the customer can have financing problems etc. Other example is in supplier selection. The material cost reduction can be achieved by selecting of a new supplier. It is the risk for the company because it can bring the cost saving if the supplier offers lower price but also additional cost and delay if the supplier proves to be unreliable and its product quality low. Both above mentioned cases show that the cause of risky situations is in uncertainty. If we knew that no time delays in contract term occur or the supplier is perfect it could be possible to plan the necessary logistics and simply execute the plans. The model of risk is based on the scheme in Fig. 1. Fig. 1 The model of risk The model shows that there is certain cause (or causes) of the risk. But due to uncertainty the risk can occur but it need not occur. The effect of risk on the company (if the risk occurs) can be in principle negative or positive. If we use the second example of supplier selection: the CAUSE can be the necessity to decrease the cost of product, it is the certain fact the UNCERTAINTY is in the prices and quality of potential suppliers and it determines the RISK the EFFECT can be the cost saving (POSITIVE EFFECT) or in the contrary the delay and increased cost (NEGATIVE EFFECT) The base plan and base calculation are prepared in the planning phase of the contract and the risk should be also covered in the calculation. We can use two principle approaches to the above mentioned risk of supplier selection: the base plan contains estimated cost saving during the supplier selection then the RISK can be defined as the THREAT that the saving will not be attained the base plan is prepared conservatively with no saving and the RISK equals the OPPORTUNITY to attain certain saving In this way some risks can be treated both as threats or opportunities these risks are called business risks. There are also other risks that can have only negative outcomes, e.g. the risk of breakdown, fire, injuries these risks are called pure risks. All the risks should be properly managed to fulfil the contract on time and budget. Even in the time of crises or stagnation it is necessary not only to protect against threats but also to look for opportunities [1]. The procedures of risk management are the topic of many books and also some international standards as will be shown in chapter 6. 4. RISK IN LOGISTICS DURING PRODUCT LIFE CYCLE Logistic activities in an industrial enterprise are based on the activities of the company related to their products and services. Companies can manufacture standard products or introduce new products or design and deliver the products (projects) according to the customers needs (engineer to order). The products should be regularly innovated and the portfolio of products and their proportion in company sales is changing as well as the volume of production of the whole company. The origin of risks is most often in product portfolio changes, introducing new products, realizing complex projects, selecting new suppliers or in changes in orders intake volume. Each product has its life cycle beginning from product design until its disposal after the end of life. The product life cycle was selected for illustration of logistic risks as it presents the relation between individual phases of this cycle and the fact that risks that are not treated in early phases of life can substantially influence other phases. The product life cycle and its main phases with the main activities in logistics are in Fig. 2. Fig. 2 Product life cycle and its relation to logistics activities Logistics activities in an industrial enterprise come out mainly of the activities of the company related to their products. Fig.2 shows well the time sequence and also mutual relation between the phases of product life cycle and logistics activities. Starting with key supplier selection in the phase of product design there must be decided what cost and quality is demanded which are usually the contradictory requirements. The quality, ability to meet the deadlines, reliability in operation, responses to service demands, maintainability and life cycle cost of the key supplier s product are influencing the quality and performance of the final product. It also influences next phases of the product life cycle. With suppliers fulfilling above mentioned qualities the next phases are much easier to manage. Especially during manufacturing the supply comes on time and during operation the failure rate and operating costs are low. At the same time the uncertainty and especially threats during life cycle are lower. Both product design and supplier selection determine the quality and future level of risk. After good key suppliers selection there is significant opportunity to win good references and interest of more customers. Manufacturing and logistics planning is also a key phase. Proper planning includes make or buy decisions based on own capabilities and also expected workload in the company. High threats are probable when outsourcing is not well prepared. Selection of other suppliers (except of the key suppliers) is often used for cost reduction. It brings usually lower risk but we must be also careful because a failure of any supplier can deteriorate the final product and it is highly recommended to have for all cases in reserve some substitute supplier. Dimensioning of warehouses and fast material preparation to manufacturing are important for fluent production. It should be able to cover failures or irregularities both in production and supply chain. Also the production logistic i.e. material flow, means of manipulation and transport, stock in production area at workplaces and layout of production machines and assembly posts are crucial. There are different demands in low volume (or make to order) production and mass production in high series. The methods used in these different types of production are also different and copying of some methods regardless of conditions in production is harmful. The logistics planning is very demanding in a new production plant or new products introducing (very often in combination) where the optimizing of the production logistics can substantially help [2], [3], [4]. The success in the phase of manufacturing usually depends on the quality of preceding phases. The good preparation also includes monitoring of identified risks. For instance the performance of a new supplier selected with the goal to decrease cost should be regularly checked. Similarly all identified opportunities should be monitored and the actions for its realization should be prepared. The activities in warehousing and material flow in production should be also monitored and the potential improvements should be identified. Potential irregularities in production should be covered by flexible organization of work in shifts or in holidays with the flexibility of placing of own or external employees. In expedition / distribution phase the good partners for transport are important as well as proper organizing. Also the packing must correspond to the way of transport, in some cases some fixtures for product manipulation are necessary. Phase of service harvest from preceding phases positively or negatively. It also sets good or bad references among the customers. The contemporary trend with the customers is to ask for so called full service, i.e. providing not only the warranty service but also maintenance and service of own products during warranty period or following period of e.g. 10 years for fixed cost (bound to intensity of operation) and with guaranteed availability or reliability of the product. It leads to the requirement for designing the product for low operating cost, high reliability, easy maintenance and also to optimising of spare parts stock and the way of servicing. Liquidation and recycling of the product after its life cycle is a business in some products and further extension can be expected also under the pressure of state regulation. 5. INFORMATION TECHNOLOGIES IN LOGISTICS MANAGEMENT Information technologies are indispensable for enterprise management as well as logistics management. Management of industrial enterprise is supported by ERP (Enterprise Resource Planning) system which is often accompanied with PLM (Product Lifecycle Management) system taking care especially for product design, technical preparation of production and product data management during the whole product life cycle. These systems enable to control the supply chain and production but the using of these systems also bring about some associated risks. The risks arise mainly from: major and unexpected changes in terms of delivery, production or supplies when the plans must be quickly changed the way of using these systems or overestimating of their capabilities especially the ability to re-plan the production after major changes in production schedule can cause headache for logistics people. The key in solving such changes and associated risks is in understanding the systems capabilities and reasonable actions adequate to system possibilities. Communication and consultation + Documentatrion 5.2 Communication and consultation 5.6 Monitoring and review , Jeseník, Czech Republic, EU 6. RISK MANAGEMENT IN LOGISTICS Risk management has become the firm part of enterprise management during recent decade. The risk management was recently standardized in ISO 31000:2009 Risk management - Principles and guidelines [5]. The overview of main risk management methods used worldwide and also own method of risk management in projects can be found in the monograph [6]. The risk management process dividend into phases is shown in Fig. 3 where the risk management process phases according to [6] are compared with the standard ISO [5]. RISK MANAGEMENT PROCESS [6] ISO [5] R1 Establishing context Risk assessment R2 Risk identification R3 Risk analysis Qualitative analysis Quantitative analysis Risk evaluation R4 Risk treatment Risk treatment plan? Reassess STOP Approve Updating of plans, reserve Preventive actions 5.3 Establishing context 5.4 Risk assessment Risk identification Risk analysis Risk evaluation 5.5 Risk treatment R5 Risk control Monitoring a controlling Risk review R6 Closing evaluation STOP Fig. 3 Risk management process according to [6] and ISO [5] Although the process according to [6] is aimed to project risk management, its phases and procedures are fully compatible with ISO standard. It can be used for projects supplying the product to the customer, or investment or product development projects (see also [7]), or in any projects in logistics or in management of risks in logistics in an enterprise. In the beginning (R1) the goal of risk management (risk management in project, enterprise, logistics, etc.) should be established and available information gathered. According to this phase the next phases of the process should be adjusted. Then the assessment including identification of risks (R2) and their analyzing (R3) must be done. During the analysis the risks are classified according to their probability and also possible effect to the project (see also Fig. 1). The classification can be made in scales (e.g. 1 5) or the risks can be directly quantified with their expected financial impact to the enterprise (project). The risk treatment plan (how to handle the risk) is prepared in phase R4 with the possibility to change the prepared plans or even stop the project or other related activity which is managed. Phase R5 is covering the project execution or management of enterprise logistics operation. The phases R1 R4 are regularly revisited during the phase R5 new risks can be identified, the risk treatment plans can be modified. After finishing the project or the period where the risk management of e.g. logistics operations is performed the closing evaluation / review R6 should be done to gain lessons learned and improve the risk management for the future. 7. CONCLUSION The paper summarizes main aspects of risk management in logistics. It shows that risk is caused by uncertainty and can have not only negative (threat) but also positive (opportunity) effect on the enterprise operations or projects. The risk in logistics is shown in the context of product life cycle. It begins with a selection of suppliers and planning of material flow in production and warehousing. Identification of risks and preparation of risk treatment plans in these two phases influence substantially the success in risk management during production and operation of the product. The risk in logistics can be successfully managed by the method of risk management consisting of 6 phases that comprises initial analysing of context of risk management, identifying and analysing the risks, preparing the ways and plans for risk treatment and then utilizing these plans during risk management. In this short paper only the introduction of risk management in logistics was given to raise interest. The method of risk management introduced in the paper is based on the author s practical experience and was proven in practical management in several enterprises and many projects. LITERATURE [1] KORECKÝ, M. Project Business Risks and Opportunities at the Current Crisis Environment, In: Invence Inovace Investice od recese k prosperitě. Kompendium finančního a logistického řízení podniku (sborník mezinárodní konference FLM 2009 Malenovice ), Vysoká škola báňská Technická univerzita Ostrava, ISBN [2] KORECKÝ, M. TRKOVSKÝ, V: Řešení logistiky výroby kolejových vozidel při inovacích výrobního programu. In: Invence Inovace Investice od recese k prosperitě. Kompendium finančního a logistického řízení podniku (sborník mezinárodní konference FLM 2009, Malenovice ), Vysoká škola báňská Technická univerzita Ostrava, ISBN [3] VOTAVA, V. ULRYCH, Z. EDL, M. - KORECKÝ, M. TRKOVSKÝ, V. Analýza optimalizace výrobních procesů malosériové složité výroby v nových výrobních prostorech na základě diskrétní simulace. In: Sborník příspěvků 11. ročník mezinárodní konference WITNESS 2008, hotel Skalní mlýn u Macochy, Humusoft a Vysoké učení technické v Brně ISBN NOVÁK, J. Dějiny technického pokroku. 1. vyd. Praha: Akademia, s. [4] VOTAVA, V. ULRYCH, Z. EDL, M. - KORECKÝ, M. TRKOVSKÝ, V. Analysis and Optimization of Complex Small - Lot Production in New Manufacturing Facilities Based on Discrete Simulation. In: 20th European Modeling & Simulation Symposium (EMSS 2008), Campora San Giovanni, Amantea (CS), Italy, September 17-19, ISBN NOVOTNÝ, K. Vliv teploty na deformační chování mosazných slitin. In Sborník z konference Tvařitelnost kovů. Ostrava: TANGER, 1997, s [5] ISO. Risk Management - Principles and guidelines ISO Switzerland: ISO, [6] KORECKÝ, M., TRKOVSKÝ, V. Management rizik projektů se zaměřením na projekty v průmyslových podnicích. (Project Risk Management with Focus on Projects in Industrial Enterprises). 1. vyd. Praha: Grada Publishing, a.s., ISBN [7] KORECKÝ, M. TRKOVSKÝ, V. ROŽNOVSKÝ, L. Planning and Management of Investment and Technical Development Projects under Uncertainty. In Metal 2012: 21. mez. metal. konference: Brno, Hotel Voroněž, Česká republika [CD-ROM]. Ostrava: TANGER: Květen, 2012, s. 90. ISBN
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