Brief Risk Evaluation for Hekumu’s Supply Chain
Kirjoittanut: Xiaoqing Yang-Pyydysmäki - tiimistä FLIP Solutions.
Fundamentals of risk management : understanding, evaluating and implementing effective risk management
Hekumu is one of the projects under Flip Solutions Osk. It was working on importing herbal tea with packaging from Vietnam to Finland. As the production process was only happened in the supplier’s factory in Asia, Hekumu had to put lot of effort on communication with suppliers and make sure we can get right products in Finland and deliver them to the customers. However, due to the hit of covid-19 in Vietnam, Hekumu had to change the strategies and look for other suppliers till the last moment. After several twists and turns, it was found Hekumu has maintained good communication with current supplier. In this essay, Hekumu has learnt from the lesson of risk management will be shared. One pure and one speculative risk will be identified and analysed base on the time scale, FIRM scorecard categorization, and risk mapping. At the end, the the risk estimation and risk reduction method will be given for reducing the risk in the future.
2. Process and risk identification
2.1 Importing in the supply chain
Hekumu tea idea came from Vietnam which the ingredients contain Asian and tropical herbs, fruits and flowers. For multiple considerations, it was planned directly import such products from the Vietnam factory to Finland, including product packaging and printing. The production line is far in Vietnam, with a 4-hour time difference, cultural differences, and the impact of the epidemic since 2020, this series of influences caused Hekumu to face great risks while executing business plans. Many important matters can only rely on remote calls and trust in local contacts. Therefore, in order to be clearer about the risks in supply chain, pure risks and speculative risks will be identified in particular from suppliers as following. These risks were also the biggest challenges that Hekumu was facing.
2.2 Risk identification
2.2.1 Pure risks- “pure risk is a category of risk that cannot be controlled and has two outcomes: complete loss or no loss at all. There are no opportunities for gain or profit when pure risk in involved.”(Julia Kagan, 2021)
When Hekumu was dealing with supplier in Vietnam, the possible pure risks can be summarized as following:
a. Supplier factory hardware/software broken.
b. Natural disaster in Vietnam.
c. Covid-19 caused the related staff cannot work properly in Vietnam.
d. Covid-19 caused delivery delay.
In this case, the risks “Covid-19 caused the related staff cannot work properly in Vietnam” and “Covid-19 caused delivery delay” hit us in real. They’ll be focused on this paper. With the impact of the second wave of the epidemic, not only India, but Southeast Asian country like Vietnam is also experiencing the impact (Vietnam PM warns, 2021), so does the third wave. None of these is under Hekumu’s control, but they have significant influence for the whole business.
2.2.2 Speculative risks- “Speculative risk is a category of risk that, when undertaken, results in an uncertain degree of gain or loss. All speculative risks are made as conscious choices and are not just a result of uncontrollable circumstances.” (Ben Cole, 2018)
To select supplier from Asian country is the speculative risk especially during the pandemic time. Lots of uncertainties increased risk in the investment, for instance, the product quality control and lead time control. However, as the business idea came from the tea products mainly produced in Vietnam, product cost and delivery cost were ideally in the budget, it was the first choice.
3. Pure risks in supply chain
3.1 Risk analysis
3.1.1 Time frame
As mentioned above, the second and third wave of Covid-19 were sever in Vietnam during last summer. Usually, after signing the contract, the production time is about two to three weeks. Local supplier was very careful dealing with this impact, they took series actions to make sure production and delivery won’t be delayed and gained trust from Hekumu. And there were few months buffering time from Hekumu to handle the delay. Thus, it was a short-term risk.
However, Covid -19 was underestimated as supply chain pure risks. The current epidemic situation in Vietnam is still not very optimistic. Even if we do not change suppliers, the future procurement will be full of uncertainty as well. Therefore, this risk can now be classified as a medium to long-term risk.
3.1.2 Recognizing risk
Because of the Covid-19 that some of the staff and contact persons are possibly not able to work properly in Vietnam. Shipping has also suffered a lot. The accumulation of goods and the lack of containers have made the delivery date extremely uncertain. This wasn’t obvious in the beginning of working with local suppliers till it was informed that only air freight could reduce the risk of lack of inventory.
It will not only raise the financial risk for Hekumu but also impact the level of efficiency which associated with failure of maintaining normal routine and satisfy the customer requirements. Another example was during the negotiation process that Hekumu temporarily lost connection with contacts in Vietnam. Due to at that moment, there is no possibility Hekumu employee working locally with suppliers, all the communication were done online. When it’s suspended, the production line can get affected right away.
3.1.3 Risk mapping
Figure 1. Pure risk (P) and speculative risk (S) have been placed to B risk group and A risk group accordingly in the risk map in summer 2021.
Even though there was high infection risk of coronavirus, one reason we chose supplier from Vietnam was the frequency with the pure risk is still identified to be low. The coronavirus case number was 7,972 (Vietnam Coronavirus Cases, 2021) compare with population of Vietnam around 96 million, the chance of being infected is still can be seen as relatively low. In addition, the Vietnamese government was adopting stricter and more active and effective anti-epidemic measures to minimize the impact caused by the virus to the economy.
3.2 Risk estimation
3.2.1 Risk capacity
The risk capacity of the pure risk with Covid-19 was relatively low because basically it’s not under Hekumu’s control. Even everyone knows that if there is one case found in supplier’s side, it will cause a series of problems. What Hekumu can do at that time was to make backup plans. If it exceeds the low level, the risk management actions will be launched.
3.2.2 Risk exposure
The most likely consequence of the pure risk is the production delay. The economic loss will be speed of slow capital return and effect the next ordering. For instance, if one order costs around 15,000 euro, and restock every 3 to 4 months. In this sense, the delay may reduce the restocking frequency of tea products. For decreasing one restock, Hekumu will lose at least one ordering payment.
3.3 Risk reduction measures
As the pure risk with Covid – 19 cannot be avoid or eliminated, for protecting own benefit, Hekumu has to insure and reduce the impact from such risk. For instance,
a. Making conditional contract with suppliers that if there is delay due to their reason, they will be fully responsible for the consequences. It is to transfer the risk that suppliers will put it on their agenda and pay more attention.
b. Take insurance that losses caused by natural and man-made disasters could get compensated.
c. Developing a backup plan base on the Covid -19 impact to neutralize risk by other products or using other suppliers.
4. Speculative risks in supply chain
4.1 Risk analysis
4.1.1 Time frame
While importing food to European countries, a certificate issued by an EU-approved food safety inspection agency is necessary. However, the tea products that contain multiple ingredients which means there are many categories that can be tested (about 800 criteria per ingredient to test). As different standard, even if there is an EU-approved inspection certificate, it may not be able to pass the customs inspection. Customs usually conduct spot checks on important indicators.
Thus, if supplier cannot provide quality product and important indicators are not passed from the inspection in agency, it is a short-term risk. And Hekumu has to stop the contract and change the supplier. If supplier provides quality product and important indicators are passed from the inspection in agency but failed in the custom check in Finland because of other indicators, it would hide a short-term, medium-term or long-term risk for Hekumu. Since custom performs random check, it’s hard to predict when it will happen. This was one of the concerns giving up the coorperation with Vietnam suppliers.
As mentioned earlier, covid-19 plays significant role on international shipment. Besides the pure risk, the lead time is mostly under control of supplier. Once not on time is a short-term-risk, it still could affect the trust built by both parties in the long term coorperation.
4.1.2 Recognizing risk
Quality assurance is the most important element for Hekumu. Whether the supplier’s product is qualified will decide if our products can be launched in the Finnish market.. The supplier may believe that their products are having good quality locally, but the food safety standards are relatively different. EU is well-know that has the strictest standards for food safety in the world, any quality problem can cause extremely serious consequences for Hekumu. If delay happens, it will impact customer satisfaction and operation process.
4.1.3 Risk mapping
Please see Figure 1. Pure risk (P) and speculative risk (S) have been placed to B risk group and A risk group accordingly in the risk map in summer 2021.
The speculative risk was located in the A group which has medium risk frequency and strong risk impact. The reason for this is the supplier was taking care of the raw material purchase channels and initial quality control. The product quality test can be done partly through authorized agency. As there are different food safety standards between the two countries, the custom check is random, it is difficult to know the risk frequency. Hence, for the time being, the speculation risk is set at medium frequency level. If the quality problem occurs, it will have very strong impact for the company such as brand image, financial, infrastructure change, and etc. ’
4.2 Risk estimation
4.2.1 Risk capacity
The unqualified product risk capacity is very high. In the food industry, this is the risk no one can avoid especially importing from countries outside of EU. If Hekumu chooses to import product from Asian countries, it has to take this risk and try to make the quality assurance as specific as possible. So that there are countermeasures to deal with different consequences.
4.2.2 Risk exposure
As mentioned earlier, if the product cannot pass the quality test that it will cost some thousands of euro. And if the product is found unqualified in custom check in EU, the whole restock will be destroyed which all the investment will be lost without counting the marketing, sales, credibility loss.
4.2.3 Risk reduction measures
In terms of quality, Hekumu must take the initiative, because this is an important basis for the entire brand and corporate values. Quality control must be strict. Following measures could be considered.
a. Improve the quality control system, try to carefully specify every step.
b. Make conditional contract with supplier that if the product is not qualified in the test, supplier will be responsible the consequences.
c. Ideally, hire a local quality assurance keeper to supervise the quality control.
d. Improve risk management plan and supplier selection process. For example, find backup suppliers. Or if it happens twice in one year that supplier provides unqualified product, Hekumu will change supplier
Importing business itself is involving lots of risks. During pandemic time, Hekumu needs to be aware of the possibility of various risks and have an assessment of the risks in each step. While the epidemic is spreading, everyone may not be able to control the impact of the virus. But after evaluation, some risks can be reduced and avoided. The pure risk and speculative risk mentioned in this essay are telling that prepare early and foolproof. If we had the risk management knowledge, analyze and evaluate the situations in the earlier stage, many difficulties can be solved in the easier way. If the prevention and backup plans are made for risks, then even if it happens, there is no panic.
Basically, this essay is a short review of Hekumu’s dealling with suppliers and the corona last summer. The risk evaluation supposed to be done beforehand As a startup, lack of experience led a lot of time losing in negotiating with suppliers. At the same time, the impact of the covid-19 is very unfavorable to international trade. Fortunately, Hekumu made the right decision in time. Nothing was lost, and Hekumu has learned a good lesson in a short time. Like Professor Ralf and Richard mentioned in their article “The shrinking of the supply chain footprint dynamic may accelerate as companies seek a different cost/resilience trade-off and look to localize production and sourcing.”, Hekumu is looking forward being fully localized and more sustainable in the future. (Ralf&Richard, 2020)
Pure Risk. Julia Kagan, May 2021
Speculative Risk. Ben Cole, 2018
Vietnam PM warns (2021). Vietnam PM warns COVID – hit supply chain still at ‘very high risk’. Tomoya Onishi, Nikkei staff writer. Referred: May 27, 2021 from https://asia.nikkei.com/Spotlight/Coronavirus/Vietnam-PM-warns-COVID-hit-supply-chain-still-at-very-high-risk
Digesting the shocks: how supply chains are adapting to the COVID-19 lockdowns
Coping in a unique moment. Ralf W.Seifert &Richard Markooff, March 2020
Vietnam Coronavirus Cases (2021). Referred: June 03,2021 from https://www.worldometers.info/coronavirus/country/viet-nam