ESSENCE OF RISK MANAGEMENT TOOLS IN INTERNATIONAL LOGISTICS
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INTRODUCTION 7
CHAPTER 1. SUBJECT OF INTERNATIONAL LOGISTICS 10
1.1 Marketing Approach to Defining International Logistics 10
1.2 Subject of International Logistics 12
1.3 International Logistics Functions 19
1.3.1 International Logistics Mix 19
1.4 Theoretical outcomes 21
CHAPTER 2. INTERNATIONAL LOGISTICS DISRUPTIONS 23
2.1 Nature of Risks in International Logistics 23
2.2 Risk management in IL 27
2.3 IL risk assessment framework 30
2.4 Methodology 39
CHAPTER 3. FINDINGS OF THE EMPIRICAL RESEARCH 44
3.1 Classification of international logistics risks 44
3.2 Managers’ perception of international logistics risks 45
3.3. Empirical research outcomes and recommendations 47
3.3.1 Managerial implications and research limitations 48
3.3.2 Theoretical implications 49
DISCUSSION AND CONCLUSIONS 51
LIST OF REFERENCES 54
APPENDICES 59
Appendix 1 59
Appendix 2 60
CHAPTER 1. SUBJECT OF INTERNATIONAL LOGISTICS 10
1.1 Marketing Approach to Defining International Logistics 10
1.2 Subject of International Logistics 12
1.3 International Logistics Functions 19
1.3.1 International Logistics Mix 19
1.4 Theoretical outcomes 21
CHAPTER 2. INTERNATIONAL LOGISTICS DISRUPTIONS 23
2.1 Nature of Risks in International Logistics 23
2.2 Risk management in IL 27
2.3 IL risk assessment framework 30
2.4 Methodology 39
CHAPTER 3. FINDINGS OF THE EMPIRICAL RESEARCH 44
3.1 Classification of international logistics risks 44
3.2 Managers’ perception of international logistics risks 45
3.3. Empirical research outcomes and recommendations 47
3.3.1 Managerial implications and research limitations 48
3.3.2 Theoretical implications 49
DISCUSSION AND CONCLUSIONS 51
LIST OF REFERENCES 54
APPENDICES 59
Appendix 1 59
Appendix 2 60
Most business related operations and activities are exposed to specific types of risks. Multiple studies have been carried out in this area. First academic papers on risk management in business date back to 1950s. The concept of risk management may be found in many subjects concerning business. Risk management frameworks are discussed and applied in various subjects, such as strategic management, finance, legislation etc. Despite this, there is a shortage of academic research on risk management in supply chain management, general logistics and especially in international logistics. The reason for that is relative novelty of these subjects and uncertainty regarding the subject of international logistics and its relation to supply chain management.
The total globalization process, based on the global transport and virtual networking and underpinned by the worldwide liberalization of international relationships (of any nature) (Cherenkov. 2005), has drastically boosted Russian companies’ involvement in international business operations. The core item of successful internationalization is presented by their global competitiveness on the world market. Searching for sources to increase the competiveness due to international transaction costs reduction the Russian companies are forced to pay attention to international logistics costs.
Speaking about international logistics risks we have to highlight following two items. First, the proper “international logistics”, what does it mean in the frame of any convenient scientific/practical definition; and in general, does this “convenient definition” exist? Second, what is the place and role of international logistics among other international business disciplines related to marketing, management, finance, law, etc? The second item, taking into account that international logistics manage almost all flows in any business (material, financial, and intellectual, personified included; internal and external; inbound and outbound; forward and reverse; domestic and global), could convert the subject of international logistics into something like a meta-science covering all things and finding difficulty in explaining anything. Therefore, defining the subject of international logistics they have to find out the essence of this multidimensional phenomenon.
As a result, in accordance with a set of international logistics definitions (e.g., Nelson & Toledano, 1979; A Handbook of World Trade, 2004; Harrison & van Hoek, 2005) analyzed by the author, the most significant determinants were determined. The antecedents of international logistics risks are the uncertainty and disruptions in global supply links between trading countries. These disruptions arise as a result of differences between national marketing environments and logistics mixes of countries involved in international trade (Cherenkov, 2010). As it was noted in a recent survey at Global 1000 companies (Green, 2004), supply chain disruptions were perceived as the biggest threat to their companies’ revenue streams.
In order to facilitate flows of trade between countries, multiple issues have to be solved in the first place. Even countries of the same region may have a lot of similarities, there is still a series of discrepancies that may hamper trade between countries. Among most distinct challenges are: level of economic development, difference in currency and exchange rate fluctuations, multiple legal procedures etc.
There are multiple logistics functions which together form logistics support. Movement of goods or services within borders of a country does not encounter distortion of logistics functions, since the environment within one country is more or less equal regardless of destination. However, challenges start to arise in case of international trade. Distortions appear when a flow of goods or services crosses national borders. The degree of distortion is linked directly to diversity of trading countries. In case, when goods cross international border of countries from the same region with similar language and identical currency (e.g. Austria and Germany, European Union), the discrepancy is at minimum. On the opposite, when the trade flow crosses the border between two substantially different countries, let’s say Russian and China, tremendous discrepancies arise due to multiple factors:
• Difference in currency;
• Infrastructural differences - railroad track width is different;
• Infrastructural limitations - inability to process required amount of containers
Thus, due to substantial differences between logistics environments of trading countries multiple distortions occur, which pose many challenges and risks for logistics manager.
Nowadays, networks of production and marketing are mostly based on outsourcing and globalization. These networks are represented by highly sophisticated and interconnected supply chain flows. As a result, any disruptions in the network (its flows) will result in adverse consequences for organizations which comprise these global supply chains. According to the famous words of Oskar Wild, there is no existence of ‘common sense’. Not a single person shares the same common perception or view of a single matter. And this concept is also may be extrapolated to risk analysis and risk management. Each manager has his own view, attitude or opinion based on personal experience on risks faced by an organization. Thus, this makes any risk perception theoretically subjective (Slovic, 1992), there is no objective risk. It is essential how managers perceive and assess international logistics risks. By the end of the day, it is the corresponding manager who estimates the risks and comes up with a strategy, a set of reactive and proactive measures or risk management.
The goal of this master thesis is to discover the nature of risks in international logistics, classify them, and elaborate a manual for a logistics manager charged with arranging international operations. The purpose of this manual is to minimize potential risks which may arise in case of international logistics.
The subject of this research are differences of national logistics environments, discrepancies arising as a result and instruments to match these environments.
Objects of this master thesis include international logistics risks and perception of these risks by logistics managers. For research purposes a number of representatives from third-party logistics providers have been interviewed. Pool of companies consists of national service providers as well as foreign firms. Operations of these firms encounter challenges crossing borders of various countries. Examples include import, export and transit operations.
In order to achieve the above mentioned goal, the author of this research aims to answer the following research questions:
1. What is the subject of international logistics?
2. What are the sources of risks in international logistics and how to classify them?
3. How do logistics managers perceive logistics risks and how to mitigate them?
The purpose of the first chapter is to clarify the subject of International Logistics and a set of logistics operations involved. The second chapter is devoted to classification of International Logistics Risks, based on the academic works and primary data acquired from managers of third-party logistics operators, and Logistics risks management tools. In order to facilitate mitigation of risks in international logistics, a manual (or set of check-lists) will be developed for logistics managers of international company in the third chapter.
The total globalization process, based on the global transport and virtual networking and underpinned by the worldwide liberalization of international relationships (of any nature) (Cherenkov. 2005), has drastically boosted Russian companies’ involvement in international business operations. The core item of successful internationalization is presented by their global competitiveness on the world market. Searching for sources to increase the competiveness due to international transaction costs reduction the Russian companies are forced to pay attention to international logistics costs.
Speaking about international logistics risks we have to highlight following two items. First, the proper “international logistics”, what does it mean in the frame of any convenient scientific/practical definition; and in general, does this “convenient definition” exist? Second, what is the place and role of international logistics among other international business disciplines related to marketing, management, finance, law, etc? The second item, taking into account that international logistics manage almost all flows in any business (material, financial, and intellectual, personified included; internal and external; inbound and outbound; forward and reverse; domestic and global), could convert the subject of international logistics into something like a meta-science covering all things and finding difficulty in explaining anything. Therefore, defining the subject of international logistics they have to find out the essence of this multidimensional phenomenon.
As a result, in accordance with a set of international logistics definitions (e.g., Nelson & Toledano, 1979; A Handbook of World Trade, 2004; Harrison & van Hoek, 2005) analyzed by the author, the most significant determinants were determined. The antecedents of international logistics risks are the uncertainty and disruptions in global supply links between trading countries. These disruptions arise as a result of differences between national marketing environments and logistics mixes of countries involved in international trade (Cherenkov, 2010). As it was noted in a recent survey at Global 1000 companies (Green, 2004), supply chain disruptions were perceived as the biggest threat to their companies’ revenue streams.
In order to facilitate flows of trade between countries, multiple issues have to be solved in the first place. Even countries of the same region may have a lot of similarities, there is still a series of discrepancies that may hamper trade between countries. Among most distinct challenges are: level of economic development, difference in currency and exchange rate fluctuations, multiple legal procedures etc.
There are multiple logistics functions which together form logistics support. Movement of goods or services within borders of a country does not encounter distortion of logistics functions, since the environment within one country is more or less equal regardless of destination. However, challenges start to arise in case of international trade. Distortions appear when a flow of goods or services crosses national borders. The degree of distortion is linked directly to diversity of trading countries. In case, when goods cross international border of countries from the same region with similar language and identical currency (e.g. Austria and Germany, European Union), the discrepancy is at minimum. On the opposite, when the trade flow crosses the border between two substantially different countries, let’s say Russian and China, tremendous discrepancies arise due to multiple factors:
• Difference in currency;
• Infrastructural differences - railroad track width is different;
• Infrastructural limitations - inability to process required amount of containers
Thus, due to substantial differences between logistics environments of trading countries multiple distortions occur, which pose many challenges and risks for logistics manager.
Nowadays, networks of production and marketing are mostly based on outsourcing and globalization. These networks are represented by highly sophisticated and interconnected supply chain flows. As a result, any disruptions in the network (its flows) will result in adverse consequences for organizations which comprise these global supply chains. According to the famous words of Oskar Wild, there is no existence of ‘common sense’. Not a single person shares the same common perception or view of a single matter. And this concept is also may be extrapolated to risk analysis and risk management. Each manager has his own view, attitude or opinion based on personal experience on risks faced by an organization. Thus, this makes any risk perception theoretically subjective (Slovic, 1992), there is no objective risk. It is essential how managers perceive and assess international logistics risks. By the end of the day, it is the corresponding manager who estimates the risks and comes up with a strategy, a set of reactive and proactive measures or risk management.
The goal of this master thesis is to discover the nature of risks in international logistics, classify them, and elaborate a manual for a logistics manager charged with arranging international operations. The purpose of this manual is to minimize potential risks which may arise in case of international logistics.
The subject of this research are differences of national logistics environments, discrepancies arising as a result and instruments to match these environments.
Objects of this master thesis include international logistics risks and perception of these risks by logistics managers. For research purposes a number of representatives from third-party logistics providers have been interviewed. Pool of companies consists of national service providers as well as foreign firms. Operations of these firms encounter challenges crossing borders of various countries. Examples include import, export and transit operations.
In order to achieve the above mentioned goal, the author of this research aims to answer the following research questions:
1. What is the subject of international logistics?
2. What are the sources of risks in international logistics and how to classify them?
3. How do logistics managers perceive logistics risks and how to mitigate them?
The purpose of the first chapter is to clarify the subject of International Logistics and a set of logistics operations involved. The second chapter is devoted to classification of International Logistics Risks, based on the academic works and primary data acquired from managers of third-party logistics operators, and Logistics risks management tools. In order to facilitate mitigation of risks in international logistics, a manual (or set of check-lists) will be developed for logistics managers of international company in the third chapter.
The objective of this dissertation was to discover the nature of risks in international logistics, classify them, and elaborate a manual for a logistics manager charged with arranging international operations.
The literature review suggested highlighting following two items. First, the proper “international logistics”, what does it mean in the frame of any convenient scientific/practical definition; and in general, does this “convenient definition” exist? Second, what is the place and role of international logistics among other international business disciplines related to marketing, management, finance, law, etc? The second item, taking into account that international logistics manage almost all flows in any business (material, financial, and intellectual, personified included; internal and external; inbound and outbound; forward and reverse; domestic and global), could convert the subject of international logistics into something like a meta-science covering all things and finding difficulty in explaining anything. Therefore, defining the subject of international logistics they have to find out the essence of this multidimensional phenomenon.
Having run the in-depth literature review on the subject of logistics and international logistics, the author encountered great variety of definitions for general logistics, international and supply chain management. As an outcome, the term ‘international logistics’ was clearly defined as well as the subject area of it. It turned out that academicians are still unclear regarding relationship between supply chain management and logistics, however, the author concluded that inclusionist point of view is prevailing. In addition to that, the author proved a close relationship between marketing and logistics. The split between these two business areas was due to a dichotomy in 1960s when the two were split. This fact enables employment of marketing tools with regard to logistics. Out of abundance of logistics functions, those relevant to international logistics subject area were selected. These functions comprise the totality of logistics mix. Each trading country has its own logistics mix and marketing environment (external). Dissimilarities of these marketing environments lead to disruptions in the logistics flows (supply chain) of the trading countries. For the purposes of keeping the scope of this research paper clear and concise, the variety of intermediaries was not described in fine details as it was unnecessary. A short definition of parties involved in international logistics process was given in chapter 2.
The above described processes (disruptions due to marketing environment dissimilarities) is clearly defined and described in the upcoming academic book by professor Vitally I. Cherenkov. The so called prismatic model describes the phenomena of disruptions in supply chain of trading companies. This model was used as a theoretical foundation for this research paper. According to this model, the logistics mix represents a link of the supply chain (or complex of logistics flows) between two trading countries. Due to differences in marketing environments of these countries, the logistics flow crosses the border and this is where disruptions occur. Thus, the author assumes that it is possible to adjust these disruptions in order to mitigate or avoid international logistics risks.
Having established a proper theoretical framework, as a second objective an adequate tool for managing risks associated with international logistics needed to be found. As the author proved the relationship between logistics and marketing and established that disruptions occur due to dissimilarities in marketing environments of trading companies, an adequate instrument for managing international logistics risks would be a check-list. It is one of the most essential but rather overlooked instruments of marketing audit. Marketing audit is a subject area yet undeveloped in Russia. As disruptions are result of differences in national marketing environment, a proper marketing audit of this environment is necessary. This check-list would reflect major factors, influencing the supply link between trading countries. Jumping ahead, it will be a self-audit checklist with seven major categories of risks and subcategories. Ideally, a manager would follow this list and perform a self-audit concerning his own operations and would make sure he is assessing all the risk areas.
There are various frameworks for managing risks to be found in academic literature. The author found the framework of four steps to be the most adequate: risk identification, risk assessment, risk mitigation and risk control. The first and the most important step was to identify key risks for their further assessment and mitigation. Risk identification as well as assessment may be carried out on a qualitative or/and quantitative base. The major obstacle - lack of historical data on risk events and their consequences predetermined the selection of qualitative approach with a trait of quantitative assessment.
Thus, for risk identification purposes an interview with 12 representatives of companies involved in international logistics was set up. These companies were from four groups: national logistics providers, foreign logistics providers, local manufacturing companies and foreign manufacturing companies. The major requirement was that companies had to be involved in international trade. Having conducted initial interviews, the author was able to form risks into seven major categories (risk identification): transport, environment, political, financial, information, risk of human factor and contract risk. This was the foundation for further assessment of the identified risks. For this purpose, an online questionnaire was conducted with 117 companies. As a final step, a check list of seven major risk categories and their risk value (probability*severity) perceptions by managers were assessed.
In conclusion it is essential to mention that the execution of the risk assessment framework in this paper is considerably far from being perfect. There are multiple limitations such as the distribution of respondents with regard to the size of the company, geographical location and status of the manager. The goal of this paper is rather to lay the foundation for further development of the subject of international logistics among students and academicians in Russian Federation. In addition, the author would like to mention that the area of marketing audit is yet untapped in the academic literature of leading business schools in Russia, which as a result leads to lack of sophisticated practice of these risk management tools in Russian business.
The literature review suggested highlighting following two items. First, the proper “international logistics”, what does it mean in the frame of any convenient scientific/practical definition; and in general, does this “convenient definition” exist? Second, what is the place and role of international logistics among other international business disciplines related to marketing, management, finance, law, etc? The second item, taking into account that international logistics manage almost all flows in any business (material, financial, and intellectual, personified included; internal and external; inbound and outbound; forward and reverse; domestic and global), could convert the subject of international logistics into something like a meta-science covering all things and finding difficulty in explaining anything. Therefore, defining the subject of international logistics they have to find out the essence of this multidimensional phenomenon.
Having run the in-depth literature review on the subject of logistics and international logistics, the author encountered great variety of definitions for general logistics, international and supply chain management. As an outcome, the term ‘international logistics’ was clearly defined as well as the subject area of it. It turned out that academicians are still unclear regarding relationship between supply chain management and logistics, however, the author concluded that inclusionist point of view is prevailing. In addition to that, the author proved a close relationship between marketing and logistics. The split between these two business areas was due to a dichotomy in 1960s when the two were split. This fact enables employment of marketing tools with regard to logistics. Out of abundance of logistics functions, those relevant to international logistics subject area were selected. These functions comprise the totality of logistics mix. Each trading country has its own logistics mix and marketing environment (external). Dissimilarities of these marketing environments lead to disruptions in the logistics flows (supply chain) of the trading countries. For the purposes of keeping the scope of this research paper clear and concise, the variety of intermediaries was not described in fine details as it was unnecessary. A short definition of parties involved in international logistics process was given in chapter 2.
The above described processes (disruptions due to marketing environment dissimilarities) is clearly defined and described in the upcoming academic book by professor Vitally I. Cherenkov. The so called prismatic model describes the phenomena of disruptions in supply chain of trading companies. This model was used as a theoretical foundation for this research paper. According to this model, the logistics mix represents a link of the supply chain (or complex of logistics flows) between two trading countries. Due to differences in marketing environments of these countries, the logistics flow crosses the border and this is where disruptions occur. Thus, the author assumes that it is possible to adjust these disruptions in order to mitigate or avoid international logistics risks.
Having established a proper theoretical framework, as a second objective an adequate tool for managing risks associated with international logistics needed to be found. As the author proved the relationship between logistics and marketing and established that disruptions occur due to dissimilarities in marketing environments of trading companies, an adequate instrument for managing international logistics risks would be a check-list. It is one of the most essential but rather overlooked instruments of marketing audit. Marketing audit is a subject area yet undeveloped in Russia. As disruptions are result of differences in national marketing environment, a proper marketing audit of this environment is necessary. This check-list would reflect major factors, influencing the supply link between trading countries. Jumping ahead, it will be a self-audit checklist with seven major categories of risks and subcategories. Ideally, a manager would follow this list and perform a self-audit concerning his own operations and would make sure he is assessing all the risk areas.
There are various frameworks for managing risks to be found in academic literature. The author found the framework of four steps to be the most adequate: risk identification, risk assessment, risk mitigation and risk control. The first and the most important step was to identify key risks for their further assessment and mitigation. Risk identification as well as assessment may be carried out on a qualitative or/and quantitative base. The major obstacle - lack of historical data on risk events and their consequences predetermined the selection of qualitative approach with a trait of quantitative assessment.
Thus, for risk identification purposes an interview with 12 representatives of companies involved in international logistics was set up. These companies were from four groups: national logistics providers, foreign logistics providers, local manufacturing companies and foreign manufacturing companies. The major requirement was that companies had to be involved in international trade. Having conducted initial interviews, the author was able to form risks into seven major categories (risk identification): transport, environment, political, financial, information, risk of human factor and contract risk. This was the foundation for further assessment of the identified risks. For this purpose, an online questionnaire was conducted with 117 companies. As a final step, a check list of seven major risk categories and their risk value (probability*severity) perceptions by managers were assessed.
In conclusion it is essential to mention that the execution of the risk assessment framework in this paper is considerably far from being perfect. There are multiple limitations such as the distribution of respondents with regard to the size of the company, geographical location and status of the manager. The goal of this paper is rather to lay the foundation for further development of the subject of international logistics among students and academicians in Russian Federation. In addition, the author would like to mention that the area of marketing audit is yet untapped in the academic literature of leading business schools in Russia, which as a result leads to lack of sophisticated practice of these risk management tools in Russian business.
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