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RISK MANAGEMENT IN LOGISTICS
Abstract
Every business function is associated with opportunities and threats because of the uncertainties about future
developments. Logistics chain is also affected by this dynamic medium. In every ring of the chain, there is a serious
threat potential due to the internal and external supplier or customer. The problem is the uncontrollable nature of
risks in product/information flow and the inability of managing risks.
Because logistics is cross functional when compared with other basic functions, the emergence of logistics risks
can range from the first supply source to point of sales (PoS) that covers all areas, processes and actors. The
emerging risks can originate from inside or outside the firm. When classifying the risks in logistics, speculative
(emerging from management behaviors) risks should also be taken into account as well as real risks
(damage/harm), risk of loss, and risk of not to take advantage of opportunities.
Another classification of risks can be made by the risks importance and weight as being minor/harmless or as
being major risks that threaten the survival of the firm. Risks in logistics systems can be input, transformation and
output risks; or can be strategic, tactic, and operational risks. Logistics management is responsible for the
management of these risks per se.
1. Introduction
Both as a business function and an industry, the importance of logistics is continuously increasing. But parallel
to this increase, logistics security is becoming to be a more critical and important competition parameter for all
actors (companies) within the logistics chain (Pfohl, 2003: 49). There are many benefits of being in a logistics
chain, but it can also bring some risks to the companies (Hallikas, Virolainen &Tuominen, 2002: 45). The increasing
expectations and requirements of customers force both the parties who are responsible for logistics function and the
logistic service providers to be more provident against the possible risks. Also there is an increasing pressure
derived from laws. For example, the 9/11 terrorist attack is a milestone for the firms and they learned a lot from it
(Guinipero & Eltantawy, 2004: 698; Pfohl, 2003: 49). After the attack, the prevention of terrorism act directly
influences the material flow processes in national and international scale, and thereby, with these new and radical
legal measures taken, the cost of logistics security has increased. All parties within the logistics chain have turned
out to be vulnerable to such pressures of cost, and are forced to undertake new and additional responsibilities.
On the other side, changes increase uncertainties. The risks emerging from the uncertainties in the decisions of
management have increased and it will possibly increase in the future, because the gap between being ready for the
risks and the ability to overcome these risks is increasing from day to day. This is a result of increasing dynamism
and complexity of markets. While the logistics risks globalize and become more various, the logistics costs will
increase because of this globalization and variety. In this paper, the sources of risks that are related to logistics risk
management, types of risks, the steps of logistics risk management, and new measures employed in preventing the
risks will be discussed (Pfohl, 2003: 49).
1
Yildiz Technical University, Turkey, +90 212 2597070, akaraman@yildiz.edu.tr
2
Yildiz Technical University, Turkey, +90 212 2597070, duymaz@yildiz.edu.tr
Schulte classifies the risk fields and subjects in logistics as given in Table 1 (Schulte, 2005: 692);
All risk fields and subjects of the risks can in turn emerge for any firm. Particularly the rule violations or
negligence in food and medicine sector can cause fatalities.
1. Risk Identification
In this step, the definition, type, cause of the risk, and the level of damages it can generate is specified. Risks
may range from the infrastructure facilities or tools to technical quality or organized personnel or information. At
this step, the security problems and undefended points should be diagnosed.
4. Risk Financing
The risks can either be financed through equities or through insurance. In order to compare the suitable financing
model, it is necessary to know about the origin and frequency of losses/damages. Insuring the risks which cannot be
influenced by management and have a high financial burden seems the best solution today. Insurance companies
also focus on clarity of risks, their level of estimation and a premium system suiting the risk.
Risk management is generally considered as a task of operational management but isnt assigned to only one risk
manager.
4. Conclusion
Fast changes in the economy and technology create uncertainties and risks. The risks arising from the
uncertainties in business decisions have increased, and will probably increase in the future, because the gap between
the requirement to be ready to risks and the ability to bear risks is becoming larger. This fact is due to increasing
dynamism and complexity of the markets. The instabilities arising in the supply chain due to various reasons, and
increasing number of interfaces nurture risks in logistics activities. It is therefore necessary to act with a security
margin in all decisions and applications in logistics and take various risk costs into account. The problem in fact is
not taking controllable risks. The problem is the uncontrolled existence of risks in logistics and failure to have
dominance over such risks. The real issue is due to the increasing distance between being ready to a risk and the
ability to overcome that risk. Because of the increasing environmental dynamism and complexity, increasing scale
of the business, increasing innovativeness of new manufacturing techniques/methods, and increasing distance in the
commercial locations, an increase in the number of risks should be expected. While it is possible to take preventive
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