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 HUMAN RESOURCE RISK MANAGEMENT IN SUPPLY CHAIN

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HUMAN RESOURCE RISK MANAGEMENT IN SUPPLY CHAIN

Marija Matotek and Dušan Regodić

Singidunum Universityt, Republic of Serbia, 11 000 Belgrade, 32 Danijelova st., Tel +38 1643833131. matotek@gmail.com

Received: 24/nov/2014 -- Accepted: 3/feb/2015 - DOI: http://dx.doi.org/10.6036/MN7478

ABSTRACT: The main purpose of this paper is the improvement of knowledge base related to risk assessment and
management in the human factor domain in supply chains. Specific goals of this research are achieved through the
realization of particular research activities. Special research goals, which have to be realistic with clearly measurable
results and complements with an overall research goal, in this paper are: Defining appropriate logic frame for
terminological systematization related to risk management in supply chains and Development of model for risk
assessment in supply chains. While making this paper, we used scientific method base on available literature as well as
on legal and planning acts. Data analysis enabled us to research and identifies possibilities for application of risk
assessment in supply chains in order to carry out their optimization in emergency situations. It is possible to define and
systemize risk group that can occur in mutual interaction between members of supply chain and are the result of
individual member’s activity. Available literature related to risk management in supply chains is not sufficient for
“logistic” risks. An efficient model for risk management in supply chains has been developed, which is compatible with
general strategy used for risk management in supply chains. Defined model is compatible with basic theoretical
postulates of risk management and is applicable in real business systems. Elegant, but very complex task, can be a
simulation of supply chain segment through stochastic modeling in order to support risk assessment mapping of the
influence of different variations for risk parameters. The partners in the supply chain should develop the understanding
of the importance of recognizing the structure of key risks. This research gives a new aspect of risk management in
supply chains.

Keywords: Supply Chain Management, Risk Management, Risk Analysis, Logistics, Human Resource.

RESUMEN: El objetivo principal de este trabajo es la mejora de la base de conocimientos relativos a la evaluación y gestión de
riesgos en el dominio del factor humano en las cadenas de suministro. Los objetivos específicos de esta investigación se logran a
través de la realización de actividades de investigación en particular. Objetivos especiales de investigación, que tienen que ser
realistas con resultados claramente medibles y complementa con el objetivo general de la investigación, en este trabajo son:
Definición de marco lógico apropiado para sistematización terminológica relacionada con la gestión de riesgos en las cadenas de
suministro y Desarrollo de modelo para la evaluación de riesgos en las cadenas de suministro. Al hacer este trabajo hemos utilizado
la base del método científico en la literatura disponible, así como en los actos jurídicos y de planificación. Análisis de los datos nos
ha permitido investigar e identificar posibilidades de aplicación de la evaluación de riesgos en la cadena de suministro con el fin de
llevar a cabo su optimización en situaciones de emergencia. Es posible definir y sistematizar grupo de riesgo que puede ocurrir en la
interacción mutua entre los miembros de la cadena de suministro y son el resultado de la actividad del miembro individual.
Disponible literatura relacionada con la gestión de riesgos en las cadenas de suministro no es suficiente para los riesgos de
"logística". Un modelo eficiente para la gestión de riesgos en las cadenas de suministro se ha desarrollado, que es compatible con la
estrategia general que se utiliza para la gestión de riesgos en las cadenas de suministro. Modelo definido es compatible con los
postulados teóricos básicos de la gestión de riesgos y es aplicable en sistemas reales de negocio. Tarea elegante, pero muy
complejo, puede ser una simulación del segmento de la cadena de suministro a través de la modelización estocástica con el fin de
apoyar la cartografía de evaluación de riesgos de la influencia de diferentes variaciones de los parámetros de riesgo. Los socios de la
cadena de suministro deben desarrollar la comprensión de la importancia de reconocer la estructura de los principales riesgos. Esta
investigación da un nuevo aspecto de la gestión de riesgos en las cadenas de suministro.

Palabras clave: Gestión de la cadena de suministro, gestión de riesgos, análisis de riesgos, logística, recursos humanos.

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1. INTRODUCTION

The process of risk management in the supply chain, which involves the identification, analysis and adequate treatment
of risk, does not tolerate an ad hoc approach, but requires formalized involvement in the organization of supply chain
management. The essence of this process lies in the timely reaction to changes. Managers have to be aware of potential
impacts on all levels, in order to successfully manage them.

The forms of risk in supply chains range from everyday, minor delays and holdups to catastrophic events caused by
human activities (fires, terrorist attacks) and natural processes (volcanic eruptions, earthquakes). The key stage of
understanding and effective risk management is related to determining the diversity of their forms, i.e. their
identification and categorization. Basically, risks vary in terms of frequency and consequences.

Risk management in the supply chain began to form as a separate research area within the supply chain management
after 2001 [4]. There are two main reasons. The first reason is the intensification of events such as terrorist attacks,
natural disasters, disease and disasters caused by human error. Another reason is the use of new business philosophy in
supply chain management, such as "lean" strategy, globalization of supply, outsourcing, etc. These reasons are in fact
the main source of threats and vulnerabilities in the supply chain. Therefore, supply chain vulnerability is caused, on the
one hand, by the increasing complexity of the supply chain structure and diversity of business process models that
appear in it, and on the other hand, by the inability of accurate prediction of changes in the environment of supply
chains. The domain of the research, i.e. the problem in this paper includes the risk that has its’ source in the category of
the human factor.

2. RISKS IN THE SUPPLY CHAIN

Supply chain management as a complex function, among other things, is facing the challenges of a large number of
different risks, with the intensity of consequences ranging from a minimum of delay to the complete interruption of
flow in the supply chain. According to the adopted definition, risk is a measure of exposure to a risk event, with the risk
event in the context of the supply chain in general may involve two categories of events. The first category of events is
related to natural or other disasters that are not the result of organized exercise of any business activity. The second
category of risk events are exactly the activities that are carried out by individual members in the supply chain and
outside it, directed toward business objectives. An example of the second category of risk events is activities that are
undertaken in order to improve business operation in order to achieve higher overall efficiency and effectiveness. What
is characteristic of these activities is that during their planning, organization, implementation and control, the associated
risks are not considered. This situation is a breeding ground for the emergence and growth of risk in the supply chain,
where some members of the chain do not perceive the risks to which they may be directly exposed or the indirect risks
associated with hazardous events that can potentially be achieved with other members of the chain, whose consequences
will have an impact on the operations of the observed members of the chain. Taxonomy of risks is possible in respect of
several criteria.
 human factor,
 technology,
 environment and
 business processes.

In relation to the source, risk may be operational - comes from the functioning of the organization and strategic - comes
from business, social, political, economic and technological factors. Willingness to change is directly related to
employee attitudes towards risk. Attitude towards risk can be seen through the analysis of several phases of work
processes:
 the risk of recognizing the problems,
 the risk of approaching the problems,
 the risk of defining expectations,
 the risk of fair comparison of expectations and ideas and
 the risk of implementing solutions.

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Employee attitude towards risk becomes positive if the difference between the current situation and conditions that will
cause a change is realistically observed, and based on reality, the option that in the best possible way explains the
change or problem is chosen. The certain probability that an individual is involved in the activity as well as their
personal beliefs about the outcome, with their personality traits, may be taken as the basic preconditions for the
formation of a positive attitude towards risk [3]. Very often employees behave according to certain roles, adopted
models, habits that they do not want to or cannot quickly change, so the existence of readiness for change cannot be
identified. The behaviour of individuals within an organization is in the function of cultural, educational and other
personal characteristics and cannot be generalized as a unique form. The concept of risk in the supply chain can be
defined as exposure to risk events that adversely affect the operation of supply chain and hence, its’ performance, such
as the level of services to the user, the costs or the possibility of rapid response. The range of hazardous events that may
affect the operation of the supply chain is very broad and ranges of external (in the environment of the supply chain), to
the inter-organizational and intra-organizational, with their consequences being categorized from short-term (of less
intensity) to long term (of greater intensity).

Level Level
Activities which can cause potential harm
1 2
H Availability of nepotism, non-compliance of the workplace with the education system, inadequate education / skills / abilities,
U skilled staff brain drain, work under pressure, expired contracts
M morals and ethics, disclosure of business secrets, bribery and corruption, disrespect for The Systematization of
The behaviour of
A jobs and other legal acts at the level of the organization / state, resisting the adoption of new technologies /
employees
N business processes, information theft / theft of material goods
Community environment (waste, waste water, emissions, resource depletion, radiation), terrorism and threats (by the wider
F relations community), advertising, bad reputation due to disturbed interpersonal relationships
A failure to create a safe working environment, disregard for the prescribed acts from the domain OSH and fire
C Health and safety
protection, use of defective equipment and work resources (without certificates, approvals)
T Outsourcing loss of competence, dismissal or transfer of staff, uncertainty among workers
O
R Communication poor (or lack of) communication, mobbing, failure to realize plans and forecasts, resistance to new technologies
Tabla I . Categorization of the threats from the domain of human resources in the supply chains

From a logistical point of view, the interaction between members of the supply chain becomes more complex,
especially in the context of growing uncertainty which is, among other things, the result of new business models that are
applied in order to improve logistics efficiency and increase competitiveness. Therefore, as the main source of risk in
the supply chain two types of interaction can be identified: the first one occurs between members of the supply chain
and the environment, and the other one between the individual members in the supply chain. Traditional ways of
managing these risks include engaging additional material and time resources.

What companies really need is a proactive risk management in supply chains [4]. A detailed categorization of threats
from the domain of human resources is shown in Table 1.

3. RISK MANAGEMENT

Traditional risk management was limited to clean risk, which included: property risks, personal risk and liability risks.
During the nineties, many companies began to expand the scope of risk management, such as taking into account the
speculative financial risks, which led to new efforts in the area of risk management. Recently, some organizations have
gone even further, because they included all risks they are confronted with their risk management programs. This
implies such a program that includes: clean, speculative, strategic and operational risks.

The concept of risk management allows the systematic creation of a framework for reducing the risk to a minimum
during the performance of an activity.

3.1. A Systematic Approach to Risk Management

The concept of risk management is based on the basic premise that risk management is planned, farsighted, structured,
informative and steadily applicable technique [1]. The key to successful risk management is early planning and

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aggressive implementation. Good planning enables an organized, comprehensive and iterative process of identification
and assessment of risks and an adequate response. Although each risk management strategy depends on the nature of
the system under consideration, studies have shown that good management strategy is based on the process shown in
Figure 1.

3.2. Risk Planning

Risk planning is the initial stage of risk management and a set of actions to be implemented within the overall risk
management process and is defined by the risk management plan. The main elements of the risk management plan are:
a summary of the system; the objectives and purpose of the system; the necessary standards development strategies;
way of considering risk; determining risk; rating scale of risk; organization of the risk management process through the
stages; responsibility for risk management. Risk management plan is the basis and the guideline for the operation of the
risk manager team.

Risk Management

Risk Planning
Documentation and Communication

Risk Assessment
 Identification
 Analysis
 Evaluation

Risk Mitigation
 Control
 Reduction
 Retention
 Transfer

Risk Monitoring

Fig. 1. Phases of Risk Management

3.3. Risk Assessment

The phase of the risk assessment process consists of risk identification, risk analysis and risk evaluation.

Risk identification is the process of reviewing the elements and processes of the system in order to identify and
document potential risks. After the completion of the risk identification a register of all identified risks is formed.
In the risk analysis process, each identified risk is evaluated (determination of cause and effect), the existing control
measures in the system are analysed and the quantification of risk is performed.

The quantification of each identified risk involves defining the quantitative and qualitative assessment of risks. The
quantitative risk assessment implies numerically expressed risk assessment. Probability of occurrence is expressed
through the frequency of events in a given time or activity, while the consequences caused by risk are expressed
through monetary value (loss of revenue, repair costs). Its’ evaluation (assessment) is based on the obtained values of
risk.

The qualitative evaluation implies defining the magnitude of danger, the probability of a risk event and its
determination. In practice, the individual impacts caused by the risk of the system cannot be quantified by the numerical

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values (loss of integrity, loss of confidence, the impact to the public, etc.). Instead, qualitative evaluations, usually
based on a subjective assessment, are used in the decision-making process.

Determination of risk implies the formation of a matrix of risk level. The matrix of risk levels is used to estimate the
overall risk in the system based on the level of probability of risk occurrence, magnitude of its’ impact and the measures
implemented to reduce the risk. Within the matrix, scaling of risk must be completed. Also, depending on the value of
risk, priorities can be assigned to actions.

Risk evaluation is the process of comparing quantified risk in comparison with the set criteria to define the significance
of risk. The criteria of significance can be set from different angles, e.g.: costs and benefits, regulatory requirements,
socio-economic aspects, the protection of the environment, the demands of contractors, defined priorities, probabilities
of occurrence, risk consequences, etc. Exit out of this process represents the list of priority risks.

3.4. Risk Mitigation

Risk mitigation is the process of selecting the best strategies for risk management in accordance with the existing
restrictions and set goals. Within this phase, the plan of selected strategies is formed. Strategies for risk management
include: risk control, risk reduction, retention and transfer of risk. Risk control does not try to eliminate risk, but to find
ways to control risk, i.e. its’ probability and consequences to the system. Ways to control risk are: the use of an
alternative design that provides risk reduction, the development of a parallel system which is used for studying risks, the
aggregated principle of construction to facilitate the easier change of parts, use of models, simulations, etc.

Reducing the risk represents such a management strategy in which we perform some changes to the system, change of
the concept, requirements, specifications and performance (decrease max speed, reduce operating temperature...) in
order to decrease the possibilities of a risk event and its' impact on the system and the environment. In this way, sources
of high and medium risks are eliminated and replaced with solutions that bear a low risk.

The risk retention implies risk acceptance if it appears within the system and strategies in dealing with small risks are
preferred as well. Certainly it is not advisable to retain a risk in case of a large risk, i.e. it is acceptable only in situations
where the probability of occurrence of a greater risk is low.

Switching or transfer of risk is such a strategy in which we are trying to get rid of or reduce the risk by transferring or
sharing a part or the entirety of the risk, to another part of the system or, usually, to another party. Transfer of risk is the
process of relocation or distribution of risk thus reducing the overall risk. One example is the change of the hardware
components with the software. Warranty or the formations of fixed contracts represent the transfer of risk for the
contract bound parties.

3.5. Monitoring Risk Management

Monitoring of the system implies the systematic tracking and evaluation of the results of applied strategies and their
comparison with the established criteria. The monitoring activities are directly related to the system status indicators
which provide timely and accurate impression of the state of the system. The key to monitoring is setting up economic,
technical and planned-time indicators for defining the current status of the process and the early risk indicators.
In the process of risk monitoring a report is formed, the RTR-Risk Tracking Report, which defines critical risks that
need to be monitored. Also, it is necessary to form a Watch List form, which is a set of planned monitoring activities.

3.6. Information and Communication throughout the Management Process

Changes in the environment or obtaining new information from exploitation, followed by the occurrence of unidentified
risks in the production phase, as well as information from the phase of risk monitoring, affect the change of the original
assessment of risk in the system. This does not necessarily mean changing the entire management process, but only
particular phases of management to which the new information are related. Therefore, it is necessary to consistently
update information on risks. Through communication information about the participants of team analysis, priorities and
main objectives, outputs from the individual phases i.e. their database about the risks or the manner of conducting the

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assessment can be obtained. In this manner, the focus on crucial objectives and a two-way flow of communication are
provided.

3.7. Documenting Risks

Documenting risks is a mandatory procedure within each phase of risk management and consists of all the plans,
assessments and reports. Forms of documentation depend on the size and nature of the system under review, and some
of the useful documents in the risk management process are: risk management plan; the assessment report (used as a
basic document for decision-making); the list of priority risks; Plan of selected strategies; report on the monitoring of
risks (standard and ad hoc reports).

4. RISK MANAGEMENT IN THE SUPPLY CHAIN

Risk management is the official tool of the financial environment in the business world. The same applies to the concept
of logistics and supply chain management. Increased level of integration and cooperation along the supply chain leads
to a new category of risk. Risk management can help in understanding the key drivers of risk in the supply chain and
enable optimization of internal risk management system. It is necessary to change the perception of the risk
management. This change is driven by logistics. Logistic functions provide a competitive edge to a company, no matter
which strategies are pursued. With any of Porter's strategies of management or differentiation, logistics helps to meet
the goals of the company and to provide added value for the customer.

Supply chain management aims to integrate partners in the supply chain, reducing the flow of materials, information
and finances. However, with higher levels of integration, the interdependence of individual partners is more likely.
Besides, global sourcing adds a further dimension of uncertainty in terms of transport, unstable political environments
and different levels of commitment to quality and reliability. Tightly linked international supply chain results in the
complex process of coordination and administration of the partners in the supply chain. Different levels of responsibility
of both employees and partners must be taken into account.

5. RISK ASSESSMENT THROUGHOUT THE SUPPLY CHAIN

The process of risk management in supply chains is similar in all aspects to the risk management in the company. The
preparatory step is to define the risk management policies. Along the supply chain, companies of different industrial
profile, size and ownership structure must work together to achieve a common goal. Their diverse interests must be
integrated through the use of a consistent policy on risk management.

Figure 2 illustrates the two different types of risk in the supply chain: internal and external risks. External risks are the
result of supply chain interactions with the environment, and the internal stem from the interaction between partners in
the supply chain [5].

The main objective of risk management in supply chains is to identify those risks that pose a great threat to the supply
chain. It is necessary to introduce a measuring instrument to enable and facilitate transfer among companies – specific
risk matrix in the supply chain that integrates the risks within the supply chain and specific endogenous (internal) risks.
As with traditional risk management, risk control phase completes the overall risk management process. Accepting risk
or its’ avoidance are the polarities between which control takes place. Avoiding risk may indicate that nothing is being
done. Accepting risk means that one simply lives with it. Among these cases there are a number of risk control
measures. These measures can be summarized in the categories of compensating for the risk, risk transfer and risk
reduction.

Measures of reduced business risk should be given priority over other measures; the level of the supply chain, reducing
risk requires special focus. Transfer of risk - though relatively easily achieved in traditional risk management, for
example, through the purchase of insurance - by definition, is difficult to achieve in the supply chain. Compensation for
the risk along the supply chain - at the corporate level is achieved through the regulation or containment- manifested in

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the rules which regulate the cooperation between partners. However, repayment / risk compensation can be initiated
through the partnership agreement on specific actions to be undertaken on a joint basis [2].

RISKS IN SUPPLY CHAINS

RISKS OF MACRO ENVIRONMENT
carry the potential effects/consequences throught the supply chain

RISKS OF THE EXTENDED VALUE CHAIN

origin in upstream and downstream activites of partners

OPERATIONAL RISKS
refer to the risks in the internal processes
Delivery/Return of
Development Planning Sources Production
Products

ACQUISITION DELIVERY
Rank n Rank 1 services of third parties distributors final beneficiaries

Economic Environment Geopolitical Infrastructure

Supervision Safety
Risks Social Responsibility Hazards Resources

FUNCTIONAL RISKS
exists during the execution of all functions in the process of supply chain

Financial Risks Human Resources Risks IT Risks Legal Risks

Fig. 2. Identification of the risk categories in the supply chain

By default, risk compensation is separated from measures of risk transfer, which have a much more institutionalized
contractual basis. Whereas at risk compensation each partner takes the risk, transfer of risk between partners means the
selection of the partner who is willing to take the risk of another.

6. APPLICATION OF KINNEY METHODS FOR SCRM

Using the Kinney method [6], the organization assesses and evaluates the risks due to the occurrence of identified
hazards. Kinney method, which is most often used for assessment and the evaluation of the risk due to the presence of
danger determined by the OHS, is based on the basic consideration of: The probabilities of possible events – (P),
Consequences - the severity of injuries or diseases - (C), and frequency (time of exposure to hazards / harmful effects) –
(F).

Risk Assessment (R): R = P * C * F

In Table 2, risk assessment is given by the use of Kinney methods in supply chains, which the author had adapted to the
propositions of mathematical modelling, which apply to this method, and applied it to the classified threats that are
considered to be most important in the supply chain.

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Risk Assessment
Recognizing and identifying threats
Probability Consequences Frequency PxCxF Rank of threats
THREATS
HUMAN FACTOR
101 Availability of qualified personnel 1.0 3.0 10.0 30.0 II
102 Employee behaviour 6.0 3.0 10.0 180.0 III
103 Relations with community 3.0 1.0 2.0 6.0 I
104 Health and Safety 10.0 10.0 6.0 600.0 V
105 Outsourcing 6.0 3.0 2.0 36.0 II
106 Communications 6.0 6.0 3.0 108.0 III
Tabla II . Risk assessment in the supply chain using Kinney method

Based on the risk assessment of the supply chain through Kinney methods, we came to the conclusion that extreme
level of risk most often occurs in the areas of the human factor and finance, while acceptable risks, which do not require
special intervention, usually appear in the areas of information, product and market (segment marketing and
competition).

6.1. Proposed measures for the elimination of risk in the supply chain

Efficient security and the protection of the supply chain include basic standards for the physical security, access control,
personnel security, education and training, procedural security, IT security, business partners, as well as the safe transfer
from the point of origin to the final destination within the supply chain. According to Table 2, a proposal of measures to
eliminate / mitigate risks in the supply chain (the domain of Human Resources) is:
 Availability of qualified personnel - introduction of HR services, interaction with the NES, the selection of
personnel for employment through various forms of tests, interviews, probation work
 Employee behaviour - the introduction of the code of ethics of employees, training employees, more control
when going in and out of the company, the introduction of ID cards and enhanced discipline
 Community relations - enhancing the reputation of the company through donations, sponsorships, events,
granting scholarships to talented students
 Health and Safety - the issuance of a risk assessment act and the Regulations for fire protection, training
employees on basic OHS regulations and fire protection, periodic assessment tests, medical examinations,
supply and the use of appropriate PPE
 Outsourcing - improvement of employees, employee incentives, giving priority to its’ workers
 Communications - information exchange should become a norm, creating a strategy and the communications
plan, organize regular weekly meetings of the project team to exchange information, regular email updates on
the latest news of the project, an online discussion forum where project team members can ask questions and
get answers with the results.

7. CONCLUSIONS
Handling or managing risk is becoming a necessary and an objective assumption of business success. On the other
hand, risk management should provide continuous existence of the system. The documentation resulting from the risk
management process enables the process of accreditation and authorization of the risk management process. Risk
management should not be linked only to organizations, but it should apply to the individual activities of short-term or
long-term nature.

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The concept of supply chain management brings additional risks, which in accordance with the objective of
management increases the level of integration and coordination among supply chain partners, and should be dealt with
together. These risks include the internal risks in the supply chain, such as co-operative and operational risks.

Risk management should be extended from the financial and corporate perspective, to the domain of logistics and inter-
organizational cooperation. However, although it sounds simple, the problems to be solved are:
 the challenge of transforming risk management from legal obligations into a tool for planning;
 identification of hidden risks and their overcoming;
 quantification and the probability of the level of damage;
 application of bottom - up risk management in supply chains in order to avoid overloading the top
management, as is the case in the top - down management.

Segments of the supply chain simulation by stochastic modeling in order to support mapping of risk impact assessment
of different risk parameters variation may represent an elegant but a complicated task. Therefore, supply chain partners
need to develop an understanding of the importance of the process of identification of the structure of key risks.
Efficient security and the protection of the supply chain include basic standards for the physical security, access control,
personnel security, education and training, procedural security, IT security, business partners, as well as the safe transfer
from the point of origin to the final destination within the supply chain.

BIBLIOGRAPHY
[1] Brzaković R, Marjanović Z, Radulović Ž, “Upravljanje rizikom i portfolio kao metod za ocenu rizika”, 36th National conference of Quality,
Mechanical Faculty, Kragujevac, Serbia, 2009, p.81-87.
[2] Christopher M, “Managing risk in the supply chain. Logistics and Supply Chain Management (Ed. Christopher, M.)”, 3rd ed., Prentice-Hall,
Harlow, 2005.
[3] Grubić – Nešić LJ. “Razvoj ljudskih resursa”, Novi Sad, AB print, 2005.
[4] Maslarić M, “Razvoj modela upravljanja logističkim rizicima u lancima snabdevanja [Development of model for logistics risk management in
supply chains, PhD thesis]”, Novi Sad, Univesity of Novi Sad, Faculty of Technical Sciences, 2014.
[5] Rao S, Goldsby TJ, “Supply chain risks: a reveiw and typology”, The International Journal of Logistics Management, 2009, Vol. 20(1). p. 97-
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[6] Kinney GF, Wiruth AD, “Practical Risk Analysis for Safety Management”, NWC Technical publication 5865, 1976, Naval Weapons Center,
China Lake CA, USA

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