Procurement risk management under uncertainty: a review
| Pages | 1547-1574 |
| Published date | 13 August 2018 |
| Date | 13 August 2018 |
| DOI | https://doi.org/10.1108/IMDS-10-2017-0469 |
| Author | Zhen Hong,C.K.M. Lee,Linda Zhang |
| Subject Matter | Information & knowledge management,Information systems,Data management systems,Knowledge management,Knowledge sharing,Management science & operations,Supply chain management,Supply chain information systems,Logistics,Quality management/systems |
Procurement risk management
under uncertainty: a review
Zhen Hong
School of Mechanical Aerospace Engineering,
Nanyang Technological University, Singapore
C.K.M. Lee
Department of Industrial and Systems Engineering,
The Hong Kong Polytechnic University, Hunghom, Hong Kong, and
Linda Zhang
IESEG School of Management, Lille, France
Abstract
Purpose –The purpose of this paper is twofold, first providing researchers with an overview about the
uncertainties occurred in procurement including applicable approaches for analyzing different uncertain
scenarios, and second proposing directions to inspire future research by identifying research gaps.
Design/methodology/approach –Papers related tosupply chain risk management and procurement risk
management (PRM) from 1995–2017 in several major databases are extracted by keywords and then further
filteredbased on the relevance to the topic, number of citationsand publication year. A totalof over 156 papers
are selected. Definitions and current approaches related to procurement risks management are reviewed.
Findings –Five main risks in procurement process are identified. Apart from summarizing current
strategies, suggestions are provided to facilitate strategy selection to handle procurement risks. Seven major
future challenges and implications related PRM and different uncertainties are also indicated in this paper.
Research limitations/implications –Procurement decisions making under uncertainty has attracted
considerable attention from researchers and practitioners. Despite the increasing awareness for risk
management for supply chain, no detail and holistic review paper studied on procurement uncertainty.
Managing procurement risk not only need to mitigate the risk of price and lead time, but also need to have
sophisticated analysis techniques in supply and demand uncertainty.
Originality/value –The contribution of this review paper is to discuss the implications of the research
findings and provides insight about future research. A novel research framework is introduced as reference
guide for researchers to apply innovative approach of operations research to resolve the procurements
uncertainty problems.
Keywords Procurement, Risk management, Supply chain management, Literature review, Supply risk
Paper type Literature review
1. Introduction
Manufacturing industry nowadays has a very fierce competition and competes with price,
quality and logistics (Roberta et al., 2014). To keep pace with the industry, many
manufacturing companies begin to outsource the business which is not their core
competency (Kremic et al., 2006). Indeed, the trend of outsourcing makes the supply chain
more complex and hard to control. From a survey conducted by Computer Science
Cooperation, there are about 43 percent of firms reporting that their companies are facing
disruption risk (Tang, 2006a). Enterprises may face negative consequence of risk if they do
not realize the impact and occurrence of the risk. Risk has been well defined as the variance
of return in financial industry and risk can adversely affect the expected yield (Markowitz,
1952). Risk management is not only an important issue of financial industry and it also has
a growing concern in supply chain management as uncertainty of the occurrence of an event
in one function of supply chain can brings to undesirable chain effect for the supply chain
network (Finch, 2004; Tummala and Schoenherr, 2011).
The importance of procurement in the supply chain can be also realized from the
percentage of cost it takes in the industry. Maucher and Hofmann (2011) mentioned that the
Industrial Management & Data
Systems
Vol. 118 No. 7, 2018
pp. 1547-1574
© Emerald PublishingLimited
0263-5577
DOI 10.1108/IMDS-10-2017-0469
Received 9 October 2017
Revised 6 January 2018
22 March 2018
Accepted 22 May 2018
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0263-5577.htm
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PRM under
uncertainty: a
review
material cost are at 45 percent in German automobile industry. Furthermore, price
fluctuation may be difficult to predict. In addition, quality level of supply is important as
defective items would cause larger lost and make buyers recall products if defects are
discovered by the downstream partners. Therefore, when designing the optimal lot sizing
policy, the existence of defective items should be considered as one source of the random
yield factor. To mitigate the risk, Mahapatra et al. (2017) suggested to combine contract and
open market to obtain the optimum procurement under the uncertain market price.
It is obvious that the optimal decision making in PRM under uncertainty should
incorporate many potential risk sources, such as demand, price and supply yield. Scholars
have done considerable research in this area. Martel et al. (1995) studied the problem of
procurement planning over rolling planning horizons facing the stochastic demand. In face
of uncertain demand and price in spot market, Seifert et al. (2004) tried to find the optimal
order quantity from forward contract and spot market in a single period setting. In a single
period setting, Federgruen and Yang (2008) developed a model to configure the supply base
and figure out order allocation among suppliers in the presence of yield and demand
uncertainties. However, before implementing PRM strategies, it is necessary to find out the
source of uncertainty which leads to procurement risk. Procurement risk is predominantly
reliant on the manager’s experience and intuition as there is no systematic way for them to
classify the source of procurement risk and myopic risk management strategy is formulated
once the unexpected risk occurred. Although there are several review papers in supply
chain risk management, according to author’s knowledge, there is no review paper
published in PRM. In this paper, the topology of the PRM is devised so as to help
management to realize the source of uncertainty in the procurement process. The adverse
consequence of procurement risk is come from ignoring the uncertainty or wrong estimation
of impact due to the lack of risk management knowledge, this paper provides the body
of knowledge about procurement risk for both practitioners and researchers. Section 1
provides a brief introduction about the background of PRM. Section 2 describes the review
methodology which is manly based on the seven steps of Comprehensive Literature Review
(CLR) approach. Section 3 provides the overview of the PRM. Section 4 is about the
classification of PRM. Section 5 shows PRM strategies and modeling method. The
conclusion and future trend of research direction are shown in Section 6.
2. Review methodology
Review methodology is based on CLR (Onwuegbuzie and Freis, 2016) which is a
methodology of literature review. A flow chart of literature search procedure is depicted
in Figure 1 to provide a clear picture of the review process and results. The selected papers
were mainly published within 1995–2017 and the main electronic database includes Science
Direct, Emerald, Scopus and Google Scholar. The keywords used to retrieve the relevant
papers include risk management, supply chain management, supply risk, procurement,
contract and sourcing. The papers are further filtered based on the relevance to the topic,
number of citations and publication year. As described in Figure 1, over 153 papers from
various journals, such as European Journal of Operational Research,International Journal of
Production Economics and Operations Research are selected.
3. Overview of PRM
In this section, a PRM classification is outlined and positioned within the supply chain risk
managementstructure proposed by Tang (2006a)who defined Supply chain riskmanagement
as “the management of supply chain risk through coordination or collaboration among the
supply chain partners so as to ensure profitability and continuity.”Furthermore, common
procurement risks are identified to set our review scope in Subsection 3.1. In Subsection 3.2,
the procurement risks and the related approaches are presented.
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