Professor Onno Omta looks at the big picture and emphasizes honesty and good-willed cooperation between members of a supply chain in his award-winning approach to risk management.
He views opportunism as a “risky” behavior, and looks at how such behaviors ripple through the supply chain. He provides guidance on how to avoid opportunism and promote trust when forming business agreements.
Omta and his team won the Supply Chain Journal’s prestigious Harold E. Fearon Best Paper Award in August for their article on risk-management strategies.
“Chains have higher returns if they are based on reciprocity, trust, and honest sharing between chain partners,” Omta explained by email. “Chain-wide cooperation is necessary to create added value for the consumer.”
Traditional theories “focus on individual contracts with suppliers or customers, and [do] not provide tools to integrate supply and demand,” Omta said. Also, they do not focus enough attention on the institutional and social context and company characteristics.
Omta’s models seek to minimize “risky” behaviors, such as opportunism, shirking of responsibilities, or maladaptation to unforeseen events affecting supply or demand. The idea is, if one actor cannot or does not meet expectations, all actors in a chain are affected.
Here’s a look at three of his strategies, though his award-winning paper included others:
1. When drawing up contracts, preemptively make agreements on how prices will change based on a changing market.
This prevents the opportunism that often arises when contracts are made with fixed prices or volumes. It also mitigates the impact on those in the chain who are disproportionately disadvantaged when conditions change.
Such people may otherwise be tempted to shirk previous arrangements.
Omta suggests using reference market prices instead of fixed prices. In this case, the product price is based on a similar product exchanged in the open market. Reference market prices are commonly used in the financial sector—variable interest mortgages, for example—and could be used in other contexts too.
2. Companies should share costs for investments that will help all businesses in the supply chain, such as investments in brand development.
This multi-company cooperation can help business grow across the whole chain. Other examples of such cooperation include joint investments in measurement technology and independent monitors.
3. Tie the profits of second- or third-tier suppliers, and so on up the chain, to the performance of the final product.
This third strategy involves vertically organized associations holding the property rights of the consumer brand.
This happens in some agri-food chains. Some small, high-end organic or fair trade businesses, for example, use this organization strategy.
Omta’s new approach is tailored for a market that is becoming increasingly complicated. The need for risk management becomes greater as consumer behavior becomes more unpredictable, products’ life span shortens and complex international chains are more common.
Omta’s theories were initially inspired by his observation of Dutch supermarket supply chains.
At the moment, supermarkets are highly competitive and their profit maximization cuts off suppliers.
When supermarkets make long-term agreements with suppliers along the lines of “we will buy your food for the next three years for a fixed price,” the suppliers and the farmers pay the piper when the value changes but the price is fixed.
The new strategies would not allow the supermarket to reap benefits at the cost of the farmer and supplier, thus promoting the well-being and growth of the entire chain.