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EXPLORING SUPPLY CHAIN RISKS AMONG

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 Proceedings of INTCESS 2017 4th International Conference on Education and Social Sciences
6-8 February 2017- Istanbul, Turkey

EXPLORING SUPPLY CHAIN RISKS AMONG MALAYSIAN AUTOMOTIVE

SMES

Norlaile Salleh Hudin1*, Abu Bakar Abdul Hamid2, Thoo Ai Chin3, Nurul Fadly
Habidin4
1
Dr., Universiti Pendidikan Sultan Idris, Malaysia, norlaile@fpe.upsi.edu.my
2
Prof. Dr., Putra Business School, University Putra Malaysia, Malaysia,
bakarhamid3030@yahoo.com
3
Dr., Universiti Teknologi Malaysia, Malaysia, acthoo@utm.my
4
Dr., Universiti Pendidikan Sultan Idris, Malaysia, fadly@fpe.upsi.edu.my
*Corresponding author

Abstract
There is scant evidence pertaining to risks faced by Malaysian automotive SMEs, although many researches
have been conducted in other countries. For that reason, this paper aims to explore supply chain risks
experienced by Malaysian automotive companies. By using a case study method involving three Malaysian
automotive SMEs, the data analysis reveals that Malaysian automotive SMEs are mostly affected by risks
external to firm but internal to supply chain, particularly the risk of late delivery and part shortages. With
respect to risk internal to firm, all three case companies admitted that human-related risk is putting pressure
on them. The risks of force majeure events and government regulation emerge as the most common risks
external to Malaysian automotive SMEs supply chains. Although the results of this study are limited due to
the small number of case companies investigated, they suggested automotive SMEs to implement multi-
sourcing or develop closer relationship with sister companies and supply chain members to manage supply
chain risks.
Keywords: Supply chain management, Supply risks, Automotive, SMEs

1 Introduction
According to Professor Martin Christopher, who is an expert of supply chain management (SCM), SCM
encompasses both the internal management of the logistics processes that support the flow of product and
related information as well as the upstream and downstream linkages with suppliers and customers
(Camerinelli, 2009). Batten (2008) emphasized that one of the main benefits of practicing SCM is to
decrease the risks related to purchasing activities.
In general, SCM is no longer an alien concept especially among manufacturing companies. Surprisingly,

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however, supply chain risk has shown an increasing trend in recent years. In 2010, a McKinsey Global
survey indicates that 71 percent of the executives in America reported that their companies were facing more
risk from supply chain disruption than previously and 72 percent expected those risks to continue to increase
in the next five years (McKinsey Global Survey Results, 2010). In another survey conducted in North
America, 34 percent of the supply-side manufacturers had received queries from their buyers who
experienced supply chain disruptions within the past quarter (MFGWatch Survey, 2010). A BBK Industry
Week Survey further exposed that more than one-third of survey respondents in America said that over the
past 12 months, they have had to halt or delay production due to supply chain capacity and/or resource
issues (BBK, 2013). This survey also revealed that 84 percent of those impacted cited late deliveries and 55
percent said they paid premium shipping costs due to production stoppages (BBK, 2013).
Based on MFGWatch Survey conducted in early January 2010, 35 percent of the respondents, including
automotive purchasing professionals, said that they had experienced a significant supply chain disruption
(MFGWatch Survey, 2010) while one-third of the respondents also reported that they experienced a
significant number and trend of supply chain disruptions (MFGWatch Survey, 2010). In further support,
Punter (2013) reported 17 case studies of supply chain failures involving major companies such as Honda
and Toyota.
Among the Asian region, South East Asia is right behind China, compared to India, Middle East and other
Asian countries that cause the most costly outcomes from risk events in the automotive supply chain
(Marchese, 2013). Despite that, not much is known about supply chain risks faced by Malaysian automotive
small and medium enterprises (SMEs). The SMEs, compared to large automakers, seize the center stage
when earlier research confirmed that having SMEs in supply chain increases overall supply chain risks
(Henschel, 2008; Finch, 2004). The major concern here is that half of automotive suppliers in Malaysia are
suppliers to PROTON, with 62.7 percent of them being SMEs (as cited in Ana Sakura Zainal Abidin et al.,
2013). Therefore, the consequences of supply chain risks could easily spread across the whole sector. More
recent evidence indicated that even PROTON, which used around 80 percent of Japan-sourced content
(Seow, 2011) was disrupted because of earthquake and tsunami in Japan. Although PROTONs suppliers,
which are mostly SMEs, did not operate in Japan, some of these suppliers sourced parts from Japan
(Autoworld, 2011).
For the reasons discussed above, this research aims to explore risks that threatened automotive SMEs in
Malaysia. This aim is particularly parallel with Chopra and Sodhi (2004), who strongly advised practitioners
that they need to understand the types of risks as well as the events and conditions that manifest these risk
events before they could alleviate those supply chain risks. This paper begins with a review of the existing
literature and followed by the methodology, results, discussion and conclusion.
2 LITERATURE REVIEW
Certain risk classification or categorization is necessary for more systematic viewing and broader
understanding about the source of the risks. Thus, earlier researchers, such as Wu et al. (2006), categorized
risks into internal controllable, internal partially controllable, internal uncontrollable, external controllable,
external partially controllable and external uncontrollable. Internal risks are those rooted from the company
whereas external risks originate from outside of the company, such as the suppliers, customers or
environment. In contrast, Norrman and Lindroth (2004) also proposed a risk typology which divided risks into
three broad types, which are operational accidents, operational catastrophes and strategic uncertainty.
Operational accidents describe the risks affecting day-to-day logistics or supply chain activities for example
fires and resource failures with minor consequences. Operational catastrophes, on the other hand, cause
more severe consequences than operational accidents but lower probability of occurrence such as economic
crisis, natural disaster and political turbulence. The strategic uncertainties affect companies at the strategic
level, for example supplier default or bankruptcy and technology change (Vanany et al., 2009).
Despite the supply chain risks categorizations provided by Wu et al. (2006) and Norrman and Lindroth
(2004), this study utilized risk categorization proposed by Mason-Jones and Towill (1998). Mason-Jones and
Towill (1998) divided risks into risks internal to the firm, risks external to the firm but internal to the supply
chain and risks external to the supply chain. This is because a good risk classification should provide a clear
distinction of each category of risk but the risk typology proposed by Wu et al. (2006) requires the users to
judge the degree of risk controllability. The problem here is that the different conditions of companies could
influence this degree of risk controllability. For example, compared to companies with weaker power over
their suppliers, a company with greater power may have a higher degree of risk controllability for the same
type of risk. Similarly, risk typology suggested by Norrman and Lindroth (2004) requires the users to
determine the degree of risk consequence. Obviously, a fire may result in minor consequence and perceived

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as operational accidents but if that fire burnt down a facility that produces a unique and critical car
component, should it still be considered as an operational accident? To avoid such confusion, this study
applied Mason-Jones and Towills (1998) risk categorization.
In narrower perspective, several scholars have attempted to identify specific risks in the automotive industry.
Table 1 summarizes the risks commonly associated with automotive industry in the United States, Brazil,
German and China. Based on these studies, poor quality of supplies is the most frequently occurring risk
among automotive companies. Supplier bankruptcy, increased raw material prices, hurricane, tsunami,
earthquake, union issues and shortages of supplies followed next. However, while observing Table 1, bear in
mind that none of these studies investigated Malaysian automotive companies. The unique setting of
Malaysian automotive industry, such as strong government protection and heavy reliance on foreign partners
for continuous supply and technology transfer, may result in a different set of risks. In response to that
matter, this paper conducted interviews to seek specific risks experienced by Malaysian automotive industry,
and risk typology proposed by Mason-Jones and Towill (1998) is used to identify the origin of such risks. The
next section discusses the research methodology in more detail.
Table 1. Risks in automotive industry
Risk/Author 1 2 3 4 5 6 7 8 9 10 11
Hurricanes/storm / / / /
Earthquake / / / /
Tsunami / / / /
Flood /
Fires / / /
War and terrorism /
Political issues /
Debt and credit rating / / /
Liquidity and cash / /
Currency exchange /
Interest/inflation rate fluctuation /
Increased raw material prices / / / /
Increased setup cost /
Increased labor cost /
Increased transportation cost /
Union regulation/issues / / / /
Operator error/accident damage /
Dealer relation /
Customer demand changes / / /
Property damage /
Theft / /
Supply shortages / / / /
Poor quality of supplies / / / / /
Supplier bankruptcy/failure / / / /
Extended total cycle time (e.g. design /
and production)
Poor delivery time / / /
Delivery responsiveness /
Malfunction of IT system / /
Immature regulation and policy /

Sources: (1) Norman & Jansson (2004); (2) Blackhurst et al. (2008); (3) Blos et al. (2009); (4) Trkman &
McCormack (2009); (5) Zolkos (2011); (6) Snyder (2011); (7) Thun & Hoenig (2011); (8) Yong Lin (2011)

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(9) Wagner & Neshat (2012); (10) Lockamy III & McCormack (2012); (11) Scannell et al. (2013)
3 METHODOLOGY
This paper applied phenomenological case study approach due to the fact that the study about supply chain
risks among Malaysian automotive SMEs is under-researched. Therefore, three automotive SMEs were
selected through purposeful sampling in order to find the informants with in-depth knowledge of an issue
(Cohen et al., 2007) so that rich and detailed account of the phenomenon could be obtained. Creswell (2007)
explained that purposeful sampling enables researchers to gain different perspectives of a situation and
study typical or unique cases. To narrow down the scope of the study, PROTONs vendors were selected as
the sampling frame for this study because PROTON is the largest automaker in Malaysia besides Perodua
(Malaysia: Business and Opportunities Investment Yearbook, 2008). Moreover, PROTON uses more than
90 percent of local content (Produk Komponen Boleh Berdaya Saing, 2014) compared to other car makers
in Malaysia. As a result, many parts manufacturers belong to PROTON (Malaysia: Business and
Opportunities Investment Yearbook, 2008). Particularly, more than half of PROTON suppliers are SMEs. To
further represent the Malaysian automotive industry, a subsidiary of a renowned Japanese automaker was
selected as a sample.
By using vendor assessment reports and feasibility studies, the case companies were selected based on
PROTONs recommendation. Three cases were selected, which is in line with Creswells (2007) suggestion
that not more than four or five cases should be explored, in which for each case, three to five informants are
recommended for interview. Semi-structured interview was employed because it enables the researcher to
probe unexpected responses and build rapport with the informants to enhance the quality of responses
(Lethbridge et al., 2005). To overcome the drawbacks of this method, which include response bias,
inaccuracy of the data due to researchers poor recall and reflexivity problem, as well as to triangulate the
data, this study used documents analysis to ensure the consistencies of the information gathered from the
interviews. The interviews were also tape-recorded to avoid any details being forgotten. Altogether, ten
informants were interviewed as the data reached saturation. The number of informants satisfies Giorgis
(2009) suggestion, which is to have at least three informants for phenomenological study. Moreover, Klenke
(2008) supported this recommendation as she proposed using between two to 25 informants. Finally, data
were analyzed by using thematic analysis to capture latent and conceptual meaning of the responses. The
interviews were first transcribed and then coded. The codes were then categorized to develop themes, which
were then interpreted.
4 FINDINGS
4.1 Case 1
Based on the thematic analysis, the first case, which is the manufacturer of automotive gasket, was found to
be involved primarily with risks external to supply chain and risks external to the firm but internal to the
supply chain. However, risk internal to the firm was rarely mentioned. In conjunction with risk internal to firm,
only one informant strongly emphasized on human-related risk whereas for risk external to the firm but
internal to the supply chain, the informants agreed that their company is frequently threatened by changes of
customer demand. Some customers did not provide demand forecast earlier while some customers tricked
them by giving high demand forecast to gain quantity discount when in reality, these customers purchased
lower volume. In even worse condition, instable relationship with customers caused the gasket manufacturer
to absorb the cost of excess stocks that resulted from changing customer demands. Moreover, the gasket
manufacturer also faced raw material shortage and late deliveries since most supply of parts and
components were imported from foreign countries such as Japan and US and thus, required longer lead
time. The gasket manufacturer further explained that the quality of cars manufactured by PROTON, their
main customer, also concerned them because they perceived that they increase their supply chain risks
when PROTON had difficulties in selling their cars.
Regarding the third type of risk, two out of four informants emphasized risk related to government regulation
and only one informant spoke about force majeure event. According to one of the informants, the local
automotive industry is currently in survival mode. By enforcing Common Effective Preferential Tariff (CEPT)
and ASEAN Free Trade Area (AFTA), the gasket manufacturer expected that their main customer,
PROTON, will be jeopardized as they will be involved in even tougher competition with other international
cars assemblers in the South East Asian region. Regarding the force majeure event, high dependency on
nd
Japan for parts and components caused supply disruption to the gasket manufacturer when their 2 -tier
suppliers were ruined by the natural disasters.

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4.2 Case 2
Similar to the first case, the manufacturer of air-conditioner units demonstrated that they were most
vulnerable towards the second category of risk, risk external to firm but internal to supply chain. Pertaining to
risk internal to the firm, only one informant explained how inaccuracy of stock level had previously affected
the production. When the volume of raw material was recorded higher than the actual physical count, there
were shortage of raw material, which affected the production plan. He further elaborated that this problem
mostly occurred because the employees neglected the standard operation procedures (SOP) for inventory
recording.
While this problem is still manageable, this company had more to deal with risks external to firm but internal
to supply chain, such as quality, flow of information, increased raw material price and the price of finished
product. Three out of four informants reported the poor quality of raw materials imported from China, which
accounted for the majority of the raw materials for this company. Clearly, the air-conditioner manufacturer
had difficulties in controlling the quality standard of Chinese suppliers because they were located far away.
Consequently, it obstructed them from conducting frequent visits to the suppliers sites. In addition, their
Chinese suppliers also limited the flow of information to the air-conditioner manufacturer by not submitting
and even counterfeiting routine reports. The global sourcing strategy further exposed this company to
currency exchange risk, which so far caused them to experience increased raw material prices. Without this
cost advantage, the air-conditioner manufacturer had to increase the selling price of their finished products.
As automotive component companies are deeply involved in fierce rivalry, the increase of finished product
price does not help this company to gain competitive advantage. At a lesser extent, only one informant
mentioned suppliers bankruptcy. However, this informant further reported that the suppliers who went out of
business were all local suppliers.
In conjunction with risk external to supply chain, two out of four informants claimed that the flow of raw
material supplies from Japan and Thailand was disrupted due to tsunami and flood. Moreover, they had to
postpone the delivery of finished products to customers in Thailand as well since the customers facilities
were damaged by flood.
4.3 Case 3
The company for the third case produced plastic automotive parts, such as dashboards and car bumpers.
Human-related risk emerged as the only risk mentioned by the informants of this company, which falls under
the category of risk internal to firm. However, one of the informants stressed that human-related risk had
once caused a major impact to this company. He explained that this company depended heavily on formal
and standardized procedures to control the occurrence of risks but such strict procedures required men as
the major instruments. Given this condition, the failure rooted from human flaws often delayed the flow of
supplies to this company.
Furthermore, the informants also declared that they are frequently threatened by risks external to firm but
internal to the supply chain, especially part shortages, delivery delay and downtime. They explained that part
shortages could happen due to mixed product variants and delay in delivery. Since most supplies are
imported overseas, the delivery of supplies is subject to port congestion, bad weather and the performance
of carrier. The informant explained that they had major disruption in March 2014 when the ocean carrier that
transported their supplies from Philippines changed route to Taiwan without any notice. On the downside, the
occurrence of part shortages and disrupted delivery could result in production downtime at customers
facilities. In that case, this company could be charged for RM720, RM630 and RM1000 per minute of
downtime by customers in Malaysia, Thailand and Japan respectively.
Although risks external to supply chain particularly government regulation and force majeure events do not
occur so often, they could not be controlled much by the plastic automotive components manufacturer. With
respect to government regulation, this company was obligated to excise duty, which they believed was
difficult to control. Although they implemented localization program to reduce the excise duty, they still could
not bring down the final selling price lower than national cars. In addition, since most electronics parts were
imported from Japan, the occurrence of tsunami had interrupted the flow of supplies. Similarly, they also
stopped their production because their customers in Thailand were hit by heavy flood. Overall, Table 2
summarizes the findings of this research.

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Table 2. Summary of automotive risks

Case/ Types Risks internal to Risks external to the firm but Risks external to
of risk the firm internal to the supply chain supply chain
Case 1 Human-related risk Customer demand changes Government regulation
Raw material shortage Force majeure events
Late deliveries
Quality of cars manufactured by
customers
Case 2 Human-related risk Quality of raw material Force majeure events
Global sourcing
Increased raw material price
Increased finished product price
Suppliers bankruptcy
Case 3 Human-related risk Raw material shortages Government regulation
Late delivery Force majeure events
Production downtime
5 DISCUSSION
This study found that most of the risks affecting all three case companies were risks external to the firm but
internal to the supply chain. In conjunction with risk internal to the firm, all three case companies agreed
upon human-related risk. In detail, the case companies reported that the staff occasionally ignored SOP
intentionally or unintentionally. However, to the best of our knowledge, only one past research focused on
this aspect, i.e. Blos et al. (2009), who mentioned operator error. Clearly, this risk has yet to be solved
effectively and more studies should be dedicated to investigate human-related risks in the automotive
industry.
Regarding risk external to the firm but internal to the supply chain, previous researches revealed that quality
of supplies received a greater deal of attention (Trkman & McCormack, 2009; Thun & Hoenig, 2011; Yong
Lin & Li Zhou, 2011; Wagner & Neshat, 2012; Lockamy III & McCormack, 2012). Nevertheless, this study
proves that only one of the case companies, the air-conditioner manufacturer, experienced this problem.
Deeper investigation exposed that the poor quality automotive parts and components were sourced from
China. On the other hand, the gasket and plastic components manufacturers purchased raw materials mostly
from Japan and other foreign countries. After the world war, Japan went through an era of Japanese quality
revolution (O'Conner & Kleyner, 2012) and since then, they never looked back and kept on producing
quality automotive parts and components. In stark contrast, China is notorious for producing poor quality
parts. For example, Aston Martin was forced to recall their sport cars when counterfeit plastic materials
supplied from China was found in the accelarator pedal (Pomfret et al., 2014). To lend further support,
Navarro (2008) admitted that in many cases, China automotive parts have poor quality that often lead to
dangerous failure. Based on this study, apparently, the dominant influence of Japan in case 1 and 3 caused
most of the supplies to be imported from Japan. Due to this situation, quality risk is under control at the
gasket and automotive plastic manufacturers compared to the air-conditioner manufacturer. Nevertheless,
the gasket manufacturer also expressed their concern about the overall quality of cars produced by
PROTON, their main customer.
Although case 1 and 3 did not reveal any risk pertaining to the quality of parts and components, the risk of
late delivery and raw material shortage concerned them. Therefore, this finding supports previous
researches, which verified that the automotive industry is burdened by supply shortages (Trkman &
McCormack, 2009; Snyder, 2011; Thun & Hoenig, 2011; Yong Lin & Li Zhou, 2011). When probing into this
issue, this study found that importing automotive parts and components from Japan raised the risk of raw
material shortage. First, the Japanese suppliers were shortening their lead time from three months to one
and a half months, thus last minute orders were often rejected. As a consequence, the case companies used
backup suppliers but sometimes, delivery time had to be compromised. Secondly, being located far away
from Malaysia, the supplies were usually shipped through ocean carriers that required months to arrive.
Considering the weak logistics system in Malaysia (Williams, 2014) and inefficient clearance procedures at
Malaysian ports (Mohd Hafizzuddin Md Damiri, 2008), Malaysian automotive companies, which depend
largely on foreign suppliers, are frequently facing late deliveries (Williams, 2014; Wan Hasrulnizzam Wan
Mahmood et al., 2009).
With respect to risk external to the supply chain, the finding corroborates with earlier studies (Blackhurst et

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al., 2008; Zolkos, 2011; Snyder, 2011; Lockamy III & McCormack, 2012; Scannell et al., 2013) when all three
case companies experienced the risk of force majuere events especially earthquake and tsunami in Japan
and major flood in Thailand. This consistency of result can be explained by a report which revealed that more
than 50 percent of auto suppliers are located in just four countries, including Taiwan, China, USA and Japan,
and many of these hotspots for high-tech and automotive suppliers are in areas known for susceptibility to
natural disasters (Global Supply Chain Risk Is Concentrated and Concealed in Sub-tier Suppliers,
SDCExec, 2013). Ayutthaya province in Thailand, which was once hit by heavy flood, is also well-known as
the home for many automotive factories. For that reason, any natural disaster occurring in these areas can
cause ripple effects that affect the automotive industry at a global scale.
6 CONCLUSION
Increasing statistics of supply chain risks in automotive industry catches attention from researchers
worldwide. From practitioners perspective, understanding the nature, events and conditions that materialize
the risks can help them formulating better risk countermeasures (Chopra & Sodhi, 2004). Nevertheless,
research on supply chain risk in Malaysian automotive industry is particularly scarce despite the fact that
Malaysia has been involved in this sector since 1983.
Therefore, this study explored supply chain risks experienced by three selected case companies. Earlier
findings showed that poor quality of materials was the most frequent supply chain risk in automotive supply
chain. Past studies further described that supplier bankruptcy, increased raw material prices, force majuere
events, union issues and shortages of supplies are among the important risks inherent in automotive supply
chain. Despite that, this study discovered that among the three selected companies, poor quality of raw
materials was a concern only to air-conditioner manufacturer because they imported parts from Chinese
suppliers, which had quality control problems. The other two case companies purchased most parts from
Japan and other countries that implement a better quality management system. However, the companies
that sourced parts from Japan encountered late delivery risk. Human-related risk, which has been commonly
neglected in the current literature, surprisingly is a common risk among the case companies. Aligning with
past studies, this paper found that force majuere events affected all case companies in this investigation.
Overall, this study clarifies that most supply chain risks experienced by the three case companies are rooted
from risk external to the firm but internal to supply chain. Due to the nature of this type of risk, automotive
SMEs and other members of the supply chain are suggested to develop more transparent relationship so
that any signals of risk occurrence could be shared as soon as possible to limit greater consequence. For
late delivery risks, companies can implement multi-sourcing or at a lesser extent, develop close and stronger
relationship with sister companies in nearby countries. This is because many automotive SMEs are
subsidiaries of international automotive parts manufacturer, which has several other subsidiaries located in
different countries. Since supplier development is not easy nor inexpensive, working hand-in-hand with sister
companies may be seen as a more practical approach to manage supply chain risks. With regards to human-
related risks, this study indicates that employees skills and trainings are still inadequate and more intensive
training activities are necessary than just buddy system or on-the-job-trainings, which are commonly
conducted in the Malaysian automotive industry. Finally, industrial areas in Malaysia have yet to be hit by
force majuere events, thus localization program seems to be a suitable long-term strategy to ensure the
continuity of business operations.
The outcome of this study is somehow limited by the small number of cases but looking at the brighter side,
this research has shed some light into the critical types of risks experienced by Malaysian automotive SMEs.
Obviously, more attention should be paid on reducing or eliminating these risks to push the Malaysian
automotive industry forward. Nevertheless, future researches that employ survey method are strongly
recommended to gain insight into supply chain risk at a larger scale.

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