Role of relationships between suppliers and customers in the disclosure
of supply chain risk
Hamada El Massarowy
Risk is one of the business realities in today's
world. It exists continuously and will not disappear. On the other hand, these
risks carry opportunities for companies through which to maximize their
profits. There are a number of risks posed by suppliers to purchasing
companies. The source of these risks is the increasing prices of goods and
services, energy or transportation, product or product performance levels,
delay in delivery, or threats stemming from natural and non-natural disasters,
in addition to deliberate and unintentional violations of export and import
restrictions and financing risks Suppliers, quality and infrastructure risks.
In recent decades, the business environment has been characterized by global
competition, customer needs and requirements, product life cycle, rapid change
in consumer tastes, and business focus on high quality products and services.
Which makes the business enterprises face a large range of risks and threats
may lead to a decline in profits of companies and the deterioration of
financial position and possibly bankruptcy and exit from the market, which
affects the value of the company and the prices of shares in the financial
markets, for example, the results of the global financial crisis in 2008, many
board members and executives realized the interdependence of supply chains. The
crisis has led to many collapses around the world, The risks of global supply
chains are complex, intertwined and surprising. Thus, stakeholders in companies
need information with a high degree of relevance and honest representation in
order to make decisions.
The researcher can define the
risks of the supply chain as the risks resulting from the possibility of a
negative impact on the future of the facilities of the supply chain to achieve
its objectives and strategies as a result of inability or inability of one of
the chain to play the role assigned to the supply chain.
There are benefits to financial investors, lenders and local financial
markets from companies disclosing the risks to their suppliers and customers in
different supply chains, which enhances the transparency of financial reporting
due to high levels of negative impacts of supply chain risk. The benefits of
disclosure of supply chain risks can be summarized as follows:
1-Helping to anticipate and manage the supplier's risks and to mitigate
the potential interruptions or disturbances in the supply chain
2- Risk inherently contains a high level of uncertainty
and therefore there is asymmetry of information
between internal users (managers) and users of the information and thus
disclosure usually helps in the flow of information associated with major
suppliers and enable the managers of the supply chain to provide important
information that helps in Managing risks and identifying potential events
before leading to disturbances in the supply chain such as product recovery or
loss of revenue
3- Supporting communication along the supply
chain Along Supply Chain among all business partners throughout the supply
chain.
4- The separate report on supply chain risk allows for a
comprehensive overview, strengthening the company strategy, and anticipating
risks and operational challenges.
5- Increase the transparency of financial reports, which
leads to reducing the asymmetry of information between different parties, which
leads to a reduction in capital costs while reducing the risks that investors
may be exposed in the financial markets.
Despite all these advantages, however, companies
disclose the risk of their supply chain depends on the level of competition
with other companies in the market and level of disclosure by competitors and
the expected impact of this disclosure on its market share.
Financial Reporting Standards have been exposed to some of the risks
faced by companies in sporadic locations, including the International Standard
IAS1, in which the Company makes a limited assessment of the Company's ability
to continue or disclose the assumptions and basis of uncertain estimates with
significant risks, IAS 37 - Provisions, Assets and Contingent Liabilities
However, the concentration of these standards has been directly attributable to
the risks associated with financial instruments as reflected in IFRS 7 and IFRS
9. At the same time, there are no requirements in international or US standards
so far it is expressly stated to disclose the operational risk facing companies.
The relations between companies across the
supply chain vary in terms of degree of cooperation and interdependence. Some
researchers[Cooper & Slagmulder,1999, P.31] have divided the various relations between the company
and the suppliers as follows:
|
The company is
dependent on the supplier
|
The supplier is dependent on the company
|
||
|
low
|
high
|
|
|
|
Case2
|
Case1
|
high
|
|
|
Case4
|
Case3
|
low
|
|
Therefore, the
different types of suppliers according to the degree of interdependence between
suppliers and customers will affect the levels of disclosure of risks, in light
of considerations of costs and benefits of the suppliers of the disclosure
process and can address the previous cases as follows:
Case 1: Cooperation and interdependence are at best, and enterprises can
implement interorganizational cost management. At best, the regulatory
boundaries between The company and suppliers fade away. The correlation between
customers and suppliers in the supply chain is highly correlated as long as
they apply the interorganizational cost management method. Of them about the
risks or threats will affect the supply chain as a whole and may be affected by
the value of their shares in the market and therefore exposed to significant
risks, so the researcher believes that the case 1 may occur collusion between
the chains of supply chain in order not to disclose the risks they are exposed
to, Next, this will cast heavy burdens on the auditors of these companies in
the verification of the accounting figures published and in the evaluation of
each of the episodes of the chain of supply to continue in the future, because
the company's ability to continue will not only depend on the lack of
confirmation of the substance of events or circumstances that have received
Cast doubt on the company's ability to continue but also not to confirm the
essence of each of the episodes of the supply chain.
Case 2: The
company has many suppliers to differentiate between them and suppliers need to
trust more through long-term contracts with the company so that they can
participate in the implementation of interorganizational cost management In
this case we are in two different situations
1-
In the case of the company to enter into long-term contracts with the
suppliers in order to increase the confidence and therefore companies can
implement interorganizational cost management and thus we have the same effect
of the case 1
2- In the case of non-conclusion of long-term contracts with suppliers and
therefore the company has many alternatives to suppliers
In this case, the costs of switching from one supplier to another will
be low for the company. Therefore, it is expected that the suppliers will
disclose or make optimistic or idealistic claims about the potential risks.
This is consistent with the expected behavior of the good news disclosure
compared with suppliers who are not equally customer dependent. Suppliers of
this type are far from providing warnings for situations where risks are
expected to result in significant material losses or to reveal late warnings
compared to suppliers who are not as dependent on customers as the provision of
disclosures in The right time for risk increases the likelihood of ending the
relationship with key customers.
Case 3: The company relies heavily on the supplier while
the supplier has alternatives and here fears the leak of industry secrets to
competitors, according to the criterion of operating segments IFRS8 The company
should provide information on the extent of dependence on its customers and if
the revenue from transactions with one external client equal 10% or more of the
company's revenues, the company should disclose the fact, number and total
amount of revenue from each such customer, but the standard did not require
companies to provide information on the extent of their dependence on their
major suppliers.
When the supplier suffers from a shortage in the management of raw
material needs of its customers or increase in prices, it adversely affects its
customers in terms of efficiency of production and inventory management and
delivery of products in a timely manner, in this case the risk of ending the
relationship with the supplier is high because The supplier for any reason, it
will affect the ability of the company to meet the requirements of its customers
and lead to loss of a large amount of revenue in addition to the reputation of
the company will be affected. Therefore, the company will be very interested in
obtaining information about the risks that may be exposed to its major
suppliers.
Case 4: The company has alternatives to the supplier and supplier have
alternatives to the company in this case will not have a supply chain any
impact on the disclosure of risk by suppliers, and will face the company's
various risks faced by companies in the market
From the point of view of the researcher, companies must disclose the
risks of supply chains within Footnotes to Financial Statements , based on the volume of transactions and the large
relations with each supplier and customer, especially the first case, which is
related to the fading of the regulatory boundaries between enterprises and
suppliers and the second case related to the association of enterprises with
suppliers on long contracts Term, and the third case related to the adoption of
the company to a major supplier, but this supplier has alternatives to the
company in the market as well as senior suppliers and customers outside the
state, as this is mandatory in the financial accounting standards
As for the second case of non-existence of long-term contracts and
the fourth case, the disclosure of the risks of suppliers is optional for
companies. At the same time, this disclosure should include the most important
suppliers in terms of the size of the relationship with them, the extent of the
chain's suspension and exposure to risks on this relationship, The exposure and
nature of these risks are political risks, exchange rate risk, transfer risk or
quality or other risks. The form of disclosure of supply chain risk can be
summarized in the following table.
|
Supplier
State
|
Current Situation of Supplier Risk
|
Nature of Risk
|
Supplier
|
Number
|
|
|
|
|
|
1
|
|
|
|
|
|
2
|
|
|
|
|
|
3
|
|
|
|
|
|
……
|
-
Cooper, R., & Slagmulder. R., 1999, "Development profitable new
products with target
cost", Sloan management review, Vol. 40, No. 4, pp. 22-33.
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