Supply chains have become much more complex and this not only means greater vulnerability, but also makes it much harder to manage the risk. But with the help of new IT capabilities, together with risk engineering expertise, organisations can be better prepared for supply chain disruptions, mitigate or prevent the effects, or even gain a competitive advantage.
There has been a growing trend for organisations to outsource more and more value creation to their suppliers, driven by cost-cutting as companies look to become leaner. These suppliers in turn outsource to their suppliers and so on, creating a complex chain in which dependencies are created between the different players, and visibility beyond tier one becomes almost impossible. This dependency makes companies much more vulnerable than ever before. If part of the supply chain network is disrupted, it can have huge consequences along the entire value network of enterprises.
And it is important to stress that it is not just suppliers. There is an entire value chain that includes not only suppliers, but also utilities, and everything that is needed for the product to be managed, handled and shipped. The problem faced by organisations is a lack of visibility – an inability to see beyond the supplier. And being able to monitor all the many players in the supply chain across continents is simply beyond human scale.
Protecting the supply chain
Procurement and supply chain departments need good visibility and data to understand the tier one relations of their supply networks, the transportation providers, the logistic nodes and hotspots across the supply chain, both inbound and outbound. Enterprises need to move from a reactive, firefighting position to a more proactive, predictive capability of understanding risk exposures and the financial impact, and being better able to plan and prevent a risk materialising in advance.
Over time, they should slowly move to sub-tier visibility in those areas that are highly exposed and highly critical to the enterprise. Business partners should be provided with incentives to disclose information on their suppliers, because ultimately, getting sub-tier visibility is about give and take between the various players, otherwise it will fail.
However, the risk of a disruption can never be totally eliminated, and organisations need to prepare and ensure that they have crisis management plans in place. It is important to be aware of issues in a timely manner, but it is also vital that organisations are able to respond quickly and find solutions.
The role of technology
The information required to manage a supply chain is changing constantly. When you are mapping an organisation’s supply chain, it is changing from month to month, and that is where artificial intelligence plays such an important role.
The challenge is to take the information available from the enterprise and external sources and build a digital twin of the supply network, and then match this with external information from sources such as insurance databases, ratings agencies, media outlets, etc. Artificial intelligence can then be utilised to understand whether there are any matches that will impact the supply chain. And all of this will be done on a real-time basis, so that the systems identify the threats and risks and provide alerts as quickly as possible.
There are unpredictable incidents every day around the globe, whether a strike, a fire, or an explosion in a seaport, and it is important to be notified as quickly as possible, in order to be the first in the market to react and secure supplies and even gain competitive advantage as a result. Competitors that are not notified as quickly may be forced to reallocate their supply, pay higher prices, or even be unable to find supply and therefore unable to deliver to market, thus losing market share.
It is also crucial to be ahead of the risk by leveraging big data analytics to understand negative trends and patterns, allowing organisations to think about alternative options, re-planning and designing the supply network, and making better purchasing decisions in order to avoid those incidents.
Engineering the risk
Ultimately, the aim of risk management is to build resilience within an organisation and its whole value chain. Unfortunately, organisations are extremely blind when it comes to the risk exposure of their supply networks. Commonly, procurement will simply create a credit rating profile of the business it wants to onboard.
Currently, there is little knowhow in organisations on how to manage suppliers beyond pure economics (meaning looking to reduce costs, inventory level and lead-times), so the perspective on the exposure is extremely limited. That is why it is so important to extend the scope of risk engineering activities beyond own risk locations to those of suppliers. There is a need to have experts onsite that can enable organisations to cope and deal with business continuity management beyond your own business boundaries. This risk engineering approach requires that you try first to identify and assess the risk, to help understand preventative options as well as improve the situation. Traditional approaches would stop here.
Now, thanks to the combination of advisory services with technology, companies are enabled to monitor a risk situation 24/7 and create an alert when a risk materialises. In the event of such an unpredictable crisis, having the most reactive and effective crisis management response in place using expertise based on technology, combined with risk engineering capabilities, is where the real value is for enterprises.
It does not only lower the cost of risk by avoiding unnecessary costs in crisis situations but also, thanks to business continuity, it protects the reputation and ultimately the brand. In the end, it is about being able to deliver on the promise that the company made to its customers, and protecting shareholder value.
And there may be an opportunity that such a crisis can offer, which can be fully exploited if the organisation is well prepared and aware of the situation before its competitors. It is all part of being able to turn risk into competitive advantage.
For more information, visit: www.zurich.com/en/products-and-services/protect-your-business/what-we-protect/property/supply-chain
Contributed by Jean-Pierre Krause, global head risk engineering, commercial insurance, Zurich Insurance Company, and Heiko Schwarz, founder and managing director, riskmethods