Watershed moment for supply chain risk as disruption set to worsen
Mounting global supply chain disruption is likely to be the catalyst for a radical overhaul of supply chain risk management and could lead to increased regulation, experts have told Commercial Risk Europe.
Recent months have seen unprecedented supply chain disruption, impacting almost all sectors and hindering the economic recovery after the end of Covid-19 lockdowns. The pandemic and a wave of power shortages in Asia have hit production, while the post-lockdown boom has caused a surge in demand for raw materials and goods, contributing to long delays in shipping. Adding to the pressure, severe shortages of labour are affecting many industries, not least the UK transport sector where a shortage of lorry drivers as a result of Brexit has led to panic-buying of food and petrol.
Disruption is expected to continue for the foreseeable future and potentially worsen, experts agree.
“It is not over yet, not even close to it,” warned Hayley Robinson, group chief underwriting officer at Zurich Insurance. “Certain products will run out in the coming months and seasonal items might arrive too late. Production and logistics will need a while to get back to normal. Or perhaps we even need to find out first what normal is in 2022,” she said.
Atul Vashistha, chairman and chief executive of Supply Wisdom, which provides supply chain risk management and real-time monitoring services, also believes increased levels of disruption are here to stay. Covid-19 has not gone away and vaccination rates in parts of the world are still low, he explained. With the busy holiday season in Europe and the US fast approaching, disruptions to manufacturing in Asia and shipping delays are yet to fully filter through, while the labour shortage in Europe will take time to resolve, he warned.
Supply chain disruption is beginning to have a real economic impact. Increased labour and transportation costs are likely to act as a drag on economic growth and feed through to inflation. The automotive sector has lost some $210bn in revenue due to a shortage of micro-chips, according to AlixPartners. The cost of importing shipping containers from Asia to Europe and the US has skyrocketed, up by as much as 800% for UK companies, according to Logistics UK.
The current situation may get worse before it gets better, according to Maria Grace, global head of property at Allianz Global Corporate and Specialty (AGCS). “The range and diversity of supply chain risks is constantly growing and recent experience shows how far-reaching events like a pandemic, climate change, financial crises, trade tensions and political instability can be,” she said.
A number of factors have created a “perfect storm” for supply chain disruption, according to James Crask, senior vice-president and head of resilience at Marsh. Surges in demand have coincided with constraints in supply. But these pressures are compounded by a general lack of understanding of end-to-end supply chains, which are complex and interconnected, said Mr Crask.
“We have lived through an unprecedented period of stability, and supply chains and systems have evolved in that context, and are now under pressure. We are now, however, entering a period of instability and there are questions around whether some of these systems and models – such as just-in-time supply chains – will survive this experience,” said Mr Crask.
Supply chains have become “critical” and designed to be lean, added Ms Robinson. “Over the past years, supply chains have been optimised to reduce costs. Stock levels, lead times and transport and warehouse capacities have all been cut to reduce price… The reactions to Covid-19 pulled the trigger for the perfect storm, [and] the well-balanced system got derailed,” she said.
“Production halted and surged, raw materials and components production and movement of cargo reduced or stopped. Product demand halted, dropped and/or changed. Flex workers were without work and sent home. Containers ended up at the wrong ports and were not shipped back as the steam lines reduced capacity,” explained Ms Robinson. “After the first Covid-19 waves, the economy picked up more than it dropped, with an out-of-balance system, into where we are now.”
VULNERABILITIES
Current disruption is not a short-term blip, according to Greg Schlegel, founder of The Supply Chain Risk Consortium and co-creator of the Institute for Risk Management’s (IRM) Supply Chain Risk Management Certificate. The way in which companies have expanded their operations and supply chains globally has created vulnerabilities, he said. The more ‘touchpoints’ or ‘nodes’ in the supply chain network, the higher the probability that one of those will experience a risk event, he added.
According to Mr Schlegel, businesses are operating in a VUCA (volatility, uncertainty, complexity and ambiguity) landscape. The pandemic has produced artificial demand and supply shocks around the globe, and it will take time to rebalance the equilibrium, he said. “All sectors will be experiencing what we call the ‘bullwhip effect’ through 2021 and into 2022,” he added.
Recent disruption should prove to be a watershed moment for supply chain resilience and risk management, according to Mr Vashistha. “I hope that this will be the catalyst [to invest in supply chain risk management] and we do see early signs of this. If today’s disruption is not the catalyst, then there is something fundamentally wrong with society,” he said.
In particular, global disruption has revealed the “compounding effect of risk across multiple domains”, from power outages in China at one end of the supply chain and labour shortages and Brexit at the other, Mr Vashistha said. In the past, companies concentrated their supply chain risk management on the financial health of top-tier suppliers, but have failed to invest in the data and systems required to understand their supply chains from end to end, he added.
“Many companies have spent zero effort understanding their suppliers’ suppliers. If you do not understand your supply chain, there will not be visibility into your early warning systems. It is about investment and companies not paying enough attention to their suppliers,” he said.
Recent disruption, such as the ricocheting impact of higher energy prices down the supply chain, has demonstrated that the complexity and interconnectivity of supply chains is often poorly understood, explained Mr Crask. Higher gas prices have closed factories and manufacturing plants in China and Europe. In the UK, for example, the closure of two key fertiliser plants threatened supplies of CO2 gas, which is critical for the food production industry. “We are still not that good at understanding supply chains end to end,” said Mr Crask.
LONG-TERM ISSUE
Volatility in supply chains is a long-term consideration for companies, according to Mr Crask and Mr Vashistha.
The move to a low-carbon economy and digitalisation will create huge pressure on the supplies of certain raw materials and components. This can already seen in the shortage of semiconductors and the predicted shortages of lithium and cobalt used in electric vehicles and battery technology. The transition to net zero at a time of population growth and climate change is also expected to put energy supply under significant pressure, increasing the risk of blackouts.
“Long term, companies will need to take a look at how their supply chains are structured, but that will not help with the disruption companies face today and in coming months, for example from the shortage of labour and the consequences of higher energy prices. In the short-term, companies need a more targeted approach, using analysis and scenario planning to help understand vulnerabilities and to build a plan. This is just an interim step, before they make a longer-term supply chain strategy,” said Mr Crask.
Companies need to dramatically broaden their “risk aperture” to include a wider range of risks in the supply chain, according to Mr Vashistha. This should include considering the potential impact of social and political risks.
Risk assessments need to be more comprehensive and risk monitoring should be carried out on a continuous basis, he argued. “Companies also have to start thinking in terms of resilience, not just response. The pace of change is so rapid you can’t have resilience discussions after the fact,” he said.
Risk managers can offer skills and tools to help “shine a light” on supply chain risk, according to Mr Crask. “Risk managers can utilise the tools of risk management – such as risk analysis and scenarios – and use their skills to facilitate discussions with various stakeholders. They might not have all the answers but risk managers could hold the keys to potential solutions,” he said.
In the near term, companies can use some tried-and-tested risk management techniques to help manage the coming months of disruption. However, recent events are likely to be a “catalyst” for a more in-depth conversation on making supply chains more robust, said Mr Crask.
He predicted a sustained focus on supply chains by governments and businesses is now likely. “This is an opportunity for companies to see if they have a good understanding of their supply chains, and where they may have vulnerabilities, choke points, single points of failure or a concentration on a single location, supplier or shipping route,” said Mr Crask. “Companies need to carry out robust analysis of where their vulnerabilities are and start to think about what they can do about it,” he said.
The IRM’s Mr Schlegel advised risk managers to “get educated”. He also urged risk managers to begin dialogue about risk within the supply chain. He advocated the use of supply chain mapping, typically taking a small product line and mapping out its supply chain network with all nodes from customers back through suppliers. “This exercise tends to become a ‘Wow! I never knew that about our product line’ teaching moment for all disciplines,” he said.
