Supply Chain Risks Beyond the Coronavirus

Stephen DeAngelis

March 12, 2020

The sudden and widespread onset of the coronavirus affected the global economy and global supply chains in significant ways. Whether you quote Robert Burns (“The best-laid plans of mice and men often go awry”) or John Lennon (“Life is what happens to you while you’re busy making other plans”), people understand life finds a way of getting our attention. No one knows this better than supply chain risk managers. Robert J. Bowman, Managing Editor of SupplyChainBrain, asks some important questions: “In a complex modern-day global supply chain, how can companies assess which suppliers present the highest level of risk to business continuity? And how can they begin to implement effective risk-management programs based on end-to-end visibility?”[1] Markus Groth, Head of Marsh Client Advisory Services, along with Cornelius Herzog and Martin Zollneritsch, from Oliver Wyman, observe, “Manufacturing organizations are facing an unprecedented array of risks to their supply chains in the next few years. If not managed well, these risks may result in severe supply chain disruptions and delivery failures, with consequences for both manufacturers and customers.”[2]

Increasing supply chain risks

Even before the coronavirus outbreak, pundits were reporting on increased risks facing supply chains. Steve Banker (@steve_scm), Vice President of Supply Chain Services at Arc Advisory Group, reports an important source of information concerning supply chain risks is the annual Global Risks Report published by the World Economic Forum. He notes, “The report includes a survey of over one thousand members of various stakeholder communities. The results reported are worth the attention of executives that participate in risk management programs at their companies.”[3] He goes on to note, the top 10 global risks in terms of likelihood are:

  • Extreme weather
  • Failure of governments to take action on climate change
  • Natural disasters
  • Biodiversity failure
  • Human-made environmental disasters
  • Data fraud or theft
  • Cyberattacks
  • Water crisis
  • Global governance failure (with the rise of economic nationalism the ability for governments to work together to solve problems is decreasing)
  • Asset bubble (which can lead to a severe global recession)

If “likelihood” were the only variable risk managers had to consider, risk management planning would be much simpler. As Banker notes, however, “More important than likelihood of events occurring is their IMPACT if they do occur.” According to the World Economic Forum, the top ten risks in terms of impact are:

  • Climate action change
  • Weapons of mass destruction
  • Biodiversity loss
  • Extreme weather
  • Water crisis
  • Information infrastructure breakdown
  • Natural disasters
  • Cyberattacks
  • Human-made environmental disasters
  • Infectious diseases

The list was published before the corona virus outbreak, but we are seeing the impact of infectious diseases in real-time. As Banker observes, “It is a sobering list. What companies can do about these risks depends upon the type of risk. Risk mitigation can include changing where factories and other facilities are located, which ports goods and raw materials flow through, where companies choose to invest in growth, hardening IT systems, and many other things.” Børge Brende (@borgebrende), World Economic Forum President, adds an even more somber warning. He writes, “This is a time of unparalleled disruption and complexity. Risks — such as climate change, inequality and geopolitical tensions — transcend borders and sectors. However, the collective will to address these challenges is threatened by the sheer scale of the task.”[4]

What can companies do?

Collin Ziemerink, Executive Vice President of Industrial Manufacturing & Services at Maine Pointe, and Neil Willings, Head of Supplier Risk at SGS, write, “Despite being forewarned about these risks, research shows many businesses are still tending to be reactive rather than proactive in their approach.”[5] They add, “Businesses that ignore the disruptors and continue doing what they have always done in the way they have always done it, will undoubtedly experience margin erosion and loss of competitive advantage. A documented end-to-end Supply Chain Risk Management program is critical to growth, profitability and corporate survival.” Corinne Goldberg, a manager with Deloitte, suggests the first thing companies need to do is improve supply chain visibility. She explains, “Supply chains can be complex and fragmented. Oftentimes there’s little visibility into the robust nature of their control environment — and more importantly, the degree to which they’re operating in line with fair and ethical business practices, as well as being in regulatory compliance. An organization’s supply-chain partners can expose it to service disruption, financial and reputational risk, bribery, corruption and money laundering, as well as service-level agreement [SLA] breaches. All of which ultimately impacts the continuity of service provided to customers. It’s important that organizations have visibility over how their supply chains are operating, so that they can control their environment and effectively mitigate risk.”[5]

When people talk about gaining supply chain visibility, they mean they either have or lack data about supply chain operations and transactions. Where data is available, it can be used to reduce supply chain risk. Sam Jenks, a Communications and Marketing manager at Kodiak Rating, explains, “While this angry sea of content, data & insights may seem vast enough to drown one in its swells, artificial intelligence might just be able to throw us a life vest, so we can bear the storm and make it safely to shore. I promise you’re not seeing a mirage, AI + Data can offer a real solution for Supply Chain Risk Management, fast. … Receiving a quick-view of … risk-related insights, in real-time, is invaluable to make data-driven analysis & decisions based upon supply chain risks.”[7]

Groth, Herzog and Zollneritsch assert, “An effective risk management system needs to prevent damage from risks, but also manage crises or near misses when they occur. Such a system requires a qualified team, equipped with suitable processes, governance and tools. Most importantly, this team needs to be embedded centrally within the organization with communication channels to relevant decision-makers and stakeholder groups, so that decisions can be quickly made and acted upon.” They recommend companies follow a four-step approach:

Step 1. Understand the types and location of risks along the supply chain.

Step 2. Prioritize identified risks according to probability and impact.

Step 3. Compile a list of possible mitigation levers, such as adjusting inventory levels, altering the supplier and customer base or carrying out sustainability measures.

Step 4. Set up a monitoring framework along the lines of process, key performance indicators and tools.

Concluding thoughts

Ziemerink and Willings conclude, “Uncertainty is here to stay with risk factors likely to intensify in the coming year. A well-documented end-to-end supply chain risk strategy is critical to growth, profitability, peace of mind and corporate survival.” Goldberg adds, “Economic uncertainty, geopolitical risk and environmental catastrophes makes it all the more important for organizations to have visibility over their supply chains, especially when it comes to partners that operate in certain geographic or economic climates. Those external factors are certainly the driving forces behind why an organization should endeavor to maintain a robust approach to managing risk along its supply chain.” Groth and his colleagues agree. They conclude, “Companies are increasingly dependent on their supply chains. Effective supply chain management requires insight, analysis, action and watchfulness. Risk — like opportunity — is not static but constantly evolving. Understanding that quality and acting on it will be key to managing the key supply chain management threats in the next few years.”

Footnotes
[1] Robert J. Bowman, “Getting a Handle on Supplier Risk in Global Supply Chains,” SupplyChainBrain, 9 January 2020.
[2] Markus Groth, Cornelius Herzog, and Martin Zollneritsch, “Supply Chain Risks Are Magnifying in an Uncertain World,” Brink, 27 January 2020.
[3] Steve Banker, “What Global Risks are Increasing In 2020?Logistics Viewpoints, 20 January 2020.
[4] Børge Brende, “Global Risks,” World Economic Forum, January 2020.
[5] Collin Ziemerink and Neil Willings, “Reducing Risk in your Global Supply Chain,” Practical Insights Blog, 3 February 2020.
[6] Bowman, op. cit.
[7] Sam Jenks, “AI + Data = Supply Chain Risk Management!” Kodiak Rating, 13 November 2019.