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Navigating the Supply Chain Crisis

Two and a half years since COVID-19 emerged and set off a sea change in how we work and live worldwide, business leaders continue to grapple with the challenges it has created for the global supply chain. Extraordinary congestion at critical global ports, decreased availability of key raw materials and component parts, rising freight bills and an increasingly tight job market have all contributed to the need for companies to create an effective logistics risk management program. Such a program must focus on the detailed assessment of key risks to the supply chain and the creation of mitigation strategies that limit their impact on a company’s ability to satisfy its customers.

How Did We Get Here?

To better prepare an organization for the future, it is important to reflect on events in the past. Some of the critical issues that have contributed to the unparalleled supply chain pressure within the logistics world include:

  • Increasing reliance on foreign suppliers for key inputs, adding to the time it takes to secure goods and also leading to a diverse range of exposures that could impact customers
  • Greater dependence on ever more sophisticated components
  • Labor shortages impacting the transportation and port industries
  • Crumbling infrastructure, especially domestically, contributing to increased time and expense to move freight
  • The continued movement to just-in-time procurement, leading to challenges matching supply to demand as supply chains are strained
  • An increasingly sophisticated electronic network to plan, monitor and maintain the logistics chains, leading to increased vulnerability to cyberattacks

While these issues may have been the fuel, it is certainly the COVID-19 pandemic that was the spark for the current challenges facing the supply chain, as the pandemic affected the global supply chain in many ways. For example, reductions in production capacity overseas due to government quarantines left many components in shorter supply. Overseas port capacity was restricted because of quarantines and worker shortages due to illness. Already operating at its maximum after years of limited investment, United States port capacity became overtaxed and less efficient at moving product to final destinations. Additionally, increased consumer demand for foreign produced goods, such as home office equipment, clothing and furniture, further stressed global supply lines.

According to maritime research and consulting firm Drewry, these issues resulted in freight rates increasing by more than 100% year over year, transportation time increasing by almost 50%, and logistics professionals facing greater difficulty guaranteeing the ability to meet their company’s needs. Companies with logistics professionals who developed and implemented supply chain risk management strategies have likely experienced a limited impact in comparison to those without such processes in place.

It’s Not Over Yet

While the majority of the world is now emerging from the most dramatic parts of the unprecedented global shutdown and hope is on the horizon, significant threats remain that require vigilance and focus. This is best illustrated by the impact of the early 2022 lockdowns implemented in parts of China as part of the country’s zero-COVID strategy. With an export volume of more than trillion, what happens in China quickly ripples around the world and impacts every sector.
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From semi-conductors to resins, active pharmaceutical ingredients to petroleum products, China is a critical node in the supply chain of almost every consumer product. With major production and transportation hubs like Guangzhou and Shanghai implementing sweeping lockdowns, companies are once again feeling the pinch in reduced ability to source product and significantly expanded time lines for delivery.

What Can Be Done?

Business leaders should consider several best practices to minimize disruption to their organization’s supply chain:

  1. Develop risk assessments on primary and secondary suppliers, determining the impact they could have on the company’s ability to produce product.
  2. Create a detailed mapping of critical suppliers that includes manufacturers and service providers, such as freight forwarders, in order to assess catastrophic risk potential. Have multiple suppliers, preferably in multiple geographic areas, as sources of critical raw materials and components. This reduces reliance on any single supplier or oversized exposure to geographical catastrophe risk. For identified critical areas, create a business continuity plan that outlines the process to shift to another resource in a separate geographic area.
  3. Maintain increased inventory on hand versus reliance on “just-in-time” methods, increasing the ability to quickly match supply to customer demand.
  4. Invest in supply chain intelligence data and telematics to increase visibility on goods in transit, which will help business leaders identify a quick and effective response to catastrophes as they occur.
  5. Manage customer expectations in respect to delivery schedules. The old adage “Patience is a virtue” may never have been more apt.

Looking Ahead

Corporate executives now have a heightened understanding of the supply chain’s importance to a company’s bottom line, leaving logistics professionals uniquely positioned to gain investment in resources to help address emerging logistics and supply risks. By conducting regular risk assessments and developing risk mitigation strategies to address the exposure, business leaders can better position their company to limit the impact of supply chain challenges and create a stronger, more operationally resilient enterprise.

Business Interruption Seen as Top Risk Globally

A survey of more than 1,200 risk managers and corporate insurance experts in over 50 countries identified business interruption as the top concern for 2017. According to the sixth annual Allianz Risk Barometer of top business risks, this is the fifth successive year that business interruption has been seen as the biggest risk.
top-10-risks

“Companies worldwide are bracing for a year of uncertainty,” Chris Fischer Hirs, CEO of AGCS said in a statement. “They are concerned about rather unpredictable changes in the legal, geopolitical and market environment around the world. A range of new risks are emerging beyond the perennial perils of fire and natural catastrophes and require re-thinking of current monitoring and risk management tools.”

While natural disasters and fires are what businesses fear most, non-damage events such as a cyber incident, terrorism or political violence resulting in denial of access are moving higher up on the scale, according to the report. These types of incidents can cause large loss of income to companies, without actual physical loss.

The second concern, market developments, could result from stagnant markets or M&As, or from digitalization and use of new technologies.

Cyberrisk, third on the list of perils, has jumped up from 15th place in just four years. Cyber was identified as the second concern in the United States and Europe.

According to Allianz:

The results indicate that cyber risk occupies a significant portion of a company’s exposure map. The risk now goes far and beyond the issue of privacy and data breaches. A single incident, be it a technical glitch, human error or an attack, can lead to severe business interruption, loss of market share and cause reputational damage. Of the top 10 global risks in the 2017 Allianz Risk Barometer, a cyber incident could be a potential root cause or trigger for 50% of them. In addition, the toughening of data protection regulation regimes around the world is also contributing to this risk being at the forefront of risk managers’ minds, as penalties for non-compliance are increasingly severe.

Fourth on the list, natural catastrophes added up to $150 billion in total economic losses in 2016—with insured losses accounting for $42 billion of those losses—up from $28 billion in 2015, according to the report. Businesses also are more concerned about the impact of climate change and increasing weather volatility year-on-year.

Trump outlook for 2017

“Opportunities and challenges,” says Ludovic Subran, head of Euler Hermes Economic Research and deputy chief economist of Allianz research. “Companies which are domestic, either a regional multinational or national, will benefit. However, the business environment for large multi-national corporations who do have global, strongly regionally diversified business models will be more challenging. Stronger regional interests will make the lives of companies more complicated as there will be increasing protectionist regulation.”

A Trump Presidency Poses Top Risk to Global Economy

According to the Economist Intelligence Unit, a Donald Trump presidency poses one of the greatest current global risks. Indeed, Trump ranks as the sixth overall potential risk to the global economy, and based on a 25-point scale, the research firm rated the risk approximately equal to the rising threat of jihadi terrorism destabilizing the global economy.

The EIU, research and analysis sister company to the Economist, ranks risks based on both impact and probability, with a Trump presidency presenting considerable potential impact, but moderate probability. The EIU’s assessment focused in particular on Trump’s hostility toward free trade (most notably NAFTA), aggressive rhetoric on China, and “exceptionally right-wing stance” on the Middle East and jihadi terrorism.

“In the event of a Trump victory, his hostile attitude to free trade, and alienation of Mexico and China in particular, could escalate rapidly into a trade war—and at the least scupper the Trans-Pacific Partnership between the US and 11 other American and Asian states signed in February 2016,” EIU analysts wrote. “His militaristic tendencies towards the Middle East (and ban on all Muslim travel to the U.S.) would be a potent recruitment tool for jihadi groups, increasing their threat both within the region and beyond.”

The firm concluded with a prediction that, while it believes Trump will most likely lose to Democratic nominee Hillary Clinton, that probability could change in the event of a terrorist attack on U.S. soil or a sudden economic downturn.

In such a scenario, the trickle-down effect within the American political machine poses noteworthy risk as well.

“Innate hostility within the Republican hierarchy towards Mr. Trump, combined with the inevitable virulent Democratic opposition, will see many of his more radical policies blocked in Congress,” the report says. But “such internal bickering will also undermine the coherence of domestic and foreign policymaking.”

The firm’s overall top 10 risks by point ranking are:

economist intelligence unit top global economy risks

Widening Wealth Gap Is Biggest Global Risk, World Economic Forum Predicts

Wealth Disparity

According to the World Economic Forum’s Global Risks 2014 report, the chronic gap between the incomes of the richest and poorest citizens is the risk most likely to cause serious global damage in the next decade. Looking forward, the 700 experts queried emphasized that the next generation will only feel this disparity more acutely if current conditions continue. Those presently coming of age face “twin challenges” of reduced employment opportunity and rising education costs, prompting the World Economic Forum to consider the impact on political and social stability as well as economic development.

“Many young people today face an uphill battle,” explained David Cole, group chief risk officer of Swiss Re. “As a result of the financial crisis and globalization, the younger generation in the mature markets struggle with ever fewer job opportunities and the need to support an aging population. While in the emerging markets there are more jobs to be had, the workforce does not yet possess the broad based skill-sets necessary to satisfy demand. It’s vital we sit down with young people now and begin planning solutions aimed at creating fit-for-purpose educational systems, functional job-markets, efficient skills exchanges and the sustainable future we all depend on.”

After a widening global wealth gap, experts predicted that extreme weather events will be the global risk next most likely to cause systemic shock on a global scale. They identified fiscal crises as the global risk with the potential to have the biggest impact over the next 10 years.

The top five most likely and most potentially impactful global risks are:

Most Likely Risks

1. Income disparity (societal risk)

2. Extreme weather events (environmental risk)

3. Unemployment and underemployment (economic risk)

4. Climate change (environmental risk)

5. Cyberattacks (technological risk)

 

Most Potentially Impactful Risks

1. Fiscal crises (economic risk)

2. Climate change (environmental risk)

3. Water crises (environmental risk)

4. Unemployment and underemployment (economic risk)

5. Critical information infrastructure breakdown(technological risk)