Extending supply chains to take advantage of the rapidly growing economies of the Far East, has also extended the range of supply chain risks that organisations have to manage. And building resilience in to the supply chain is a complex process.
Managing supply chain risk means not only meticulous planning, but also understanding the changing nature of the risks that could disrupt business activities.
The World Economic Forum’s latest Global Risks Report, released earlier this year argued that the warnings of the past decade are starting to manifest themselves in new, sometimes unexpected ways and harm people, institutions and economics.
And as a result, it argued that it is now time to build resilience, rather than simply trying to avoid the problems.
In the short-term, it identifies large scale involuntary migration as the number one risk, followed by extreme weather events (second). Failure of climate change mitigation and adaptation is third, interstate conflict with regional consequences is fourth, and major natural catastrophes is fifth.
Clearly all these events have the potential to cause massive disruption to supply chains.
But the survey of some 750 experts homes in on environment issues as the most critical global risks over the next ten years. Water crises are top, followed by failure of climate change mitigation and adaptation. Extreme weather events come third, and food crises are fourth. And fifth is profound social instability.
“Climate change is exacerbating more risks than ever before in terms of water crises, food shortages, constrained economic growth, weaker societal cohesion and increased security risks. Meanwhile, geopolitical instability is exposing businesses to cancelled projects, revoked licenses, interrupted production, damaged assets and restricted movement of funds across borders,” says Cecilia Reyes, chief risk officer at Zurich Insurance, one of the strategic partners in producing the report.
Ironically, technological risk such a cyber-attack and failure of critical information infrastructure, which has been considered a major issue in the past, has receded – relatively.
Nevertheless, a separate survey of business leaders assessing risks for doing business finds cyber-attacks to be the top risk in eight countries, including the USA, Japan, Germany, Switzerland and Singapore.
The study look at some of the ways that resilience to all these risks can be increased. For example, it discusses how climate change–resilient crops and supply chain networks, as well as financing and insurance schemes, can help mitigate the social, economic and environmental aspects of food security risks related to climate change.
Nor surprisingly, the report argues that businesses, need to strengthen their resilience to these threats, and that there is a clear role for collaboration among public and private sector in achieving this.
In particular, it argues that businesses need to find new ways to partner with governments to address global risks.
Two more recently released reports tend to support the stance taken by the World Economic Forum.
A study by insurance group Allianz: Global Claims Review 2015: Business Interruption In Focus, found that business interruption now accounts for a much higher proportion of the overall loss than was the case ten years ago – and that is down to increasing interdependencies between companies, the global supply chain and lean production processes.
“The growth in business interruption claims is fuelled by increasing interdependencies between companies, the global supply chain and lean production processes,” says Chris Fischer Hirs, chief executive officer of Allianz Global Corporate & Specialty.
“Whereas in the past a large fire or explosions may have only affected one or two companies, today, losses increasingly impact a number of companies and can even threaten whole sectors globally. With our experts researching this topic, we are well positioned to respond to this evolving risk.”
The average large business interruption property insurance claim is now some €2.2 million, 36 per cent higher than the corresponding average property damage claim of just over €1.6 million.
The study analyses more than 1,800 large business interruption claims totalling over €3 billion from 68 countries for the period 2010 to 2014. Fire and explosion is the top cause, accounting for 59 per cent of all business interruption claims globally.
It also maps how large claims have followed the shift of manufacturing production to Asia, so too have large claims. There is an increasing concentration of production sites and logistics hubs in certain areas. If such clusters are hit by natural catastrophes, or a fire or explosion (the report highlights recent events at Tianjin port in China) the disruption can quickly become global.
The growth of global supply chains, which enable production to be concentrated in the most efficient locations, has been a major driver in the development of the world economy.
The other study is a recent poll of professionals by Deloitte across a range on industries found that almost one third saying that their company had experience fraud, waste or abuse in its supply chain during the previous 12 months.
That 31.3 per cent that had experienced fraud compared to 24.6 per cent that had not, while 46.6 per cent were don’t knows.
Some 2,660 professionals participated in a Deloitte Dbrief web cast entitled “Fraud risk assessment: Escalating the battle against supply chain fraud, waste, and abuse”.
There were clear differences between industrial sectors: consumer and industrial products showed the highest rate of fraud at 37 per cent – although this was down on the 42 per cent recorded in a similar survey two years ago.
Life sciences and healthcare has seen a steady rise – from 31 per cent two years ago to 36 per cent in the latest survey. Energy and resources, at 34 per cent was up from 27 per cent two years ago. The lowest rate was in financial services at 25 per cent, although this is up from 24 per cent two years ago.
The poll found that many organisations have quite a way to go in using analytics to manage fraud risk – only 8.6 per cent were described as at an “advanced” stage of using analytics to manage third party relationships and forecast for financial risks to the supply chain. Some 20.6 per cent were using analytics, but only to manage third party relationships. More than a third either didn’t use analytics at all, or had the software but were still learning to use.
Laila Beswick, marketing manager of GT Nexus, argues that the most effective mitigation against supply chain risk is to have in place a management system that allows the business to be agile, transparent and collaborative in its dealings with trading partners and service providers.
“Here are some considerations/key elements for how to mitigate the impact of supply chain disruption,” she says.
“Adopt a Network Model: A hard wired, rigidly connected supply chain is going to be challenged every time it comes head to head with unpredictable supply and demand for that matter. Companies and their trading partners can no longer work in silos – they are interdependent on one another. Those organisation with networked supply chains will have the most effective contingency plan and risk the least from disruption. When any disaster strikes, strength in supplier networks helps businesses take action. The best prepared companies operate with collaborative and agile trading networks. They will be the most resilient to risk.
“Collaboration for better visibility: When dealing with supply chain risk the ability to share information collaboratively with outside partners is paramount. If suppliers in a global trade network are able to access a common unified source of information in near real-time a company can make very quick decisions when the pressure is on – having the right information on-hand in the right context at the right time is essential to making the right decisions for the business.
“Communication: Risk mitigation should start well before any disaster strikes. Preparation is key. Plans only go so far but there’s also no excuse for not thinking ahead and for not communicating. Companies should ensure on-going communication with all supply chain partners on potential risks and contingency plans.
“Assess Suppliers: Evaluate possible providers based on different scenarios and assess pricing and shipment routes in the context of a disruption. ‘what-if’ scenarios can help with these assessments.
“Continuous assessment: The performance levels of trading partners should be continuously monitored and reviewed. This will allow for a continually improving supply chain and a strong network of partners that will rise to any challenge and provide support when needed. Supply chain disruptions are often unavoidable but the operational impact and havoc can be minimised,” says Beswick.
There is clearly a balance between trying to plan for every eventuality and designing a supply chain that it agile enough to deal with some risks.
“Planning can really only go so far especially if the data your plan is based on comes from the inside the four walls of the organisation and is passed on old historic data. When supply chains were shorter and constrained to nearby regions, managing risk and cost was much easier. Today, up to 80 per cent of data lies outside the enterprise.
She argues that only a networked supply chain will provide the responsiveness needed to deal with supply chain volatility and risk.