In our global, highly interconnected world, supply chain risk is everywhere, notwithstanding the region covered editorially by Supply Chain Asia. After all, myriad countries (e.g., those representing the Association of Southeast Asian Nations) are rapidly building a new economic life with radically different supply chain challenges. At the same time, more established brands, such as Japan and South Korea, are scrambling to adjust to a very different, pan-APAC (and worldwide) business environment. Increased supply chain risk—environmental, geopolitical, economic, technological—clearly accompanies these changes. For six months in 2011, the World Economic Forum (WEF) worked with supply chain leaders from business, government and academia to understand the nature and implications of risk in the 21st century. Initiatives undertaken included surveys and executive interviews, and encompassed a variety of industries and regions throughout the word.
This article looks briefly at the supply-chain-risk findings reached primarily by forum participants but also by groups and initiatives associated with several other organizations. Three important and interrelated insights frame the discussion:
- First, risks outside the control of individual organisations— from terrorism and weather to currency shifts and political upheavals—have been escalating furiously; so much so that few, if any, can be mitigated (or even addressed) by one organisation alone. As a result, risk must be managed collaboratively across companies’ global supply chains, in lock-step with suppliers, customers, third parties and others.
- Second, risk assessment, planning and response can no longer be the sole province of operational risk managers. Effective risk management must now encompass multiple levels within an organisation: from C-suites and boards to logistics, finance and human resources.
- Thirdly, governments must be encouraged to help companies understand and manage risk. The political, economic and security implications of regulating in a complex environment demand a new approach to public/ private collaboration.
Each of the above insights makes the same basic point: that supply chain risk has become too big an issue to handle insularly. This means that, moving forward, the most effective risk assessments, plans and solutions will have more inputs and participants than ever before: manufacturers and vendors; logistics operators, transport providers and transportation/production/consumption hubs; retailers; the general public; and government and regulatory bodies. This is why the WEF’s report, and this abstract, focus on supply chain risks with global implications—those outside the direct control of any one individual organization.
The nature of global supply chain risk
Local disruptions to corporate supply chains occur on a daily basis. However, certain external events and network vulnerabilities can turn these disruptions into much larger, global problems. Respondents to the World Economic Forum’s risk survey ranked those external disruptions (i.e., those not occurring within a company) that they believe are most likely to have significant and systemic effects on supply chain operations (Figure 1).
According to a Swiss Re study, worldwide economic losses from natural disasters in 2010 totaled $194bn. Natural disasters damage infrastructure, interrupt production, increase commodity costs, and delay or curtail shipments, to name only a few. An analysis of 15 multinational companies reported that operating profits caused by supply chain disruptions fell by up to 33% in the quarter following the 2011 earthquake and tsunami in Japan. Because natural disasters are difficult to predict and impossible to prevent, companies must concentrate on actuarial and operational planning: making pre-facto investments to reduce vulnerability, increase network flexibility (redundant manufacturing/distribution, readily available supply alternatives, larger safety stocks, etc) and accelerate recovery.
A good example of geopolitical risk is terrorism. Since 9/11, the United States has spent $1trn of people’s and companies’ tax dollars on homeland security. The costs of new industry regulations and requirements resulting from terrorism are also astronomical. In addition, businesses must worry that new security disruptions could further affect production or distribution hubs, and that such events would drive more legislation that could hamper supply chain effectiveness. Supply chain risk studies must address all these facets. Like environmental concerns, companies are highly limited in their ability to manage geopolitical disruptions or influence their outcomes. Thus a dual approach—risk reduction and increased network resiliency—is clearly called for.
Economic disruptions cover a huge range of issues, including currency fluctuations, commodity price volatility and sudden demand shocks. For multinational and local companies, border delays, export/import restrictions, and ownership/investment restrictions are particularly big APAC risk issues. A study by the World Bank concluded that enhanced capacity in global trade facilitation—resulting, for example, from streamlined customs programs, minimized tariff and non-tariff barriers, more-rational quota systems and fewer infrastructure bottlenecks—would increase world trade of manufacturing goods by almost te10%. However, from a risk perspective, the greatest concern is the possibility of sudden new restrictions or delays. This in turn highlights the need for more advanced risk management policies and mechanisms in natio
nal border administration.
Technological and infrastructure risks
Forty one percent of respondents to the WEF survey stated that their companies have experienced disruptions as a result of unplanned outages of IT or telecommu
nication systems. Increased reliance on, and use of, IT solutions such as electronic data and analytics for real-time risk assessment (eg, electronic manifests for cargo and advanced passenger information for air travel) have proven effective in facilitating movement of freight and people. However, these advances concurrently put more pressure on governments and businesses to maintain robust and secure information and communications networks. Similar to technological concerns, infrastructure failures—from roads to power stations—are subject to greater risk due to everything from lack of investment to terrorism. A report by CIBC World Markets estimates that total infrastructure spending will need to reach between $25trn and $30trn USD by 2030.
Identifying key vulnerabilities and developing metrics
In addition to identifying global triggers, the WEF study group also sought to identify those vulnerabilities with the greatest impact on global supply chains. Among the top five, all but the very highest concern (reliance on oil) relate to visibility and control, and three of the top five deal with managing multiple players across the ecosystem. Each of these also remains largely within the long- term control of supply chain organizations. However, as stressed earlier, the strategic and operational decisions required to build resiliency are often beyond the direct control of any one player. Those decisions need to be the focus of broadly collaborative (eg, pan-company) activity.
Companies struggle to quantify the risk exposure of their own organizations due to a lack of understanding, standardized metrics, and relevant and up-to-date data on supply chain risk. Assessing systemic global exposure is difficult without a platform to share data and information. A study by the Business Continuity Institute, Chartered Institute of Purchasing and Supply, Zurich and DHL found that 85%of corporate respondents suffered at least one significant supply chain disruption in the previous 12 months. However, the impact of disruptions on corporate performance tended to be insufficiently understood and quantified: 26% of respondents to the WEF’s survey could not estimate the financial impact of disruptions to their business.