SUPPLY CHAIN RISK MANAGEMENT - RISKS AND CHALLENGES

Globalization, climate change, sustainability and the rise of digital are just a few of the megatrends effecting businesses today. Megatrends are a fact of modern life with increasing economic consequences for everyone.

                                             Figure: Megatrends of our time

Impact of megatrends on companies and the economy

The long-term effects of global megatrends on company operations present an immense challenge for supply chains. Purchasing and logistics departments face increasingly complex problems with significant ramifications.

 

The below overview shows the economic impact of megatrends and the risks they present for supply chain risk management.

 

Globalization

Outsourcing and global trade relations make today’s supply chains enormously complex. Companies are more interconnected than ever before and their interdependency is rapidly increasing. As a result supply chains are more vulnerable and fraught with risks.

 

The Rise of Digital

The digital revolution provides nearly unlimited access to data and the tools analyze it into actionable information. Companies gain a competitive advantage by using technology to e.g. extract risk relevant information from millions of web pages and therefore design more responsive and resilient supply chains.

 

Climate Change

Global warming and other consequences of climate change are creating unprecedented challenges for companies. Natural disasters bring production to a halt and new environmental regulations present companies with unexpected and costly challenges.

Sustainability

Digital information and social networks create transparency concerning ethical and environment-related actions of business partners.  Non-compliance with environmental regulation and human rights violations damages a company’s brand and reputation.

 

 

The convergence of globalization and other megatrends continuously increases the impact of supply chain disruption. As a result, transparency in the supply chain combined with proactive risk management provide companies with a significant competitive edge. Companies without a robustly integrated Supply Chain Risk Management risk revenue loss, supply delays and additional costs from supply chain disruptions.

 

Read about Supply Chain Risk Management as a competitive advantage in the context of global megatrends.

Impact of specific risks on companies and the economy

Megatrends impose specific risks with immediate and direct effects on supply chains. Natural disasters, financial instability of suppliers, changes to regulatory standards, unforeseen changes in buying behavior and geopolitical crises are just a few examples of how megatrends disrupt supply chains.

Examples of recent supply chain disruptions companies have been subjected to and the resulting economic consequences include:


 

Natural disasters:

In 2011 devastating floods in Thailand resulted in sales losses of $607 million and a reduction in the operating result of $ 225 million for Canon, the world’s largest camera manufacturer.
(Source: http://www.riskmethods.net/resources/research/supply_chain_failures_2013_final_web.pdf)

 

Strikes:

The longest strike in German history by train conductors and the GDL union resulted in economic damages of approximately $750 million euros.
(Source: http://de.statista.com/statistik/daten/studie/425415/umfrage/streik-gdl-kosten-wirtschaft/)

 

Industrial Accidents:

An explosion at a highly specialized Toyota steel plant in February 2016 led to supply disruptions that required Toyota to scale back global production by 4%.
(Source: http://www.reuters.com/article/us-japan-quake-toyota-idUSKCN0XE08O)

 

Geopolitical Instability:

Attempts by refugees and migrants to cross the borders between the European mainland and the United Kingdom in 2015 and 2016 caused waiting times of up to 2 hours (Port of Calais), 6 hours (Dover) and 9 hours (Eurotunnel).  The transport of production goods was massively delayed as a result.
(Source: http://www.telegraph.co.uk/news/uknews/immigration/11774895/Calais-illigal-immigrants-crisis-Army-on-standby-live.html, http://www.bbc.com/news/world-europe-35393423)

 

Read our Whitepapers with Spend Matters: Corporate Image & Compliance at Risk: How to Mitigate the Hidden Risks Lurking in your Supply Chain and Supply Chain Risk Briefing: The Most Effective Ways to Mitigate Supplier Financial Risk.

Sector-specific challenges

Certain industries are more vulnerable to specific risks than others, but every sector must consider unique regulatory and customer-specific requirements.

Automotive, hi-tech and electronics, production, and medical and pharmaceutical industries are a few of the sectors that are constantly confronted with threats to their supply chains:

 

AUTOMOTIVE

  • Stringent just-in-time / just-in-sequence requirements with steep penalties in the event of non-compliance
  • Intense price pressure resulting in suppliers’ decreased financial stability from Tier 2 on.
  • Single-sourcing strategy for the purpose of demand pooling / cost reduction, and consequently extremely long transfer periods

HI-TECH & ELECTRONICS

  • Long replenishment periods due to lengthy machine start-ups for series production
  • Plants producing electronic and semi-conductor components are located in territories prone to natural disasters
  • Supply and demand is determined by a small number of large enterprises
  • Price fluctuations due to cyclical fluctuations of supply and demand

PRODUCTION

  • High cost of shutdowns in production
  • Expensive crisis control measures
  • Superior quality standards certifications including the ISO 9001:2015
  • Increasing ethical and environmental regulatory compliance requirements

MEDICAL & PHARMACEUTICAL

  • Strict regulatory requirements
  • High quality standards throughout the entire supply chain
  • Capability to deliver medications indefinitely
  • Capacity to store high volumes of product
     

 

Some of these challenges can quickly stretch companies to their limits. Furthermore, the occurrence of risks can seriously impact on a flawless supply chain process. Proactive risk management and a corresponding identification and analysis of objects associated with risks are therefore particularly important.

Risks to the supply chain stretch companies past their limits and one risk event can derail an otherwise flawless supply chain. Proactive risk management combined with identifying and analyzing potential risks is critical to preventing revenue loss and preserving your brand.

Secure your supply chain now!

Would you like to learn more about supply chain risk management? Get an overview here.