The hard truth about supply chain risk!
Sabine VanderLinden
Activate Innovation Ecosystems | Tech Ambassador | Founder of Alchemy Crew Ventures + Scouting for Growth Podcast | Chair, Board Member, Advisor | Honorary Senior Visiting Fellow-Bayes Business School (formerly CASS)
In December 2021, Walker was at the center of a crisp shortage. Yet, the problem had nothing to do with congested containers, lack of lorry drivers, or our pandemic-filled world of supply chain issues. A computer glitch caused this circumstance following an IT upgrade made by its parent company, PepsiCo.
In Q2 2022, Apple had difficulty meeting iPhone, iPad, and MacBook Pro demands due to supply chain constraints. These will worsen in Q3 2022. Apple CFO Luca Maestri said that Covid disruptions in China and silicon shortages make it difficult to make enough products to satisfy customer demand. The supply constraints will cost Apple $4 to $8 billion depending on how long it takes suppliers in China to get back up and running.
Supply chain management was once a logistics management process confined to the job description of a few. Now, supply chain management is far more prominent. Individual consumers are aware of supply chain problems in a way they have never been before, and supply chain management has become a hot geopolitical and social topic as well as an economic one too. And as a result, supply chains have increasingly become worthy of our attention as an emerging risk.
As McKinsey shares
"The world is getting riskier."
Today's supply chains are inherently more complex. They face significant challenges across multiple geographies, which is where data-driven real-time technology solutions could be helpful. Indeed, let's argue that many specific micro risk types feed into supply chain risk as a melting pot where hazards become an entirely new reality.
Think about this scenario
Whether the conflict in Ukraine or the pandemic, global events have brought supply chains to the front and center – such as the ongoing chip shortage that started in 2020.
This alone is expected to cost the auto industry $210 billion in lost revenues – and the shortage has already impacted over 160 other industries.
"Can you imagine the scale of the challenge?" shares Shruthi Rao from Adapt Ready.
Corporate risk managers are struggling with unprecedented supply chain disruptions and do not always know how to deal with those effectively and rapidly due to gaps in the information supplied. Further, this uncertainty creates significant emerging risks that most insurers cannot cover yet.
What is supply chain risk?
Multiple times every day, in many ways, global supply chains are exposed to risks. Anything that challenges the smooth operation of the supply and demand of goods and services drives value chain and supply chain management risk. A risk can be a geographical hazard preventing the effective movement of goods or staff shortages on production lines.?
Today, it could also be caused by technologies through inefficiencies, security risks, downtimes, and cloud outages share Ori Cohen, co-founder and COO of Downtime insurance, Parametrix.
In short, a supply chain risk disrupts the flow of goods and access to parts, raw materials, or information as they travel among suppliers to the final destination. When disturbed, this process results in significant financial losses and commercial impact.
The types of supply chain risk
The different types of risks across the entire supply chain include:
Economic instability resulting in economic and financial risk
From changes in exchange rates to a provider within the organization's supply chain going out of business, myriads of economic and financial risks come from all angles.
Economic instability drives difficulty throughout the typical supply chain, even very far away from the source. For example, the bankruptcy of Hanjin Shipping reduced global supply chain shipping capacity by 3%, leaving $14 billion in cargo stranded and unable to dock. The World Economic Forum lists economic risk as one of its three main challenges for supply chains in 2022, giving the example of Brexit as one of the critical sources of future financial constraints.
Environmental, extreme weather, and climate risk
Highly topical in current times, we need to consider environmental risk from two distinct viewpoints. First, natural disasters (e.g., droughts, storms, floods, and wildfires), climate change, and the overall environment create risks to different supply chain segments by preventing products from being transported to their delivery point. Climate change and its impact on extreme weather events are troublesome for supply chain performance. Then there is the risk of supply chain processes, logistics management, distribution centers, and supply chain partners contributing to man-made disasters due to error or negligence (e.g., leaking chemicals into waterways.)
In hand with this, a risk to global trade is our ability to carry out sustainable practices within supply chains and operate with environmental responsibility. Pressure is on for countries to meet emissions targets in light of COP26. Indeed, Forbes calls sustainability the challenge of this decade for supply chains. Supply Chain Management Review lists worldwide water instability as one of their top supply chain risks for 2022, stating that two-thirds of the world's population will experience water shortages by 2025.
Socio-political risk and governmental changes
Learning from recent events, existing governments, changing regimes, and varying social conditions require policy adaptation and pose risks to societies. Europe's energy supply is still too dependent on fossil fuels, and 90% of its oil and over 60% of its gas needs to be imported from overseas, particularly from Russia, resulting today in the significant rethinking of supply chain strategies for all European governments.?
Supply Chain Game Changer lists this concern as the number one supply chain risk in 2022.
We already highlighted the current political instability with Russia’s invasion of Ukraine. Let's remember that the UK's recent experience of Brexit also heightens supply chain issues as new rules are redefined on the supply of goods between the UK and European countries.
Scheduling risk
More targeted supply and customer demand issues create dependencies among interconnected projects to ensure they run smoothly. Unfortunately, these fail often due to poor management practices by those overseeing the schedule, events outside of the project scope and the complexity of those less controllable parameters affecting projects. The latter relates particularly to natural disasters, changing demand planning, and the lead time required when forecasting future access to critical production parts.
Legal and ethical risk
Regulatory and contractual risks can riddle business processes with red tape, audits, and compliance. Disputes can heavily impact them. Ethical risks can result in reputational damage and can crossover with legal risks.
Cybercrime, digital interconnectivity, and data integrity risk
Technological and data risks cover the risk of failing technology, inability to adopt new technology, and cybercrime risk prevention. Digitization has undoubtedly sped up over the past two years resulting in increased use of cloud computing and the unexpected side effect of a cloud outage. Since the beginning of the year, companies such as Apple, AWS, Google, IBM, and Microsoft have experienced significant cloud outages, which certainly impacted those companies with supply chain dependencies. For example, AWS has a 40% market share of the cloud market and more than 1 million customers. More than 95% of the Fortune 500 rely on Azure, Microsoft’s cloud services platform. Shopify, the e-commerce platform, supports about 800,000 merchants in the U.S. alone by depending on Google's Cloud Platform.
This interconnectivity intensifies the risk when key elements of this supply chain are attacked. In this context of insurance, the main point of exposure to this dynamic is the dependent and contingent business interruption coverages in cyber policies.
Ori Cohen, Parametrix
Supply chains are becoming increasingly vulnerable because of the reliance on open source technology and the increased volumes of active cyber-attackers. Industry 4.0 continues apace, exposing supply chain professionals to handle emerging risks and new hazards.
Human behavior risk
Supply chains are affected by business and manufacturing processes relying on the human touch. Indeed human behavior and decisions across value chains present risks that are not always easy to predict. Skills shortages often mean that companies apply shortcuts to address their talent gap resulting in poor judgment when making decisions and potentially in human errors and injuries.
Often risks don’t exist in isolation from each other. For example, an environmental hazard such as flooding at one location can lead to increased financial and scheduling risks throughout the supply chain. Risks can come from within your operations. While these operational risks are within corporate control as they are internal, they are also affected by less controllable external risks arising outside the organization's walls. These threats require improved approaches to risk management, including evaluating ways to transfer risks arising from supplier and partner relations. These new approaches have become essential despite the lack of clear answers to date.
What causes supply chain risk?
It is not simple to evaluate the above risks and define adequate strategies. Some good examples of why supply chains get negatively affected by risks include issues such as:
Risk mitigation today consists of a three-pronged approach.
Maybe one of the reason why data science practices are still such an important part of the equation. The second part is to use the more relevant pieces of information to redesign the supply chain journey and give risk managers access to real-time data a differentiator in planning supply and demand, unit economic costs, and future pricing. Leandro Dallemule from Planck
Organizations must raise their game with supply chain risk management and consider mitigating those risks via improved internal practices and risk transfer mechanisms. The latter reduces the potential damage should a risk turn into a reality, positioning them with a significant competitive advantage and improved reputational standing.
What can corporations do to mitigate supply chain risk, and what are some market players doing now?
A strategic approach to risk management is essential. Strategies should look to assess, quantify, monitor, and mitigate the risk of the suppliers. The basic premise of all supply chain risk management should be to build greater resilience within your supply chain.?
Consider these strategies to mitigate and reduce your supply chain risk.
Focus on scenario planning
Plan for the worst and hope for the best. You need to identify and address potential risks in advance, then have an action plan ready to swing into action should those risks become realities. Likewise, plan your response to specific events in advance. Remove the guesswork and put contingency plans in place.
Diversify your suppliers across the supply chain
Don't put all your eggs in one basket! Spread a load of supply chain risk by utilizing multiple suppliers. In this way, local issues are less likely to be as impactful. This should extend to replacing suppliers in the pipeline, should you need them. Do your homework so that you aren't scrabbling around for information when you need to make a change. Use supply chain mapping tools to simplify the process.
It’s worth using a metric called Value at Risk (VaR), established by the Association for Supply Chain Management (ASCM). It enables you to compare the different risks associated with diverse suppliers.
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Furthermore, building more local elements to your supply chain through onshore and nearshore processes may be beneficial too.?
Improve visibility
Risks shouldn't catch you by surprise. You should see every aspect of your supply chain and clearly determine when and where something goes wrong and what it will impact. Transparency allows you to deal with rising issues before they become full-blown catastrophes.
Include strategic suppliers in the decision making
It's easy to consider supply chain risk management as a top-down process. Still, it is much more effective to view it as a circular process where individual suppliers must be involved in risk mitigation strategies. Share the responsibility and build relationships where risk management is a vital part of the process. The latter will help you identify genuine suppliers and business partners truly vested in both parties' success.
Shift from Just-in-Time (JIT) to Just-in-Case (JIC)
JIT inventory planning has been the trend of recent years used by manufacturers of goods, but the pandemic showed us that this is fraught with risk. More and more companies are moving slightly away from the JIT model to building agility in their production, packaging, storage, and distribution by holding slightly more stock in line with the JIC model. It’s the basic concept of creating a buffer zone.?
Pay attention to cyber security risk
As organizations increase their adoption of Industry 4.0, they must simultaneously improve their cyber risk mitigation practices. Strengthening cyber security defenses will require ongoing internal and external ingenuity with regular reviews of both potential risks and strategic responses.
Engage with unique strategic partners
Startups set the trend for how we should be addressing supply chain risk too, and leading investors can predict the business model patterns that single industry experts do not always see.
While we still need to find ways to integrate all this great thinking and develop more consistent interoperability standards, startups have so much to offer.
Here is a small sample of those startups focusing on Supply Chain risk. If you dive into each site and then check the founding teams, you will note a best-kept secret. Approximately 50% of female founders lead the selected ventures below. Many of us will be able to meet many of those founders at ITC Vegas 2022!
Data Mapping
Riskmethods is an AI & cloud-based supply chain risk management software. It provides geo modeling capabilities with an interactive world heat map and offers features including supply chain visualization, scorecard, analytics, and automated data capture. The platform helps maintain business continuity and efficiencies while avoiding costs.
With a clear focus on the insurance professional, Maptycs provides geospatial risk visualization and advanced analytics technology to help risk managers better understand property risk exposure in real time. The technology integrates its own proprietary Geographic Information System (GIS) along with a broad set of algorithms to deliver a high level of performance while managing large volumes of data.
Data and analytics
Adapt Ready offers supply chain models and climate resilience solutions via its risk intelligence platform, giving real-time insights to increase the predictability of business interruption directly resulting in financial losses. The insight provided by the platform helps insurance companies deploy risk mitigation strategies through the analysis of data collected from many external data sources able to predict supply chain risks to make decisions more actionable across multiple locations.
Concirrus has been recognized as the partner of choice for providing risk mitigation solutions enabled by IoT-powered commercial insurance. Many leading London and Global insurers are partnering with Concirrus to gain access to its data-driven digital insurance platform to provide advanced analytics for specialty insurance.
A unicorn business in supply chain resilience, Interos has developed an AI-led planning and analytics risk management solution. It uses a SaaS platform to model and map the ecosystems of companies within the aerospace, defense, and finance. Interos detects a range of vulnerabilities before they impact operations. The platform drills into different supplier relationships in a way that human labor simply can’t.
Supplier relationship and reputation management
Avetta is a supplier pre-qualification system that reduces supply chain risk across several sectors, including oil and gas, building materials, construction, utility, energy, manufacturing, and transportation. The company provides a cloud-based risk management platform that evaluates and mitigates risks arising from engagements with business partners. With a strong focus on supplier management, the platform validates, onboard, and interacts with business partners, stores and verifies insurance documentation, and delivers health and safety statistics while ensuring that regulatory requirements are understood. It also assists partners with safety management system programs and policies.
Digitalis operates within digital risk intelligence by providing online reputational management, online narrative management, and risk intelligence management. Digitalis is an advisory service helping businesses stay safe online.
The right risk management partners for organizations will depend on multiple factors, but it is interesting to see the emerging players in the field.
Embedded cargo insurance
Parsyl provides real-time data-powered cargo tracking, monitoring, and management solutions using physical parameters such as temperature, humidity, pressure, or light exposure. The company increases supply chain visibility, which is essential to assess, predict and reduce risk. It's worth noting that Parsyl offers insightful real-time tracking and modern supply chain products, including embedded cargo insurance and risk transfer solutions for refrigerated cargos.
Parametric
Otonomi is?a blockchain-enabled parametric platform that transforms air cargo insurance policies into fast, cost-effective digital products for policyholders and insurers. Its parametric products bring operational & financial efficiencies across multiple industries. Otonomi offers solutions for insurance distribution, claim automation, predictive analytics, and risk management. Its solutions include flight delay insurance, parametric coverage such as covid-compliance monitoring coverage, IoT, and smart device protection.
In the aftermath of the pandemic, a new order has taken place globally: rampant inflation, international tensions, political fragmentation and supply chain crisis. Logistics operations have been challenged to their core and nearly $10 Billion USD of losses were estimated on the back of container delays and supply chain interruptions. Corporations of all sizes suffered the brunt of the recent signs of a global recession and yet have been trying to get a grip in generating revenues, managing operations, finance?and insurance coverage. Regretfully, insurance contracts have continued to bring their share of opacity and cost inefficiency due to excruciatingly protracted processes.
Yann Barbarroux, Otonomi
Parametrix provides an online insurance platform for cloud infrastructure-dependent businesses as companies outsource their IT services because it is more cost-effective and reliable and allows them to focus on their core business. It provides instant settlement insurance for cloud computing, web hosting, applications, SaaS, PaaS, and IaaS downtimes such as cloud outages, network crashes, and platform failures. It offers coverage based on size, industry, business type, and automatic claims processing services.
Traditional insurance practice did not contemplate the dependencies observed in the modern digital supply chain and does not provide the tools to detect, quantify and manage exposure to risk aggregation. Our approach at Parametrix allows tracking of direct and indirect dependencies in the supply chain to which they are exposed, thus allowing them to quantify and manage their risk accumulation. Ori Cohen, Parametrix
No surprise: Effective supply chain management requires digitization and lots of moving parts
Increasing our awareness of and using digital solutions to gain insight into growing and emerging supply chain risks is essential. As we get a better understanding of the root causes of supply chain management problems as they appear, new solutions will come to light able to help us navigate the changing landscape and mitigate these risks so that our supply chains can function reliably and securely now that we understand the world of supply risk is here to stay.
It's become incredibly overdue to embrace emerging technologies, hardware, software and middleware to help propel the transportation sector into the 21st century. By using technologies in their supply chain, industry players now have a better lens on their processes and a better visibility on the delays they must deal with. Now they just need to manage their risks.
Yann Barbarroux, Otonomi
Want to find out more:
If you are interested in the topic of sustainability, ESG, and supply chain risk. Listen to podcast 25 to 30 of Scouting for Growth where I talked to market experts and colleagues on issues that we are facing right now and the opportunity.
Managing Director, AI & Data
2 年Awesome article
Innovating at the Edges | Digital Strategist | Digital, Innovation, Strategy, Finance, Operations, M&A | BreakerofStatusQuo ??| Insurance, Banking, Health, Geospatial | Farmers, MunichRe, PwC
2 年This piece is amazing Sabine VanderLinden; love your lens and I’m keen to see how we as insurers can leverage real-time data and information streaming to disrupt supply chain management turning it more real-time based leveraging futures and derivative concepts to help lower the cost of repairs ?