Dealing with disrupted supply chains in a complex world
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As supply chains become increasingly complex and suffer disruption, how can businesses respond?
COVID-19 has had an unprecedented effect on global supply chains, causing disruption across the world and interrupting many business operations. According to a Business Continuity Institute (BCI) report, 73% of organizations reported that COVID-19 caused a detrimental effect to their supply chain[1]. A McKinsey Global Institute report also found that supply chain shocks are becoming more frequent and severe[2]. As a result, the need for businesses to invest in resilient supply chains has arguably never been more important and numerous organisations have started a process of re-evaluating their exposure to ensure future business continuity.
Localisation or Diversification, That is the Question
In 2020, we are seeing more companies and countries considering solutions like re-localisation and diversification to build resilience and mitigate supply chain disruption. For example, the Japanese Government is currently in the process of providing funding to encourage Japanese businesses to assess their supply chains and possibly re-shore or diversify them[3].
While localisation may be a tempting solution for some organisations, it is one that often ignores how COVID-19 has affected all regions across the planet. For instance, there would be no benefit to returning a supply chain to the home nation of a company, only for a local wave of coronavirus to take the facility offline and in effect make the re-shoring process both costly and ineffective. Business leaders are, therefore, challenged with carefully evaluating whether a localisation strategy is a sensible investment, given its potential to alter the level of risk a supply chain is exposed to.
Although COVID-19 has disrupted some elements of globalisation, it is probably a step too far to say it is doomed. There are still many benefits to having global, diversified supply chains in place. Diversification can mitigate exposure to singular hazards, as organisations can create supply chains which can potentially still function even if one location is forced completely offline. If this does occur, due to a local outbreak of coronavirus or a natural catastrophe, having access to multiple locations and suppliers can reduce the risk that the incident will wipe out the operational ability of the entire supply chain.
No matter which choice organisations make, they need to understand the risks present within their supply chains – be these risks linked to COVID-19, natural hazards, or climate change – and should take steps to mitigate them.
Resilience Means Being Certain in the Face of Uncertainty
The resilience of a country’s business environment matters for businesses planning where to locate a particular supply chain. One tool that can help organisations better understand a country’s business resilience and gain critical insight to inform strategic decisions is the FM Global Resilience Index.
The FM Global Resilience Index compares risk in nearly 130 countries, by providing insight into a range of drivers which can impact supply chain resilience, such as control of corruption, quality of infrastructure, natural hazard risk quality, corporate governance and supply chain visibility. This information can provide an indication to business leaders of where potential “pinch points” in supply chains could be, as well as highlighting which countries may represent less risky locations to site suppliers.
Beyond evaluating the resiliency of a country’s business environment, business leaders should also map out the multitude of risks that their operations could face and ensure they are prepared to withstand them. COVID-19 has captured recent headlines, but the mounting impact of climate change and cyber risks also pose issues for supply chains.
A recent FM Global survey tells the story. More than 3 in 4 (77%) CEOs and CFOs of the largest companies in the world admit their firms are not fully prepared for the adverse financial impact of a changing climate. Moreover, 8 of 10 (82%) believe that their companies have somewhat to no control over such an impact on their businesses.
Fortunately, most losses stemming from climate-related events are preventable, and loss prevention can help preserve a company’s value and resilience, especially during the pandemic. However, the challenge many companies will face is adequately preparing for such events if stay-at-home orders remain in place, which could exacerbate the impact climate-related events have on an already fragile bottom line.
And then there is cyber-risk, which is one of the most potentially damaging hazards that business leaders and risk managers face. The World Economic Forum estimates that cyber damage in 2021 could reach $6 trillion – that’s equivalent to the GDP of the world’s third largest economy[4]. The ability for a cyber incident to easily cross borders, crippling multiple operations and systems around the world, means that the impact of an attack can be devastating to an organisation’s supply chain.
Although the situation is complex, there are several security measures, grounded in good practice, that businesses can take to reduce mitigate cyber risks. These include implementing measures to ensure that IT and operational technology (OT) systems are kept as separate as possible – both in terms of connectivity and physically – as well putting in place systems that can identify and alert the organisation when a cyber-attack has been attempted. Firewalls and other VPN security measures are also vital, and it’s important that these systems are updated and configured to deal with the greater volume of outside traffic that COVID-19 may have caused. As always, the training of employees and anyone who may have access to secure systems is critical. Trainings through techniques such as fake phishing emails can be very valuable, as they highlight to employees the need for vigilance. Finally, should a successful cyber-attack occur, organisations need to have plans in place for how they respond – both in the short-term when dealing with the attacker and the potential damage that might be caused – but also looking further ahead, to understand how the attack occurred and how to stop it from happening again.
Prevention is Better Than the Cure
Although there are no simple answers when it comes to mitigating potential supply chain disruption, businesses can follow certain core principles to reduce their exposures and ensure business continuity. Investing in resilience should be at the heart of any strategy, as organisations could take steps to de-risk their supply chains. The key is backing up any decision with sound data and an appreciation of the exposures that it creates. If there is one learning which COVID-19 has highlighted to the business community, it is that resilient organisations do best.
[1] https://www.thebci.org/news/3-out-of-4-supply-chains-adversely-affected-by-covid-19.html
[3] https://www.ft.com/content/4ee0817a-809f-11ea-b0fb-13524ae1056b
[4] https://www.weforum.org/agenda/2020/01/cyber-risk-assessments/