Companies are increasingly vulnerable to indirect supply chain disruptions and need to factor this into their supply chain risk management.
The Business Continuity Institute (BCI) highlighted the issue in a report published earlier this year titled “Supply Chain Resilience: 10-Year Trend Analysis.”
The report found that the percentage of disruptions caused by direct suppliers (Tier 1) had fallen from 60.1% in 2010 to 52.1% in 2018. But in contrast, it also discovered that a higher percentage of disruptions was coming from suppliers of suppliers (Tier 2), and in turn from their suppliers (Tier 3).
The BCI said that between 2010 and 2018 the percentage of disruptions caused by Tier 3 suppliers rose from 8.4% to 11.0%.
Despite the increasing complexity of supply chain risk management, it seems executives in C-suites could do more to address the issue directly.
Supply chain risk management still lacks boardroom priority
The BCI report found that board-level commitment to supply chain risk management remains patchy. In 2013, only 34% of BCI survey respondents said their organization’s top-level management had a “high” commitment to supply chain risk management. Five years later, in 2018, that figure had remained almost static at 35%.
This is even though in 2018, 57% of organizations said they had suffered a supply chain disruption. The impact of these disruptions, no matter from which part of their supply chain they arise, included:
- Loss of productivity
- Increased cost of working
- Impaired service outcomes
- Customer complaints received
- Loss of revenue
- Delayed cash flows
- Damage to brand reputation
- Shareholder/stakeholder concern
- Product release delay
- Increase in regulatory scrutiny
Challenges to overcome
So, what is stopping companies from getting on top of their supply chain risk and building resilience into their operating model?
In 2019, global consultancy McKinsey blamed what it called a “lack of robust processes to identify and successfully manage growing supply chain risks as the world becomes more interconnected.”
Elaborating, it said the number of supply chain participants made it very difficult to create full transparency, while data restrictions and corporate sensitivities further restricted the ability to see deep into a supply chain. There was then the challenge of accurately assessing the scope and scale of potential exposures.
Detailed supply chain mapping will help companies identify the risks in each link, and impact analysis of potential supply chain disruptions will assist them in understanding the most appropriate risk management strategies to employ.
Such an approach will also create a more risk-aware culture within a business, and this is an important step in building resilience against unknown risks that arise out of the blue.
Analytic tools to help understand supply chain exposures
Developments in risk analytics are making it possible to assess more accurately the potential vulnerabilities in a supply chain.
For example, FM Global’s Resilience Index ranks almost 130 countries and territories using a large number of economic, risk quality and supply chain metrics. The annually updated index allows C-suite executives to assess weak spots within their own organizations and supply chains. It also provides valuable insight to those evaluating the risks associated with future expansion plans.
Discussing 2019’s results, Kevin Ingram, FM Global executive vice president and chief financial officer, highlighted the fact that improving corporate resilience was a choice that progressive organizations can make.
He said, “Resilience is critical for CFOs as trade conflicts, weakening economies, national elections, Brexit and evolving climate risks prompt companies to rethink their locations and partners. We believe resilience is a choice that industry leaders make, and the Index gives executives one more tool with which to make good decisions about their futures.”
Looking specifically at climate risk, one of the risks highlighted by Ingram, Sir James Bevan, chief executive of the Environment Agency, said recently, “Climate change is likely to mean more frequent and intense flooding.”
According to Met Office records, there have been 17 record-breaking rainfall months or seasons since 1910 in the U.K. Nine of them have occurred since 2000.
In 2018, Munich Re registered 850 natural catastrophe events. Floods, flash floods and landslides made up 46% of the total, underscoring the threat flooding poses to global supply chains.
To help companies understand the risk of flooding, FM Global has developed a Global Flood Map that offers a worldwide view of moderate- and high-hazard flood zones across the globe.
It is just one of many tools and resources that FM Global has developed to help companies understand the risks they face and improve their supply chain management and resilience.
FM Global also offers policies that provide coverage for disruptions arising throughout a supply chain (Tiers 2 and 3) and not just those occurring at direct suppliers (Tier 1).
Companies that take advantage of these tools and implement well-designed insurance programs will put themselves on a more resilient footing in today’s uncertain world.
FM Global’s Resilience Index: Make a resilient decision
Global Flood Map: Are you in or out?