The Black Swan is back – risks in the Supply Chain. The ‘Black Swan’ symbolizes the return of unpredictable incidents with severe and far-reaching impacts. And it happened. Due to Covid-19, the lockdown of cities, regions and factories in the 1st quarter 2020 the world industry suffered from a historic supply chain shock. The Russian aggression in February 2022 on Ukraine caused a disruption of global supply chains. Grain supplies were suspended and gas and oil supplies sanctioned. The delivery with goods, material and upstream products could not been guaranteed any more. The ‘Black Swan’ came back.[1]
Today, trading ships on their way to the Suez Canal are threatened by drone attacks. Due to low water levels caused by the El Nino effect, the number of passages through the Panama Canal had to be reduced.
[1] See also The year 2021 in retrospect: Cause and effect of supply chain disruptions - Prewave
And 2023, since the Ukraine war breaking out, cyber-attacks on critical infrastructure have increased. “We’re tracking a notable increase in the frequency and sophistication of supply chain attacks: Cyber criminals are targeting an already stressed supply chain, whether it be the port of Hamburg in Europe or IT at the port of Bangladesh in Asia.”[1] This can lead to significant production losses.
Violations of ESG (Environment, Social, Governance) guidelines may become risk factors for supply chains in the future. Namely, when non-compliance with air and water pollution, high energy consumption, waste disposal and forced labor in the supply chain are reported. “Non-compliance with ESG requirements can threaten the existence of companies”[2].
The experience with the Covid-19 policy in China has shown that the measures taken are neither uniform nor predictable. As a result, many semiconductor chip manufacturers have left the country. New production facilities are being built around the world, partly with state funding; construction time approx. three years. Until then, there are still increased supply chain risks for various industries, such as medicine, automotive or mobile communication.
Infrastructures devastated by storms, flood disasters and entire regions in the grip of heat waves, droughts or forest fires: Extreme weather events like these have increased significantly in the recent past. As a result, production facilities are paralyzed. And, regardless of whether goods are delivered by land, air or sea: All delivery routes could be affected in extreme weather conditions.
Large scale labor strikes, but also labor shortages across many western countries hit the transport sector for days and weeks. As a consequence, companies could not deliver their products, store shelves remained empty. Indirectly the disruption led to cargo theft and petty crime.
Risks & Opportunities & Recommendations
These significant disruptions to supply chains are causing producers to rethink their security of supply of upstream products and raw materials.
Risks: Insecure supply chains endanger numerous areas of the business. Just-in-time production is undermined when supplies are too late and too little is delivered. If there are not enough stocks, production can also come to a complete standstill. Customers cannot be supplied. Supply bottlenecks occur. This has serious consequences for turnover, profit expectations and the reputation of the company.
Opportunities: It is obvious that if a company is able to react to supply bottlenecks in good time or is prepared to compensate for such interruptions in the supply chain, then the negative consequences for production and supply security are low. This strategy also leads to an assessment as a reliable partner and thus to competitive advantages over competitors.
A symbol for supply chain disruption.
Source: Canal de Suez : L’impact du blocage de Ever Given sur l’Algérie (dzairdaily.com)
Recommendations: The first step is to analyze the company's own supply chain. It is essential to identify the sensitive primary products, critical suppliers and regions. However, there are many other factors, which affect the safety level of the supply chain. These include the number of potential suppliers, the number and quantity of pre-products required, the level of stockholding along the supply chain and the volatility of expected demand.
What are further recommendations for securing supply chains? Risk management concerning the supply chain has become a permanent task in recent years. Therefore, it is necessary to establish a risk management task force and related processes in the company. The supply chain risks should be quantified, assessed and justified. And, the supply chain must be permanently monitored.
The findings and recommendations of the task force will become a valuable contribution for strategic decisions. These could be:
- Strengthening the diversification of suppliers and regions
- Better cooperation with suppliers, but also their monitoring
- Shorting of the supply chain in order to reduce potential risks
- Creation of technical and personnel prerequisites in order to prevent dangers in one's own company (e.g., shortage of skilled workers or cyber-attacks)
- The creation of a risk culture in the company
The faster and the more ambitious your C-suite establishes a risk management system, the better your risk prevention, the earlier you discover critical events and the sooner you will be able to react. A powerful competitive advantage.
[1] BSI, Supply Chain Insights Report, January 2023, p. 14.
[2] Gunter Lescher, Partner Forensic Services at PwC Germany
This was the report ROM_02 – Supply Chain. We analyze megatrends, external disruptions, and internal organizational processes for their impacts on business risks, but also opportunities. The intention will be to give impulses to make companies fit for the future.
You are invited to participate in the discussion and contribute your experiences and examples. In doing so, you will be helping to expand and improve the knowledge about risk and opportunity management.
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