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Evaluating Supply Chains in Light of Emerging Risks

The integrated nature of supply chains worldwide has made it clear that organizations need to be monitoring the emerging risk in all the geographies where their supply chain operates.

Supply chain risks — internal and external —  threaten business continuity and complicate operations management. Organizations should be forecasting how supply chain environments will change and expand, but that is becoming increasingly difficult because of the unpredictability of economic, social, and political events, and natural disasters.

For most risk managers, developing a model to quantify the risk is an excellent place to start. If an organization can understand and measure the financial impact of supply chain disruptions, they can prioritize responses and establish controls. Here are some of the gaps risk managers often miss when evaluating supply chains and the threats they face.

Consider the Impact of a Global Threat

In the past, organizations have looked at supply chain exposures individually; now, risk managers must take a global perspective when considering vulnerabilities. This global approach is more necessary than ever before because of the COVID-19 pandemic, as well as rising trade tensions worldwide.

In response to the COVID-19 pandemic, many countries are focused on establishing supply chains with local companies to maintain access to medical equipment and pharmaceuticals. Travel restrictions further complicate supply chains, and those restrictions may persist well into next year.

Even when the pandemic fades, organizations must still contend with a U.S.-China relationship that could interrupt international trade flow. This volatility has many organizations considering the pros and cons of sourcing their materials closer to home.

A domestic supply chain also has its own set of risks, especially if companies have been geared to sourcing internationally. The financial impact of shifting supply chains can be significant in normal times. In times of crisis, the costs can be even greater.

Organizations must weigh the benefits of these capital-intensive projects against their costs. For many companies, mitigating supply chain risks with alternative sourcing plans and business interruption coverage may be more cost-effective than retooling their operations to manufacture or produce domestically. 

Calculate the Tradeoffs of Centralization

Cost savings of supply chain centralization may not be worthwhile if a disruption would threaten business continuity. Many companies have built a competitive advantage around their supply chain capabilities, whether they are centralized, such as in a hub-and-spoke model, or an asset-light and just-in-time model to reduce inventory. The tradeoffs and advantages of centralization depend on the industry and organization.

Detailed capital planning can help diversify an organization’s supply chain either away from centralization or toward it, depending on its needs. Either approach generates some manner of risks. For example, concentrating in one geographic location can expose a business to more risk from natural disasters. Meanwhile, a weak link in a global supply chain without redundancies may easily break because of regional conflict or trade embargo.

Organizations should conduct extensive risk modeling and impact analysis of their supply chains to understand the weaknesses, as well as the likely costs to prevent or mitigate any damage from a business interruption.

The stakes are high with supply chain risks because of the amount of capital involved in creating and maintaining them.

Account for Long-Term Risks

It’s relatively easy to evaluate short-term risks, but it’s essential to dedicate time to evaluating longer-term threats on the horizon too. Supply chains are like spider webs. You can gather decision-makers in a room to discuss how the web works, but unknowingly miss a thread that holds the web together. Risk managers who go deeper into understanding the dynamics of their supply chains are better positioned to face emerging risk.  Supply chain risks are multi-faceted and can encompass, among others, property, casualty, marine and cybersecurity exposures.

An in-depth analysis starts with assessing the exposures, controls and coverages across the supply chain and looking for gaps. Risk managers must then define how they and their organizations plan to mitigate and transfer supply chain risk. The complex and capital-intensive nature of some supply chains means that risk mitigation strategies should examine all the options, including alternative risk financing and captive utilization if traditional insurance markets are not cost-effective.

Evaluating supply chain risks takes a team of specialists, including engineers, actuaries, accountants and risk managers. Organizations that conduct supply chain studies can help identify gaps and strengthen controls and coverages with a stronger return on investment and more protection against emerging risks. A comprehensive approach to supply chain risk will improve an organization’s resilience and help lower its total cost of risk.