A potent combination of geopolitical tensions, climate volatility and technological dependencies is putting global supply chains under more strain than ever before, according to a major report published by Airmic, in collaboration with AIR Worldwide, Gallagher, HDI, Lloyd's and Sedgwick.
The report entitled Complex Supply Chains in a Complex World, launched at Airmic's ERM Forum on 9 October, warns that a desire for low cost networks has led some businesses to turn a blind eye to, or miss, the concentration of risk that may be building up in their supply chain which could result in a catastrophic event that can bring operations grinding to a halt and inflict significant reputational damage.
Furthermore, with supply chains becoming increasingly complex and opaque, many companies are struggling to fully map their exposure, with over half of businesses failing to have visibility beyond their direct (tier 1) suppliers.
According to the report, recent trends putting greater pressure on supply chains include:
- The rise of nationalism, increasingly protectionist policies and Britain's departure from the European Union, which are threatening to roll back free trade, global supply networks and cross-border relationships.
- A volatile and more extreme climate, which is exposing the high volume of stock and supply routes that reside in areas exposed to natural disasters.
- An increasing reliance on technology, connected devices and automated production lines which has transformed the risk profiles of supply chains in recent years, leaving businesses vulnerable to an IT outage, cloud disruption or cyber attack either on their own business or on one of their suppliers.
"Most businesses have a good understanding of their suppliers, but how many track their suppliers' suppliers? The web of relationships in a typical modern supply chain is incredibly complex to unpick," comments Richard Cutcher, research and development manager at Airmic. "This report is designed to support businesses inject resilience into their entire supply chain."
Political risks and the escalating trade disputes have global companies "caught in the crossfire", according to Dr Kamban Parasuraman, principal engineer and manager at AIR Worldwide, and panellist the ERM Forum's supply chain workshop. "The evolving political risk landscape will continually force companies to move capacity and redraw the geographic footprint of their supply chains. Mitigating these emerging threats is key to sustainability."
The report, Complex Supply Chains in a Complex World, is a practical call-to-action to risk professionals and businesses to put in place a robust process for addressing risk in the supply chain. It includes advice on how to understand and manage supply chain risk, including lessons learned from the impact of the global carbon dioxide shortage in 2017, and advice for preparing for potential disruption from Britain's departure from the European Union.
The report also addresses how to ensure effective risk-financing is in place where necessary. "Standalone supply chain policies have been discussed for 10 years, but they remain uncommon and take-up is low," explains Iain Bell, director, Major Risks Practice, Gallagher. "Whilst a full risk assessment of the supply chain is necessary before buying a policy, insurers also need to address the buyer's principal concern, i.e. that any reduction in supply that leads to a loss of output or gross profit is insurable."
The report was published on the same day as new research from Lloyd's, supported by Airmic, which offers a model for quantifying risk within the supply chain. The study, Hidden Vulnerabilities in Supply Chain Risk: A Quantitative Risk Modelling Framework, presents a methodology designed to help (re)insurers to "understand risks and exposures more scientifically", according to Trevor Maynard, head of innovation at Lloyd's: "We hope that this will help risk managers build resilience into their businesses, and we are urging insurers, brokers and risk managers to work together to develop solutions."
Airmic's ERM Forum is an annual one-day conference for risk management professionals, focused on the most pressing, challenging or topical issues in enterprise risk management. The 2019 ERM Forum, The Agile Profession, took place on 9 October at etc. Venues, London.
Click here to download Airmic's report, Complex Supply Chains in a Complex World.