After decades of globalisation and a shrinking world, recent events point to supply chains becoming more localised, writes David Benyon, editor of Airmic News.
Seismic changes in the past year have driven organisations the world over to reappraise supply chain risks. The pandemic has compelled national governments to batten down the hatches in their attempts to contain Coronavirus. Barriers, checks and restrictions to international trade and logistics have resulted in predictable blockages and breakages in the supply chains of many organisations.
Globalisation has been seen as a dominant force in the last three decades, since the end of the Cold War opened up the last corners of the globe as emerging markets to international trade. However, a common response to 2021’s risk landscape seems to have been to localise logistical tails and rely on local providers, seen by some as safer options than global rivals that now seem risky bets.
The decline in global trade is much deeper than the overall economic downturn seen in 2020. The World Trade Organization, forecasts a drop in global trade flows of 13% to represent 32% of global economic activity in 2020. This is a historic reversal, as trade has accounted for between 54% to 60% of global economic activity in recent years.
“Supply chains have come under enormous strain throughout Covid with many impacted on both the supply side and demand side, creating the perfect storm for disruption," says James Crask, head of resilience advisory, Marsh.
“The Covid experience has demonstrated just how little we really know about our supply chains and how supply chain efficiencies can at times come at the price of reduced resilience. Whilst just in time techniques are unlikely to be completely replaced, Covid will undoubtedly lead much closer scrutiny over whether the balance between cost-efficiency and resilience is appropriate,” Crask says.
A significant proportion of organisations have responded to Covid by making changes to their supply chains, according to a report, “New challenges, new lessons: Covid-19 pandemic and the future of crisis management”, published by Airmic with Control Risks last year. The changes they were planning – from alternate suppliers to increased automation – can be seen in the chart below.
“An interruption to a supply chain can cause an array of problems – from loss of revenue and reputational damage, to breach of contract, loss of market share and damage to stock price protectionist policies were already threatening to roll back free trade and, with it, global supply networks and cross-border relationships,” the report added.
Coronavirus is only one factor among longer-term influences on supply chain risk. A report published by the World Economic Forum in September 2020 noted that once the Covid-19 pandemic fades away, protectionism will resume its role as the biggest threat to global supply chains.
Other geopolitical factors were already influential, to varying degrees, around the globe. In Europe, Brexit is an obvious factor that has led to supply chain uncertainties, from fisheries to financial services.
“The UK’s new trading relations with the EU and other countries is necessitating companies to review their supply chain risk management approaches to ensure operational KPI’s are met,” says David Stark, enterprise risk services practice leader, Marsh.
“Previous performance trends and supplier relationships may not be the same going forward, resulting in potentially increased volatility and financial consequences. For many companies this is being aligned to strategic and operational reviews on “make”, “buy”, “consolidate” with implications to risk appetite, supplier criticality, insurance and broader risk management and resilience,” he adds.
Supply chain relationships with China are also under review, strained by a range of factors, from protectionist tariffs to government security fears centred about espionage, intellectual property theft and the cyber-security of strategic infrastructure, such as major maritime ports and 5G mobile internet networks.
“It’s important to look at the potential effects of geopolitics on your business,” says Julia Graham, deputy CEO and technical director, Airmic. “China’s government and its relationships with Chinese companies could also bring about a sudden closure of a supply chain. This is not about protectionism but simply risk management. They could decide to cut you off because for whatever reason your company or your government has done something they don’t like.”
A trend towards bringing supply chains back home is also related to other factors. One is that businesses are going to greater lengths to demonstrate their green credentials and limit corporate carbon footprints.
“With many companies integrating Environmental, Social and Governance (ESG) goals within their strategies in 2021, attention is turning to the business impacts from and to supply chain parties,” says Stark.
“Therefore, sustainable and responsible supply chains are becoming increasingly important as part of customers ESG implementation and performance monitoring. This is typically covering factors such as carbon emissions, waste reduction, climate risk vulnerabilities from natural catastrophes, fair and equitable working conditions, pay and representativeness,” he adds.
A shorter logistical tail can also mean more visibility and transparency that might be missing for suppliers overseas. In the wake of the Tohoku Tsunami in March 2011, for example, Japanese car manufacturers and electronics firms moved their warehouses producing key components overseas. They chose Thailand, but did not realise the locations of these new plants were on floodplains – until they were submerged by Thai floods in June that same year.
“A shorter supply chain can mean you have much better knowledge, vision and the ability to easily check on what you’re doing and the site you’re reliant upon. Further from home and further down the chain, the harder it is to exercise the same level of assurance,” Graham says.
“Increasingly, people want the comfort of that assurance. The word that comes up again and again for the global risk horizon is uncertainty. In response, risk appetites have dimmed. One manifestation of that is a more conservative approach to managing suppliers,” Graham adds.