What are the key global supply chain risks?

Published by Ngoc Tran on 13 February 202313 February 2023

In the past few years, multiple organizations have been hit by different kinds of unforeseen global supply chain risks and vulnerabilities. These challenging events have also occurred simultaneously or in sequences, and companies might have not been well-prepared enough to handle and bounce back. Therefore, this post will go through the four key global supply chain risks, together with examples and inspirations for solutions.

#1: Environmental risk

Natural disasters, climate change & pollutions, pandemic are typical examples of this kind of risk. Since these events are unpredictable, it’s quite challenging to handle them properly. The blockage of the Suez Canal is an example when many firms unexpectedly experienced higher costs and negative impact on their reliability as well as customer satisfaction. Another case is extremely low water level in the Rhine River in August 2022 scaling down ship capacity, thus increasing costs yet lowering efficiency. These events have caused congestion and delays, which was sensible to result in a significant rise in container rates and air cargo. However, not many companies were able to face up to the far-reaching consequences of the environmental risks. Therefore, it’s worth paying attention to these signals to make the next moves. In short, although we cannot fully foresee these events, it’s worth paying attention to these signals to make the next moves. Another way of dealing with environmental risk is to learn from the past and have precautionary plans. For example, to prevent production suspension caused by natural disaster like the 2011 Tohoku earthquake and tsunami, companies can first check high-risk areas of n-tier supply (see Definitions) and manufacture. Additionally, they can collaborate with relevant departments to develop a business continuity plan (BCP). Other solutions that can be considered are purchase of cargo or freight insurance, development of a backup data resource, etc.

#2: Economic risk

This risk consists of some sub-risk components, such as political changes, demand and supply disruptions, oil & fuel price fluctuation, inflation, etc. In case of political changes like Brexit, we see that this event has caused an adverse effect on international trade, creating more cost and trading documentation processes, and changes in political regulations. The trade war between US and China also exposed restrictions on variable products. On the other hand, a noticeable example of demand-supply imbalance is the shortage of semiconductors in technology and automotive industries. The emergence of Covid19 caused lockdowns in China, the world’s largest semiconductor production. As a result, production of smartphones, PCs, cars have been suspended, which contributed to the global economic slowdown. Moving to oil & fuel price volatility, there are three key reasons contributing to this risk according to M.Kolaczkowski and A.White (2022). First, there was a surge in economic activity and oil demand to leverage production levels up to normal after Covid19. Meanwhile, supply of oil is limited due to long investment cycles and cautious capital allocations. The final reason is geopolitical tensions between Russia and Ukraine and rising instability in the Middle East. Regarding global sourcing, over the last decades, companies have invested in production in Asia due to low-cost labor. Labor costs in China has surged gradually, which made companies shift their production sites towards lower-cost labor countries, for example, in Southeast Asia. Nevertheless, with the occurrence of the pandemic Covid19, firms tend to seek for more regional alternatives to increase resilience (see Definitions), namely nearshoring. For example, European businesses relocate their operations to Eastern Europe and North Africa whose advantages are low-cost labor and relatively shorter distance (compared with Asia). In short, these economic events are often related to each other, which together pose a real threat to organizations.

#3: Societal risk

Societal risks are the probabilities of events that could harm a group of individuals. Some examples are safety hazards, child labor, abusive working conditions, environmental abuse, and leakage of intellectual property. Child labor is a particular issue that often occurs in fashion and chocolate companies. Despite organizations’ efforts on alleviating this problem, the supply chains are considerably complex, and it is hard to control every stage of production. Besides, illegal labor practices and poor working conditions are a controversial topic existing in many industries, but especially in apparel industry due to fast changes of fashion trends. Regardless of a company or its n-tier suppliers taking these risks to increase margins, it will eventually damage the company’s reputation. Regular auditing your n-tier suppliers is one of the most effective methods to minimize this risk. In addition, a firm can appoint ethical trade managers in different regions, train buyers and integrate the concept of Corporate Social Responsibility (CSR, see Definitions) into its strategy.

#4: Technological risk

This type of risk is defined as any technical failure to discontinue business operations. Cyberattacks, data breaches, unplanned IT outages are among the most serious threats that companies have faced in industry 4.0. In 2021, it costed around $4.2 million for a data breach (IBM, 2021). Regarding malware attacks, SolarWinds was one of the most noticeable cases in 2020. Cybercriminals hacked one of SolarWinds’s systems and added malicious code into the company software, which was widely used by approximately 33,000 clients. These risks and vulnerabilities could heavily damage a company’s reputation and form a significant amount of costs and expenses. The ultimate solution is prevention. For example, organizations should regularly review and update security software. Besides, all employees should receive cybersecurity training and be encouraged to report suspicious emails immediately without opening them. Since this type of risk is often associated with a lack of visibility, gaining control of as many processes as possible via a control tower could help minimize the risk. To influence external factors such as suppliers, standard security terms and conditions should be included in all requests for proposals (RFPs, see Definitions), or cybersecurity audit should be performed annually. If you would like a more detailed plan of dealing with technological risks, a report by the US National Institute of Standards and Technology (2021) maybe interesting to read.

To sum up, there have always been risks in global supply chains, so we can’t expect everything to happen as we hope or plan. What we can do is to learn from what has happened in the past few years, and develop a more flexible, responsive and resilient approach.

Thank you for reading! Please share if you find it useful!

Definitions:

– N-tier suppliers: are suppliers of your contracted supplier (or 1st-tier supplier) in the entire value chain. For example, your company is a supermarket which is supplied with dairy products by supplier X. Supplier X sources product components (e.g. milk) from a farmer. The farmer is part of your company’s n-tier suppliers.

– Supply chain resilience: the ability of a supply chain to prepare for and flexibly respond to unexpected events.

– Corporate Social Responsibility (CSR): a concept that organizations integrate into their business visions and operations, showing their commitment to contributing to people, the environment and society.

– Request for Proposal (RFP): a request sent to potential suppliers in which a company asks for more detailed information such as technical expertise, capacity, etc.

Recommended reading:

https://www.dhl.com/global-en/delivered/globalization/supply-chain-risks-in-2022.html

https://www.mckinsey.com/capabilities/operations/our-insights/a-practical-approach-to-supply-chain-risk-management

https://supplychaingamechanger.com/top-10-global-supply-chain-risks/

https://hbr.org/2022/03/are-the-risks-of-global-supply-chains-starting-to-outweigh-the-rewards

https://gcelogistic.com/4-core-risks-in-the-global-supply-chain/

https://grm.institute/blog/global-supply-chain-risks/

https://www.thomasnet.com/insights/how-natural-disasters-affect-the-supply-chain-and-how-to-prepare-for-the-worst/

https://www.theguardian.com/global-development/2021/feb/12/mars-nestle-and-hershey-to-face-landmark-child-slavery-lawsuit-in-us

https://www.theguardian.com/world/2022/aug/12/germany-drought-rhine-water-levels-new-low

https://www.irishtimes.com/business/retail-and-services/primark-criticised-in-germany-over-poor-conditions-of-sri-lankan-suppliers-1.3922577

https://moneyinc.com/5-huge-companies-known-implementing-horrific-working-conditions/