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How supply chain risk is evolving

At a glance

  • The World Economic Forum’s Global Risks Report, published with Zurich, highlights the major risks facing organisations around the world
  • From geopolitical risk to cyber-attack, many of the risks identified in the report could have implications for supply chain management
  • We explore the major supply chain issues likely to affect UK businesses, and discuss how brokers and customers should respond

This article counts towards accumulating your annual CII CPD structured learning hours for Business Interruption.

By reading this article, and correctly answering the three questions underneath, you will have achieved the following learning outcome: Summarise the key components of a business continuity plan and/or the benefits of supply chain risk management.

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Of all the challenges facing businesses today, mitigating supply chain risk is among the most important.

The Global Risks Report, published by the World Economic Forum in partnership with Zurich, identifies and ranks the major risks facing organisations around the world. UK businesses are not immune from these challenges, and many of the trends identified in the report should be high on the agenda for brokers and customers.

Whether a business is considering international expansion or not, the nature of modern trade means that supply chains are complex and becoming increasingly connected. While these international supply chains bring benefits, they need to be carefully managed.

However, this is not always straightforward. The complexity of most global supply chains means it would require vast resources to mitigate every conceivable risk at every link in the chain. Effective risk management is therefore about prioritisation. The challenge for brokers and customers is to identity the suppliers with critical exposures and put in place mitigation measures for these suppliers.

Geopolitical and economic turmoil

Geopolitical risks, from interstate conflict to weak governance, feature prominently in the Global Risks Report 2019. In the UK, political discussion has been dominated by Brexit, which comes with its own specific set of challenges.

For many companies, the answer to political uncertainty, and potential supply chain disruption, has been old-fashioned stockpiling. As Otto Kocsis, Principal Engineer Business Resilience, Zurich, explains, this comes with its own risk.

He says: “Stockpiling is a mitigation measure many companies are taking against the potential supply chain disruption associated with Brexit. However, this means that a company’s finances will be much more tied up in stock than they would be otherwise, which introduces new elements of risk and reduces agility.

“Stockpiling is also particularly challenging for businesses that sell goods with limited lifecycles. How precisely can these companies predict product lifecycle and what happens if they get this wrong? They could end up with a lot of stock that they can’t ultimately sell.”

Increasingly complex international supply chains, combined with geopolitical and economic turmoil, also complicates risk management. Otto says: “Supply chain risks are becoming increasingly diffuse, and it can be difficult for businesses to understand which of their many suppliers to take mitigation action against.”

Climate change and extreme weather

The Global Risks Report 2019 identifies climate change and extreme weather, including storms, fires and floods, as among the risks most likely to cause disruption – which has implications for supply chains. As the report identifies: “Disruptions to the production and delivery of goods and services due to environmental disasters are up by 29% since 2012.”

With many businesses adopting increasingly global supply chains and just-in-time inventories, a rise in extreme weather events makes supply chain interruption more likely.

However, as Otto explains, growing recognition of the danger of climate change could also lead to wider supply chain changes at many companies. He says: “We have to consider whether businesses will start implementing serious initiatives to lower their CO2 output. What does this mean for supply chains? Will reducing CO2 mean they become less global in the long run? Will business have to sacrifice some of the advantages of globalization? Can digitization help to overcome this dilemma?”

Cyber risks

The Global Risks Report 2019 makes plain that cyber-attacks are only going to become more common. “It’s not if a company suffers an attack, it’s a case of when global supply chains or critical utilities are attacked,” says Otto.

Weak cyber security at a supply chain partner can also expose a business to risk.

Typically, these supply chain attacks occur when a cyber-criminal infiltrates a company’s IT system via a third-party supplier. In 2013, attackers gained access to point-of-sale machines at US retailer Target by infiltrating a supplier who had access to an external vendor portal. The attack, which saw millions of customer payment card details stolen, illustrates the care that needs to be taken when granting third-party suppliers access to critical systems.

As Otto explains, businesses need to look at cyber security with fresh eyes: “Firewalls and protection can only do so much,” he says. “Today, almost everything is connected to the internet. Does it need to be? Where possible, companies should consider isolated and protected production infrastructure.”

How can Zurich help?

Zurich provides a range of support, guidance and tools to help brokers and customers negotiate the increasingly complex world of supply chain risk.

Otto explains: “For many issues identified in the report, market capacity is limited, meaning it is crucial to develop risk mitigation and management techniques.”

Zurich Risk Room is a tool that allows brokers and customers to model the political, infrastructure and natural risks of working in more than 170 countries.

The Global Risks Report 2019 clearly illustrates the range of challenges and pressures facing modern, global supply chains. Zurich risk engineers can provide strategic risk management guidance and tools to help minimise the threat of major supply chain failure.

For more information on the issues discussed in this article, please get in touch with your local Zurich contact.

Image © Getty

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