Supply Chain Risk Management: The Risks Continue to Rise

Stephen DeAngelis

June 4, 2014

“Supply chain risk has fallen slightly from its all-time peak last year,” writes Paul Snell, “but businesses must remain vigilant about the threats it poses, according to the first quarterly Risk Index published by [the Chartered Institute of Purchasing & Supply].” [“Supply chain risk falls, but businesses urged to remain vigilant,” Supply Management, 6 May 2014] If you’re a risk manager, I wouldn’t let the slight decrease in risk fool you. In fact, the news release that announced the Risk Index stressed, “Supply chain risk has continued to grow since the economic crisis, reaching its highest ever level last year.” And that’s the message that Brian Groom gleaned from the Index. “The risk of disruption to corporate supply chains is running at near-record levels despite signs of improvement this year,” he writes, “according to an index created by the global trade body for purchasing managers.” [“Risk to corporate supply chains at near-record levels,” Financial Times, 5 May 2014] And you should remember that the year is only half over.

According to the CIPS press release, “[The] Risk Index reveals the importance of politically unstable regions such as Eastern Europe and Asia on the daily activities of businesses in the West, plotting the rapid growth of supply chain risk since the end of the financial crisis.” An article in The Daily Telegraph focused on what the Index had to say about the developing world and concluded, “Supply chain risk ‘varies wildly in the developing world’ despite recent economic growth providing stability in Western nations.” [“Supply chain risk ‘varies wildly in the developing world’,” 12 May 2014] In particular, the article noted, “Russian energy exports ‘continue to undermine the security of international supply chains’.”

In the CIPS press release, David Noble, Group Chief Executive of the Chartered Institute of Purchasing & Supply states, “The resurgence in the global economy depends very much upon the reliability of global supply chains.” He continues:

“With political instability across the developing world, it is vital that businesses and economies recognise the risks to their supply chains and make the appropriate provisions before it is too late. Supply chains have a critical role to play in both operational profitability and economic stability. The Index provides a close examination of the global risks that need to be on the radar. Global supply chains have scarcely been at greater risk than today. Business leaders must sit up and take notice.”

The CIPS’ warning isn’t the first to be raised about the importance of paying attention to supply chain risks. To read more about why companies can’t get complacent, read my posts entitled “Supply Chain Risk Management: Fewer Risks or More Complacency?” and “Supply Chain Risk Management Teams are between a Rock and Hard Place.” Talking about “risks” in a generic way is probably not very helpful for most companies. Each enterprise has a unique supply chain that faces risks specific to it. Nevertheless, Chubb, the insurance group, conducted a survey to find out what risks were of greatest concern. “The 2014 Chubb Multinational Risk Survey identified the top overseas business threat as supply chain failure (19 percent). A data breach/cyber event (15 percent) was ranked second, and government/regulatory investigation and political instability were tied for third (13 percent). Natural catastrophe (12 percent) was ranked fourth.” [“Supply Chain Fears Rise as International Business Activity Heats Up,” SupplyChainBrain, 5 May 2014] The Survey also found that extended supply chains (i.e., those involving international transactions) are of most concern. “Nearly half (45 percent) of the executives surveyed noted that overseas risks pose a greater threat to their company than domestic ones, while one-third (33 percent) reported that overseas risks are an equal threat. In addition, nearly half (48 percent) of the companies had experienced at least one loss related to conducting business overseas over the last three years.” The Survey also identified other risks that might not immediately spring to mind. They include employee travel, mobile technologies, and social media risks. The article explains:

“Two out of three (69 percent) companies have employees who travel outside the United States and Canada on business, according to the survey. Only 57 percent of the companies provide emergency medical care or evacuation assistance to those employees. … Employees traveling with mobile devices are increasing the potential for cyber-related data breaches. Nearly three in four (72 percent) companies allow employees to use their own mobile devices, such as smartphones, tablets and laptops, for work. However, companies with fewer than 500 employees (80 percent) are more likely to permit these devices, compared to 67 percent of companies with 5,000 or more employees. … Survey respondents also were asked whether their companies have established global social media policies. Sixty-three percent of the firms have social media policies that extend to overseas employees, and 23 percent of these firms have tailored the policies for different locations. However, large companies (77 percent) were significantly more likely to have an overseas social media policy than smaller companies (55 percent).”

Chubb analysts agree with those from CIPS that companies need to start paying closer attention to potential risks. “Despite their concern regarding supply chain failure,” the Chubb survey discovered, “only 56 percent of companies have a business continuity plan that addresses overseas risks, and 22 percent of companies that do have a plan have never tested it.” The article continues:

“Larger companies (74 percent) were much more likely to be prepared for overseas business interruptions than smaller companies (48 percent). ‘The lack of business continuity plans and testing is disturbing,’ said [Kathleen Ellis, senior vice president and worldwide manager for Chubb Multinational Solutions]. ‘Companies are left exposed to significant supply chain failures and associated business interruption costs that can undermine their financial results and stability. It is equally important for companies to assess whether their overseas suppliers and vendors also have up-to-date, well-tested business continuity plans.’ Forty percent of respondents require their overseas suppliers and vendors to have a business continuity plan.”

Phil Gusman adds to the discussion by noting, “Even small companies are going global today, making education about supply-chain disruptions more important than ever.” [“As More Companies Go Global, Supply Chain Risks and Solutions Grow,” Property Casualty 360, 1 May 2014] Jonathan Hall, executive vice president for FM Global, told PC360, “Even the smaller companies today are starting to have significant overseas supply-chain issues.” Chubb’s Ellis recommends that smaller companies seek the advice and help of organizations already doing business overseas. “Smaller companies, which may be more financially vulnerable to such risks as data breaches or supply chain failures,” she states, “can turn to agents, brokers and insurers that have underwriting, loss control and claims resources on the ground overseas to help them manage the risks of their international expansions.” Hall notes that too many small firms “learn about their risks after decisions are made about the location of facilities.” Gusman agrees with Ellis that small firms should look for help from established companies and should do so before they commit strategic missteps. For example, he reports that “AIR Worldwide … provides tools for corporations to gauge risks for a specific area or a specific facility though its Catastrophe Risk Engineering (CRE) service.”

Whether your company is large or small, if it relies on an extended supply chain, it is going to face the risk of disruption. Most analysts seem to be in agreement that despite periods of calm, risks are likely to continue to increase. You simply can’t afford to be complacent and expect that catastrophes are going to pass you by.