Risk preparedness and global supply chains
Companies rely on their external suppliers, partners, and other parties. Being prepared for possible risks is essential in preventing serious business interruptions, losses, and increased costs.
Modern products are increasingly complex, and their production process often involves utilising multiple suppliers across different geographical locations.
Over the past decades, the focus has been on lean production methods, by which companies have managed to take advantage of cost savings benefitting from on-demand production, by reducing the need for warehousing and large inventories.
As witnessed during the pandemic, the downside to operating in this manner carries the risk of serious business interruptions occurring. Volatility and fluctuations can have dire consequences, and external dependencies can also ignite a chain reaction. Delays and issues with just one supplier, for example, can have a ripple effect across the entire market.
Unprepared for a pandemic
Due to the impact of the coronavirus pandemic since early 2020, significant disruptions to global supply chains have been largely responsible for the near crippling of global commerce and international trade. As a result, the securing of raw materials and the production of everything from toys to heavy machinery has faltered, and in some cases, stopped. Consequently, many businesses have had to shut down operations, cancel orders as demand plummeted, or otherwise hit the brakes on their operations.
With many countries around the world now slowly beginning to recover and with some governments claiming that the end of the pandemic is finally within sight, companies have been trying to keep up with renewed demand for their products. However, that demand is being met by delays that can range from six months to a year, or more. From a business interruption perspective, lead times of this magnitude can have serious consequences.
Raw material shortages represent just the tip of the iceberg. In the last two years, the price of wood and other natural resources has risen on a global scale. In addition, the surging demand for consumer products that contain microchips, coupled with the pandemic-related disruptions in production, have led to significant shortages and large price increases for semiconductors, further compounding the challenges.
Multiple challenges across many industries
According to Andreas Kräling, Head of Risk Management Services, If Sweden, “There were signs in the market that after such a swift slowdown in 2020, companies were beginning to find that they were not able to secure supplies and materials to ramp up their operations to the levels they were used to.
Perhaps more immediate were the issues that arose from delays in obtaining components, spare parts and building materials. Following an accident or event, businesses were finding it difficult to rebuild. Early on, for example, we saw that the lead-time on forestry equipment started to increase dramatically, increasing our exposure and complicating recovery.”
Semiconductors have been a significant challenge and there have been several notable examples reported in the media of companies facing issues due to semiconductor shortages. “In fact,” adds Kräling, “we need to understand how it is not only the supply chain and a loss in global production ability that is a problem, but also a production bottleneck of a few manufacturers going back in time leading to a very competitive procurement in a crisis, where smaller businesses were struggling to secure a supply.”
In addition, the cost of transporting goods in shipping containers has skyrocketed since 2020 and the bulk of them have continued to be in the “wrong” places due to the pandemic. Thus, even if the product is available, an added challenge exists in delivering the product further along the supply chain.
Managing business continuity
Whether it is a flood, fire, or a pandemic, being prepared for an unexpected event is vital. Business Continuity Management (BCM) tackles these challenges. To support operations, secure raw materials and fulfill customer commitments, companies need to have a plan for their Emergency Response, Crisis Management and Business Recovery, but most importantly, there needs to be a clear understanding of their exposure to risks.
Conducting a business impact analysis regularly helps keep you aware of your vulnerabilities, for example by understanding who your critical suppliers are, and where any potential alternative suppliers are located. You need to really get down into the details, e.g., how important are you to your suppliers? What about this potential alternative supplier, will they be able to support you in the face of a crisis?
Working by your side, If Risk Engineers support Business Continuity Management around the world to help prevent losses and manage risks.
Not all bad news
For some companies, the pandemic did not force them to cancel orders and shutdown operations. Several small appliance manufacturers, for example, have been able to meet demand despite the market surge and are producing and delivering appliances at an all-time high rate.
– Most likely, looking ahead, the future will probably not shift towards huge warehousing, as this binds capital, but we will see more distribution centres in other regions than Asia. Reshoring is a fact and is ongoing, and this will continue for many reasons.
Kräling notes, “Though there are many challenges, I don’t see the final farewell to the “just in time” supply chain on the horizon, but rather a more redundant sourcing with vetted alternative suppliers and increased reshoring. Most of the companies have handled supply chain disruptions quite well and will adapt to the new reality, but not by stocking up in huge warehouses. They will still have short turnarounds, as warehousing is costly and binds capital. The solution lies in strong Business Continuity Management that can effectively handle the sudden disruptions in the supply chain, and possibly the loss of production capacity.”
– There are companies that were able to adapt their supply chain by finding alternative components and other suppliers. These companies have benefitted from being flexible and setting up good Business Continuity Management as well as supply chain control. Some of these companies immediately found alternatives to their existing suppliers for components that could also meet their specifications.
War in Ukraine
As Russia continues its attack on Ukraine, supply chains in the area have been severely impacted. With various measures imposed on Russia and Belarus, including war sanctions, the departure of international companies from the market and the economic aftermath dragging down the rouble, we can see the movement of goods has halted and access to raw materials has abruptly ceased.
As Ukraine is a major supplier of wheat, for example, it is expected that the longer the war continues, the greater the impact will be on food prices across the European Union (and the wider world) over the coming months. At the time of press, the situation is ongoing and being monitored closely.