Supply chain security under threat

The challenges inherent in today’s international trade and the supply chains that service it are painfully obvious – higher prices of energy and food, shortages of and delays in delivering manufactured goods, dynamic changes in markets and sourcing regions.

2020, last year and the first half of this has been an extraordinary period in the context of the global supply chain, one that will live long in the memory of those directly and indirectly employed, affected by and reliant upon the industry.

A series of unexpected events have literally scrambled the traditional means of supply.

The on-going effects of the pandemic, with its associated lockdowns and the war in Ukraine; a large containership wedged in the Suez Canal and, in Europe, Brexit have proved to be catalysts to ignite underlying economic and environmental trends that will continue to fuel long-term changes in the pattern of global supply and demand.

TT Club is convinced that a thorough understanding of the practical risks is vital in mitigating the dangers to safety and security that are a consequence upon these dynamic factors.

We are suffering from a disappearing ability to absorb short-term shocks to the supply chain because of fundamental societal and geopolitical changes to the global equilibrium.

Yes, Covid and the other varied Black Swans that have taken flight across the world have been disruptive and are driving up prices but the longer-term trends of production cost increases in Asia and stricter demands of Environmental, Social and Governance (ESG) policies mean that cheaper goods and transport services are features that are fast-disappearing from the global economy.

The future will contain increased unreliability of supply effecting primary commodities, fuel, manufactured goods and their components, and also food and other consumables. In short anything that is moved over significant distances will be subject to delay, unavailability and loss.

Turbulent times 

Supply chains have always been subject to disruptions: Natural disasters, economic cycles, terrorism, capacity shortages. We have lived through pandemics in the past and many thought that the world would move on from Covid once more, and that supply chains would return to “normal”. But it has not turned out that way this time.

Global supply chains operate well in a stable environment, in times of peace. There will always be unexpected disruptions, but generally in the past, we had been able to rely on trade and international money flows to act as “shock absorbers”.

After the Cold War, international trade was thriving - benefitting from peaceful relations between developed and the developing countries. This helped many ex-communist (ex -Soviet) countries in Europe to develop and raise living standards and shift towards democracies. Other countries became wealthy and powerful, but benefiting mostly those already in power such as Russia and China.

Overall, world trade gained from economic growth of the primary trading blocs, North America, Europe and Asia.

Because goods produced in some parts of the world were so cheap, in comparison to production costs in consuming regions that it made sense to produce in excess. This provided a steady flow of supply, a buffer protecting from short-term fluctuations and disruptions.

Emerging risks

These buffer stocks are however far less likely in the future as the cost of production continues to rise and the cheap labour from countries with traditionally large young populations (primarily in Asia) is becoming a thing of the past.

There is also another element ever stronger in all our considerations, ESG. Actually, its goals and those of supply chains (which are optimised for cost and speed) are not necessarily always aligned. So as and when we prioritise ESG, we have to anticipate altered risks to the existing patterns of supply.

So what are the features of this less secure supply chain of the future? Trends in cargo theft are in flux with more essential goods such as food and beverages being targeted and luxury goods and electronics not so much as in the past.

Cargo at rest, either at ports or inland staging areas, some of which have been hurriedly pressed into service as overflow facilities, is increasingly subject to theft. With shippers looking for ‘workarounds’ to reduce costs or avoid congestion, thieves have been quick to adapt their methodologies and the use of online means of deception is on the increase.

It has to be accepted that freight crime pays and therefore there will always be those with criminal intent who will be motivated to target and steal cargo through the supply chain.

They will inevitably always target the most vulnerable points - victims that present the least resistance and least risk of apprehension. Instability in the transport process has the effect of creating these weak points.

Rise in fraud

Our current data on theft shows that fraud is being widely experienced, whether a simple “mandate fraud” (payment diversion) or cases whereby criminals pose as legitimate operators in the supply chain to gain access and steal.

Insider risk has also appeared to increase through this period: criminals recruiting employees of target companies to assist in theft, provide information about security provisions, or allowing access to security badges to access the cargo in store

Claims data shows that ports congestion creates a number of additional opportunities for criminals: with cargoes stowed to overcapacity, port operators and other cargo terminals must stay vigilant so as not to let criminals exploit these vulnerabilities.

In fact, raising awareness, whether that be freight crime hot spots, or any particular trends, or identifying specific cargoes, as a primary defence against such risks.

The correct use of data to analyse these trends is of crucial importance and TT is utilising its own claims experience along with theft reporting agency information to maintain and expand the all-important industry awareness of the evolving dangers.

This, in addition to the developing technologies to support the supply chain and offer predictable and resilient sourcing without the geopolitical risks of foreign suppliers and other disruptions, is seen as a primary mitigator in the management of the developing, modern, longer-term risk profile.

Rising safety concerns

Increased safety concerns are also impinging on the overall security of the world’s complex system of supply. One of the headaches creating safety issues is the prevalence of abandoned cargo. When goods are delayed through periods of congestion, or lock down, the percentage of those which are simply abandoned increases:

• When a buyer goes out of business, perhaps because delayed goods have missed their intended seasonal market (fashion items for instance) gives rise to goods arriving at the destination port and not being collected.
• For perishables, where there is congestion, the availability of sufficient plugs to power refrigerated containers, leads to damaged cargo.
• Further problems have come with the wide ranging sanctions imposed on Russian businesses and individuals. Goods that are already in transit may no longer be allowed to be sold at destination.
• As freight rates have gone through the roof in this period of instability, many shippers will have been motivated to save costs elsewhere, giving rise to poor and sometimes unsafe practices. Not using the correct securing solutions, using cheaper packaging, or misdeclaring the cargo to be shipped – saving on freight surcharges – all giving rise to potential safety concerns.

Dangerous goods are particularly concerning. It is crucial that such cargo is handled correctly and many aspects of supply chain disruption legislate against this. At rest, in ports and various storage locations it is vital to ensure that dangerous goods are segregated and protected.

The tragic explosion at the port of Beirut in August 2020 is a vivid reminder of the dangers to leave certain cargoes to deteriorate. Here 2,750 tonnes of ammonium nitrate was left unclaimed for many years. The explosion and consequent fire killed 218, with over 7,000 injured.

More recently events at a storage facility in Chittagong (Chattogram), Bangladesh also give evidence to the consequences of poor operational practices.

In terms of improving resilience within the new parameters of supply chain reality, it seems that the future lies in supportive technologies - offering predictable and resilient sourcing without the geopolitical risks of foreign suppliers and other disruptions.

It is expected that supply chain technology could be the Big Winner for future investments as companies drive to mitigate their supply chain challenges.

Artificial Intelligence (AI) machine learning and other cutting-edge tools are likely to come to the aid of manufacturers and their customers in order that they can react more swiftly to supplier hick-ups , monitor raw material availability and efficiently deal with the bureaucratic red-tape of cross-border trade. 

In conclusion, practical measures can be taken immediately.

It is important to ensure that adequate risk assessments are undertaken across the full breadth of supply chain operations in order to understand thoroughly the various risks and, where appropriate develop mitigating actions and controls, together with effective continuity plans to protect businesses.

Dorota Jilli, is a Senior Underwriter at international freight transport insurer TT Club