Sustainability: The growing issue of supply chain disruption

Over the past 12 months, global organisations have seen significant disruption to their supply chains. Coronavirus in particular, has caused havoc for multinational companies and shone a light on the interdependencies and complexities inherent in many supply chains.

Patrizia Kern, head marine, at Swiss Re Corporate Solutions explained: “One example that dominated the press was the automotive industry. One company had to shut down production in Europe in January because they were heavily dependent on parts coming in from China. At the time, there were virtually no cases of the virus in Europe.”

This demonstrates just how vulnerable businesses can be if they rely too heavily on one supplier or group of suppliers. Even if the businesses are in an area that is unaffected by a crisis – whether that’s a weather event, political event or pandemic – the financial consequences can be severe if a supplier is unable to provide you with the materials you need.

An attack on all fronts

Rainer Baumann, global chief operating officer at Migros, highlights three key areas of vulnerability for organisations when it comes to supply chain interruption:

- Disruption of raw materials (often as a result of extreme weather and nat cats),

- Disruption of transportation (for example when the Rhine reached dangerously low levels like in 2018), and

- Disruption of production (for instance parmesan shortages due to the Italian lockdown).

He pointed out that the pandemic has meant that companies are often battling all three forms of interruption at once.

For instance, companies that had the right raw materials were unable to produce end products as factories were placed under lockdown. Meanwhile, ships, railway lines and trucks were forced to a halt or slowed down substantially. In the UK, we saw reports that some raw materials would be impacted due to a lack of seasonal workers and fruit pickers, for instance.

Greater disruption on the way

There is likely to be more disruption ahead as extreme weather events appear to be on the rise. According to McKinsey, climate disruptions to supply chains are going to become increasingly frequent and more severe.

Kern said: “It’s a mathematical effect that the number of natural catastrophes has been increasing massively in recent years. If you look at Hurricanes Katrina, Harvey, Irma and Maria as well as the Japanese earthquake and the Thai floods you can see that we are getting loss events far above the previous average of around $50bn. We’re seeing nat cats causing losses up to $150bn of insured value, so as you can imagine this is a very big concern for us.”

Baumann pointed out that as well as more extreme weather, other future trends could play a role. He said: “There are several drivers of disruption. The complexity of supply chains is increasing, and more complexity means more potential points of failure. Even simple goods can have as many as ten suppliers. That in turn adds to the risk that transportation and production may be disrupted.”

At the same time, practices such as just-in-time delivery or lean manufacturing can also introduce risks, particularly when organisations are focused purely on reducing costs.

Baumann said: “These are methods, and as methods they are neutral. They can help you understand something about your business, such as how much added stock you want on your shelves or in the back yard of your store and how much delay you can tolerate in the case of interruption. But of course, when these methods are only looked at from a cost perspective, you don’t have a lot of resilience left in the system.”

Preparing for the future

As a result of the predicted risk in weather events, not to mention the complex nature of supply chains - global organisations must take broader look at their vulnerabilities going forward.

The good news, according to Kern, is that companies are rapidly waking up to the need to embed resilience within their operations. She says: “All of a sudden, supply chain became a hot topic during the pandemic. Previously, many companies had tried to manage the supply chain to reduce cost as much as possible, and few companies saw resilience and sustainability as a driver of supply chain management.

“Now people realise that they need to build resilience, need to make sure that they are able to get access to spare parts or key commodities and sustainability is more in the centre of the discussion.”

The importance of collaboration

For both Kern and Baumann, the future of managing supply chain risk will involve more collaboration between businesses and their insurance carriers. Risk managers need to break down barriers to help their providers understand and price the risks that they are facing. Simultaneously, insurers need to work in partnership with organisations to find innovative solutions to reduce the threats.

Kern said: “We can help with identifying what are the risks, and giving advice on what can be solved by risk management - and I assume 80 per cent of risks can be solved this way.

“We are extremely focused on providing solutions. When we get access to data, we want to play a role in supply chain management, but there are thousands of things that are not insurable because we don’t know how to price them. In the future, with data access, it’s going to change massively.”

Bauman concluded: “For companies it’s typically very, very tricky. We are not there to provide full transparency, but we need to collaborate with our insurers and learn to share our data. It’s a steep journey, but one that it necessary for both company and insurer.”