COVID-19: a ‘Black Swan’ for supply chains

Throughout this century, companies across the world grew reliant on international supply chains, as globalisation enabled manufacturers, designers, and labourers to complete complex tasks across borders and continents.

While international supply chains prospered, making the most of global labour markets and improved transportation methods, they were not ready for COVID-19. 

The virus outbreak has led to unprecedented disruption for businesses reliant on international partners, suppliers, and labour, with entire economies still in lockdown more than seven months after the novel coronavirus was declared a pandemic. While a vaccine edges closer to reality, companies will face another year of widespread disruption as they attempt to do cross-border business.

COVID has exposed weaknesses in the supply chain and prompted questions about future resiliency and risks as we attempt to overcome the pandemic.

In a post-COVID environment, Refinitiv’s Rich Hoffecker believes supply chain leaders will put more focus on preparing for “black swan”, seismic events, like global pandemics.

“After the immediate threat has been addressed,” Hoffecker notes, “Look to organisations to revisit their strategies around global supply chain disruptions and implement better processes for future events.”

Hoffecker expects organisations to assess their response to the crisis and supply chain resilience in the years to come. He believes companies will look for ways to improve their operating models.

“This will have board and C-level oversight, and we are likely to see supply chain leaders elevated to greater strategic corporate roles, with a stronger voice in the development of business strategies,” he says.

Refinitiv expects companies to update their strategic response plans with thought leadership around compliance and integrity risk, as “as a standard business process of onboarding suppliers, particularly in times of dramatic change and disruption”.

Companies are expected to make significant changes to their supply chain models.

“A more long-term view will be on reassessing the overall supply chain strategy and improving disruption response. We will see centralisation of oversight, country-level diversification of sources in some cases, in others a return to domestic sourcing, and in most cases a desire to build stronger relationships with suppliers.”

Building resilience for 2021 

What lessons have been learned, and are there any effective risk mitigation strategies looking ahead to 2021?

Tze Way Yeong, the manager of risk engineering services Asia for Swiss Re Corporate Solutions, says supply chain efficiencies in the decades leading up to COVID left little room for manoeuvre as the crisis hit.

“When things are going well, businesses benefit from cost-effective operations, less waste and the ability to react flexibly and in an agile way to customer demands,” he says. “This optimisation, however, has meant less slack in the supply chain, and while resilience may be very high under normal conditions, the impact of a “black swan” events like today’s pandemic is felt more acutely.”

Companies have struggled for raw materials and parts, prompting a rethink from corporates globally.

“As the pandemic continues, and companies face an increasingly uncertain business environment, many are re-looking at their supply chain vulnerabilities and contingency plans. As a result, we’ve seen an overall increase in risk awareness,” says Yeong. “Many clients were taken by surprise by extent and severity of disruption caused by the pandemic – very often not an exposure that risk managers had on the top of their minds. This has also made corporations more alert towards other potential gaps in their current insurance programs.”

Looking ahead to next year, he thinks businesses will need to “assess the strength across the entire supply chain and get as full of a picture as possible – where are the risk concentrations and potential interdependencies? Are there clusters of supplies and suppliers that should be diversified? Is there the right balance between lean operation and a buffer inventory? What contingency plans are in place and have they been stress tested? What about alternative suppliers – how are they maintained? This can be extremely complicated to map out, especially as global supply chains grow increasingly interconnected”.

Companies need to look beyond the first tier of their supply chain, down to third parties, to get a full picture of their risks.

As with several emerging and evolving threats, Yeong expects parametric solutions to be an effective risk transfer option in the years to come.

“We’ve seen an increasing number of companies are looking for solutions in the alternative risk transfer market. And here, in particular, we are seeing a rising interest in parametric insurance solutions – a very effective instrument to fill the gaps left by traditional insurance programs.

“Parametric insurance can be used to source additional capacity, provides payout certainty and liquidity when is it most needed, and offers a solution to protect against pure financial losses, in particular when it comes to “intangible” exposures such as supply chain risks.”