Understanding supply chains

Supply chain risks can be viewed from various angles. You may be a supplier responsible for a critical component of another company’s final product or you could be the final producer relying on third parties for components. Either way, understanding your supply chain and how you fit into other supply chains is becoming an increasingly important issue for risk managers.

Most companies are seeking to reduce costs and improve working capital management, while at the same time they are increasingly reliant on their suppliers. This reliance is likely to involve a combination of global sourcing, single sourcing, partnership approach and just-in-time operations.

Paradoxically, the actions taken to reduce costs may drive risk into the supply chain. In Asia - and particularly with regard to firms operating in Thailand - these decisions are being taken against a background of increased market shortages and complexities within supply chains, complicated by geographic location challenges. Thailand is also characterised by industry aggregation; for example, a large percentage of the world’s hard drives are produced there.

A Business Continuity Institute survey sponsored by Zurich Insurance conducted in October 2013 indicated that about 83% of companies had had a supply chain
disruption in the previous 12 months. Many had experienced multiple disruptions in the same period. According to Zurich’s proprietary database featuring more than 10 years of supply chain losses, almost 20%
of these disruptions were higher than US$500m owing to the significant extra expenses incurred to return to productivity. Furthermore, Zurich’s data shows more than half of supply chain losses are caused by ‘sub- tier’ suppliers and that businesses tend to underestimate the length and frequency of disruptions.

Supply chains affect every part of a business, the way blood flow affects every part of the body. As people are fundamental to the operation of any supply chain, it is critical that an appropriate risk culture is put in place. Three specific areas can be examined to help mitigate and minimise the effect of interruption on a business: approach to risk assessment; supplier due diligence; and supply chain risk and business resilience tools.

With the increased globalisation of the world’s economy and ever-growing reliance on third-party component manufacturing, it is highly likely that every business will experience a supply chain interruption at some time. It is essential to take a proactive approach to better understand exposures and assess potential effects and recovery costs to help protect profitability from breaks in the chain.