Written by In the last two years, supply chains were exposed to unforeseen risks. The impact of the pandemic, Evergiven’s blockade of the Suez Canal, or the recent disruptions as a result of Russia’s attack on Ukraine, to name a few. What else must we prepare for?
We live in turbulent times, and our world is changing. While change is important and a good thing, we are now facing a whole new dimension and new dynamics of change. Companies are challenged to find ways to manage these dynamics and their impact.
Globalisation is undergoing a reorganisation
In Europe, we rely on globalisation. Europe is the world’s largest exporter. It has brought us prosperity. Our value and supply chains also rely heavily on countries in the global South. They are our raw material suppliers. They are not only rich in raw materials, minerals and metals, they also offer the advantage of low costs of energy and labour. The ability to collaborate on a global scale – and tackle systemic risks, such as climate change – is thus a most decisive factor.
The big nations in the South, such as India, are gaining in economic strength. India is an alternative to China and benefits from the current geopolitical tensions. Investments made by multinationals in India are on the rise, and analysts are already predicting a decade of strong economic growth. Naturally, developments like these come with risks and opportunities for us as well as our value and supply chains. Our task is to anticipate both risks and opportunities.
The same applies to the effects of geopolitical constellations, such as sanctions, import restrictions or changes in legal frameworks, e.g. the EU Supply Chain Act. More and more supply chain managers have to act now also crisis managers. Cost efficiency in procurement is becoming less important. Besides quality and delivery reliability, supply chain management increasingly addresses geographical, geopolitical and ESG criteria. These developments pose a particular challenge to the small and medium-sized business sector.
Delving into supply chains
In light of the above, it is essential to examine supply chains in two steps: first, one’s direct suppliers, and second, the risk potential of their suppliers. Analysing and evaluating one’s direct suppliers is often difficult enough. Taking the second step means delving into the supply chain. In doing so, at least one’s direct supplier must be sensitized and his supplier systems and audits be checked to identify any blank spots, make reliable risk assumptions, and develop coping strategies.
This can be a ”diversification strategy to avoid”, i.e. selecting new suppliers, seeking new markets and market opportunities, or using alternative technologies to reduce the dependence on a certain raw material. An essential feature is the step taken towards an acceptable risk, for example via a traditional risk transfer with respective insurance solutions, despite the insurability of systemic risks being limited. In terms of the supply chain, this means “security comes first, before insurance”. One should be aware of one’s acceptable risk and its evaluation. Similarly, one should also keep monitoring this risk on an ongoing basis. “Transparency” thus becomes a decisive success factor in supply chain management.
Systemic risks and black swans
Managing systemic risks and black swans in the supply chain means one must also answer the question of whether one can influence the potential danger. If the answer is “yes”, the route to take includes appropriate risk management, quality, safety and environmental management or a risk transfer using insurance management. If the answer is “no”, preventive measures are called for, including crisis management, emergency planning, business continuity management as well as resilience management to optimally prepare for unexpected and to date unknown events. Flexibility is thus a key success factor.
Johannes Vogl
General Manager GrECo Risk Engineering
T +43 5 04 04 – 160
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