Top Supply Chain Risks
Supply chain risks represent a broad spectrum, from compliance and cyber issues to operational concerns and environmental risk. To enhance supply chain resilience, it’s critical for companies to understand and have visibility over the most frequent and severe problems that can impact a supplier’s ability to provide the goods and service the business needs. These challenges include:
- Poor supplier performance
- Demand planning complexity
- Global labor shortage
- Rising inflation
- Volatile global economy
- Complex regulatory environments
- Geopolitical risk
- Reputational risk
- Natural disasters and climate risk
- Cyber risk
Here’s a closer look at each of these concerns and the supply chain risk management strategies that can help to mitigate disruption.
Top 10 Supply Chain Risks in 2023
As risks become more complicated and interconnected, supply chain professionals must identify and address top challenges to ensure resilience. Today, among the top supply chain risks are:
#1: Poor Supplier Performance
Supplier performance holds a huge potential for supply chain disruption.
A supplier’s financial health is often a reliable predictor of their performance. However, other factors should be considered when assessing both the internal and extraneous factors that may impact their performance, including:
Exposure to natural disasters
The most important way to protect your company against this potential risk is to use predictive analytics to identify a supplier’s declining financial health before it impacts yours. It’s also important to maintain relationships with alternative suppliers, ideally in other parts of the world, to diversify and potentially reduce environmental risk. Finally, companies should invest in inventory management techniques and keep buffer stocks on hand to prevent delays in case of supplier performance issues.
#2: Demand Planning Complexity
During the pandemic, demand patterns changed as people were confined to their homes. Planning for pent-up demand was easier when companies operated on a just-in-time basis. Now, however, companies need to buy more than they need immediately — but they may not know exactly how much more.
Investing in more sophisticated demand planning solutions that move away from traditional algorithms tied to historical demand patterns to those that focus on predictive analytics and other advanced methodologies.
As this may be a longer-term strategy based on significant investments required, there are also some practical, short term areas that can create big improvements such as:
Reviewing vendor set up logic and accuracy
Adjusting safety stock levels with a more granular application towards strategic and under-performing supplier and focusing on lead time monitoring and more frequent updates to system settings
#3: Global Labor Shortage
Increased competition for skilled labor means that companies might not have the resources to build a product or deliver a service in time. Additionally, they might struggle to find the skills needed to effectively assess, monitor, and mitigate supplier risk.
Understand labor shortage patterns and how they relate to global supply chain risk. From there, it’s easier to identify and address workforce problems, implement solutions like retraining, or adjust hiring practices.
#4: Rising Inflation
High inflation creates unpredictable price increases, making it more difficult to effectively plan and manage cashflows. It also causes complications and delays when negotiating prices with suppliers.
Diversify supplier relationships to help distribute rising costs away from your own operations. It’s also critical to understand potential disruptions to your finances and plan accordingly.
#5: A Volatile Global Economy
Post-pandemic economic uncertainty has led many to fear a global recession. Companies used to increase inventories to ensure steady production — but if the market contracts, companies might have unsold inventories at the peak of production cycles.
Do what you can to understand the global supply chain as a whole and how suppliers in different areas impact (and are impacted by) economic conditions. Focus on managing the financial risks you have direct control over so you’re protected in case of other disruptions.
#6: Complex Sanctions and Regulations
Even before 2023, new sanctions were being imposed every day. Keeping up with sanctions is challenging: Firms must know suppliers’ ultimate beneficial owners, directors, and shareholders to comply and prevent bad actors from undermining their supply chain.
View supply chain risk management through a regulatory lens. Understand requirements, expectations, and penalties relevant to your industry, and take timely action to update relationships or choose alternate suppliers if necessary.
#7: Geopolitical Risk
Ongoing global political events like Russia’s invasion of Ukraine and China’s zero-Covid policy have heavily disrupted global supply chains. As conditions and relationships grow more complicated, the entire supply chain will shift to keep up.
Firms need both onshore and offshore alternative suppliers to ensure they have options in case of disruption. Analyze the costs and benefits of these sites to understand the domestic and international affairs where potential suppliers are based.
#8: Reputational Risk
This can result from many risk factors. One such driver can be unsatisfactory environmental, social and governance (ESG)-related practices among suppliers – including poor working conditions and labor relations.
Companies can begin by understanding possible incidents through audits and reputational monitoring. Use this information to consider external risks and their potential impact on your overall supply chain. Then, decide how to mitigate any risk areas identified – by engaging with suppliers directly or, in severe cases or where resolutions cannot be found, by switching suppliers.
#9: Natural Disasters and Climate Risk
Supply chains are vulnerable to property damage and business interruption due to natural disasters, but they also present opportunities to meet sustainability targets. Firms need to quantify the financial and operational impact in real time and assess site-specific risks.
Use climate data to assess how a supplier’s activities and the location of its facilities expose you to risk. As you learn more about your partnerships, base inventory planning decisions on areas or suppliers with the highest risk potential.
#10: Cyber Risk
The increased threat of cyberattacks has made paramount companies’ understanding of both their own cybersecurity protocols and those of their suppliers. Any organization with access to the company’s network or systems can pose a risk.
Start by reviewing system access, information sharing permissions, and the extent of the information being shared. Analyze any and all data sharing habits with suppliers that can present challenges, if managed incorrectly.
Understanding Supply Chain Risk
Although it’s helpful to understand the top supply chain risks in any given year, it’s far more important to know the underlying causes, relationships, effects, and explanations. Even as individual factors shift and impacts take different forms, these foundational principles are always relevant — and always useful in supply chain management.
The specific causes of supply chain risk may change, but they tend to align with patterns. For example, failure to follow or update certain procedures can lead to ESG, reputational, cyber, and other risks; poor global relationships can complicate geopolitical, economic, and sustainability risks; even well-meaning human error can cause cascading effects. It’s important to understand these patterns and their underlying logic so you can identify them in different forms.
It’s often difficult to separate one kind of risk from another because today’s interconnected supply chains don’t lend themselves to neat compartmentalization. This can complicate risk management — but also empower it. When supply chain leaders are called to treat risks more holistically, it’s easier to identify and capitalize on these logical relationships, ensuring that fewer issues are overlooked or unaddressed.
The effects of supply chain disruption can shift depending on the market, industry, and type of risk — but nonetheless, they can generally be sorted into the same categories:
Delays: Even small supply chain challenges can cause delays that impact workflows, projects, budgets, and outcomes down the line.
Shortages: When a supplier has performance or timing issues, they can cause shortages of raw material and specific products, which impacts availability in the wider market.
Price disruption: Shortages often lead to increased costs for everyone in the supply chain, even end consumers.
Loss of reputation: Whether it’s a small, internal supply chain risk or a public ESG failure, the effects of disruption can lead to reputational impacts that may not be easy to remedy.
While individual risks and their effects might shift, it’s always critical to have a plan. Often, this means relying on a prioritization framework — a flexible but well-defined approach to supply chain challenges that helps you analyze potential outcomes and address problems accordingly. This approach should be customized based on the risk types that are most impactful to your organization’s performance and objectives; these values may change over time, but should always relate to specific risk management goals.
Equally important is the understanding that not all participants of a supply chain or industry have the same risk appetite or priorities. This means two things: First, you needn’t base your approach on your peers’; and second, you may find that your needs conflict with those of a particular supply chain partner, which may cause friction. When you’re aware of this possibility, you can take steps to mitigate delays or disruptions without compromising your own needs.
Learn More About Supply Chain Risks and Solutions
As global economies and supply chains become more complex, so do the risks that impact them. Fortunately, your organization doesn’t have to face these risks alone.
Moody’s Analytics Supplier Risk Solutions help you understand supplier performance through best-in-class data and analytical capabilities. From Supplier Risk Performance Scores and Cyber Risk Ratings to ESG Assessments and our Supply Chain Catalyst platform, you’ll have the data, tools and insights you need to build resilience and navigate the broad spectrum of risks your company may face.
Find out more about our Supplier Risk Management Solutions.