You cannot anticipate all risks – but with the right tools, you can map likely scenarios and build in resilience. Andrei Quinn-Barabanov, Supply Chain Industry Practice Lead at Moody’s Analytics, names these tools as predictive analytics, and risk segmentation and prioritization. “To be ready for external shocks, focus on your supply chain’s critical path and bottlenecks,” he advises. “Ask which suppliers are crucial for you, and developments in which countries can have a material impact on your business.”
External shocks come in many forms. Some are macroeconomic. Quinn-Barabanov points to rising inflation, which complicates price negotiations with suppliers. “It used to be simple – you knew the rate to factor in. But now, it is much harder to predict and therefore harder to agree on price.” He also cites the deteriorating global economy. Will demand fall, or will demand habits change again, as they did during the pandemic?
Others shocks are geopolitical. Russia’s invasion of Ukraine has highlighted how geopolitics can affect supply chains. Shortages of materials sourced mainly from the region, sanctions against Russia, and disruption to supply routes have contributed to rising prices, particularly for commodities, and have forced companies to adapt quickly.
The effects of climate change are at the forefront of businesses considerations. The Rhine River, a European freight thoroughfare, reached historically low levels in August 2022, reducing shipping capacity. As climate change continues to intensify, logistics disruption like this will increase.
What can you do? Increasing inventory levels should be one of the first actions to consider, with an eye on obsolescence risk and interest rates driving up the cost of capital.
Geographical distribution of suppliers can help to counter disruption caused by regional droughts or floods. But such dispersal can be hard to achieve, and expensive to change in the short run. For example, Taiwan is a major exporter of semiconductors. Diversifying semiconductor supply would require building factories elsewhere – which would take many months and billions of dollars. The Taiwan Semiconductor Manufacturing Company plans to spend $12 billion building a chip plant in Arizona, which will open in 2024.
Concern about cyber risk is also increasing, notes Vitaliano Tobruk, Supplier Risk Industry Practice Lead at Moody’s Analytics. A company should not only focus on a direct hit – your suppliers could hold your data, so a cyberattack on them or their partners would leave you exposed. Assessing the cyber risk of your key suppliers and service providers forms part of successful risk management.
You can’t control external shocks, but you can prepare for the disruption they may cause. Container shortages, shipping bottlenecks, and logistics staff shortages are out of your control; inventory levels are not.
Carolina Azar, Senior Director, Product Strategy at Moody’s Analytics, says that “having a comprehensive view of your suppliers is the most important thing” for a resilient supply chain. Their sustainability frameworks, corporate governance, and business goals, for instance, can provide a more rounded picture and therefore give a more in-depth risk view.
“It’s important to guarantee business continuity,” says Tobruk. “This means that your profits won’t be affected; it also means your supply chain remains competitive.”
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