Supply chain challenges – and opportunities

Gary Lynch, Managing Director for Marsh Risk Consulting, on the obstacles to overcome to make supply chains more resilient. The World Economic Forum’s Building Resilience in Supply Chains report has just been published.

Fact: Global supply chains are continuously subjected to all types of shocks. Fact: Supply chains – that series of interconnected and interdependent relationships that bring value to the market – are only as strong as their weakest links. Fact: Resilience cannot be achieved in isolation. Fact: It is difficult to motivate public and private organizations to collectively address the need for greater resilience. But why?

Building Resilience in Supply Chains by the World Economic Forum’s Risk Response Network attempts to define priorities and articulate specific actions to achieve greater unified resilience. However, strong economic and political headwindschallenge the successful execution of the report’s recommendations.

These challenges are:

• Immediate/individual needs trump the greater good. Demand volatility will remain unpredictable, fuelled by global economic fragility. The result? A heightened level of economic and individual “sensitivity” that steers everyone’s focus towards short-term, individual goals, rather than greater shared resilience needs. For example, governments with economies lacking a diversified product base may institute nationalistic and trade protection policies/tariffs; organizations facing growth pressures may concentrate on their own sustainability and market leverage, even hoarding capacity at others’ expense; and individuals and labour groups, believing that jobs are in jeopardy due to further automation, may be more inclined to strike.
• Greater diligence required. Global competition and continued pressure on margins will accelerate the deployment of adaptable supply chain networks, providing organizations with “on demand” or contingent capacity. This capacity – outside the boundary of the organization – will rely on cloud computing and adaptive manufacturing capability, for example. This trend will drive greater supply chain complexity, increase third-party reliance and expose many to large-scale/systemic risk when a shared service or utility encounters a problem.
• Cost is always a consideration. The rapidly escalating cost of compliance and managing risk requires more measured risk investments. In the US alone, it is estimated that the cost of major regulation has exceeded economic growth at a rate of 7.6% versus 2.2% for the period 1998 to 2011 (NERA Economic Consulting/Manufacturers Alliance for Productivity and Innovation, “Macroeconomic Impact of Federal Regulation of the Manufacturing Sector”, 21 August 2012).

These are tempered by opportunities. Although the Risk Response Network’s vision faces significant execution headwinds, the opportunity to achieve greater resilience is not lost. We learned from recent mega-events in Japan, Thailand, Europe and the US that our global supply chains are more interdependent and interrelated than originally believed: energy failures affected manufacturing and transportation; chemical shortages impacted high technology. This further disrupted automotive and consumer electronics. And all industries were impacted by contentious disputes over critical shared resources such as air capacity. What was really needed? An aggregate view and collective effort along with opportunities to leverage isolated successes.

We have witnessed the collective industry benefits of a few large Original Equipment Manufacturers striving towards improved resilience. Leaders in the retail, automotive, high-tech and energy sectors have defined common resilience taxonomy and standards; established criteria for evaluating third-party risk; provided greater back-and-forth monitoring; and facilitated the exchange of risk-related information about critical facilities and transportation routes.

More importantly, they rewarded or penalized their partners’ behaviour. As a result, some of these partners leveraged the requirements with their business partners… and the propagation began.

So yes, resilience is achievable in global supply chains. And it begins with local, national, regional and World Economic Forum-level discussions about our common interest, followed by assessments of and conversations with all participants in our global supply chains, even our competitors.

Gary Lynch is Managing Director and Global Leader for Marsh Risk Consulting, Marsh. Find out more about the World Economic Forum’s Supply Chain Risk Initiative here.