The term “global supply chain disruption” is finding its way into daily headlines. Ports are bottlenecked, deliveries are backed up, gas prices have skyrocketed, chip supply is down, and the list goes on. Although many of these recent challenges were exacerbated by COVID-19, many are also enduring issues that have always plagued global supply chains.
To counter this, global risk professionals need to take a holistic approach to reviewing and planning for risk. A birds-eye view of the entire enterprise and all interrelated risks is needed to make the strategic decisions to protect supply chains. This enterprise risk management (ERM) approach might be the best tool an organization has to reduce the severity of global supply chain disruption.
New problems, old cause
Global supply chains are by their very nature complex, interconnected systems that are vulnerable to fluctuations like material shortages, inefficient technology, inaccurate planning, natural disasters, trade wars, market change and more. An unexpected incident at any point in the chain can wreak havoc on the entire system, impacting a company’s brand, market share, financial position and even future viability. For this reason, managing global supply chains has always been challenging for risk professionals.
The onset of the global pandemic triggered multiple instabilities at once, amplifying the complexity and risk exposure that global businesses already faced. Companies and ports shut down intermittently, product demand rose while people were kept at home and employment rates fell. Add to these unexpected occurrences the perfect storm of inflation, production challenges, COVID testing and increased shipping costs.
Globalization necessitates effective enterprise risk management
Risk management professionals can help hedge the supply chain risks inherent in globalization with an ERM approach – including bespoke global insurance programs, loss prevention strategies, business continuity plans and an understanding of how to navigate the global regulatory landscape. The process of pinpointing firmwide risks and assessing them to create strategies that are continually monitored for adjustment is how risk professionals can systematically mitigate supply chain disruptions.
Here are a number of specific strategies to consider within an ERM framework:
- Portfolio view of risk – Understand the main drivers of business strategy, as well as internal/external risk factors across all departments/areas of focus.
- Business continuity plans – Implement disaster preparedness and response plans that fit within the company’s overall ERM objectives, such as flexibility to change or outsource production as needed.
- Risk transfer – Leverage traditional options like insurance, which provide liquidity when needed. Having properly structured global insurance programs can also help address challenges unique to international operations, such as taxes and admitted regulations.
- Risk retention/avoidance – Explore traditional options like retentions, as well as alternative solutions as needed, including captives. Avoid anything deemed too risky by risk modeling and risk assessment.
- Global risk and insurance advisor – Understanding the global insurance landscape is imperative. Partner with an insurance broker with dedicated international experts who are engaged across all insurance product lines and can provide guidance, including loss prevention methods, response plans and other safeguards along the entire chain.
- Understand the global landscape – Assess each country the chain is exposed to, including the regulatory environment, the social responsibility impact of potential new vendors, and whether a supplier liability program should be considered or other alternatives.
- Communication network – If possible, establish contacts on the ground (or leverage your partner contacts) who can advise on pertinent local trends or changes.
- Technology – Supply chain technology should be reviewed periodically and integrated across all ERM disciplines. For example, predictive modeling or planning technology can be integrated with partial or fully digital supply networks (DSNs), improving both forecasting and implementation visibility.
- Inventory/production management – Review just-in-time (JIT) or short-cycle inventory management versus buffer inventory or other approaches.
In addition to these strategies, agility and the ability to level up plans and tools to a global scale is key for global businesses to combat risks.
While supply chains have always been vulnerable to change, they have been resilient, too. Companies with strategic and tactful ERM methods have been able to not only survive but also thrive during periods of disruption — and they will do so again if they are prepared to adapt.