The changing nature of global supply chains – why risk mitigation is necessary
Did you know that the average motor car has in the region of 11,000 individual parts?
Approximately 60-70% of car parts are sourced from external suppliers, with the remaining 30-40% produced by the car manufacturer themselves. Parts can come from up to 200 different suppliers across 300 geographical locations, with a strong focus towards the Far East.
The motor car industry serves as a microcosm to demonstrate the complexity and dependencies that exist within one product in one industry. Across the global marketplace, the sheer number of components being manufactured or transited at any one time is enormous.
The changing supply chain landscape
So, should we be more surprised that the global supply chain works as effectively as it does, rather than being surprised when it fails?
Consumers are arguably feeling the impact of supply chain disruption more than ever before; both in terms of availability and price. In recent months, large gaps appeared on supermarket shelves, people panic bought at fuel stations and some construction materials such as timber and steel continue to see a staggering level of cost inflation.
It would be very easy to point at a series of unprecedented global or regional events such as Covid19, Brexit, the Suez Canal blockage or civil unrest and categorise them as ‘one-off’ generational events.
Furthermore, it could be reasonably argued that the global supply chain is effective, fit for purpose and that these instances are short term blips.
Whilst it is difficult to predict what the future holds regarding the propensity for major global events, both in terms of frequency and severity, it does appear to be increasing.
The World Weather Attribution (WWA) initiative estimates that the 2021 flooding experienced in Germany is between 1.2 and 9 times more likely to occur again when compared to pre-industrial times. Added to this, The Economist estimates that mass protests have increased by an average of 11.5% per year since 2009, with 2019 seeing protests in 114 countries across all continents.
We are now living in a world where individuals and companies are determined to play their part in tackling climate change and supporting their local communities. The Covid-19 pandemic has highlighted the need to support local communities with a Barclaycard survey predicting that 9 in 10 people will continue to shop locally. Therefore, it could be inferred that businesses who also produce locally may gain a competitive advantage.
These socio-economic trends, combined with the risks outlined above, could see a move towards supply chains consolidating to include fewer suppliers, and production being brought geographically closer together.
Why risk mitigation remains a necessity
It is so important that businesses understand the potential risks and vulnerabilities that exist in today’s global supply chains. This includes a consideration of whether their current models are sustainable, both in terms of the supply chain itself and the environmental impact it has.
Whilst insurance products such as Contingent Business Interruption (CBI), can act as a ‘back stop’ to help businesses protect themselves against the risk exposures of the current global supply chain, it is imperative that businesses understand their supply chain networks and associated risks.
Businesses which are dependent on complex supply chain networks are investing heavily in supply chain management capability first and foremost. In the future, a Chief Supply Chain Officer (CSCO) will no longer expect to contract with suppliers purely based on price and cost savings, instead, they will look to develop value-add partnerships with their suppliers that can help evolve, for example, digital solutions, cyber security, and business resilience. The ‘back stop’ of CBI insurance can be purchased as an extension to a property policy, thus affording protection should a business be impacted by the failure of a supplier. However, CBI cover usually requires there to be an insured peril (i.e., fire, flood, storm) at the supplier location for the policy to trigger.
Alastair Thomson, Zurich’s Head of Expert Property Claims, comments: “We would strongly advocate an approach whereby an organisation does all they can to mitigate against the risks that exist in their supply chain. Insurance can provide protection against some of these risks and Risk Managers should engage with their insurance broker to understand the extent to which insurance can support wider supply chain risk management”.
Zurich Resilience Solutions has significant expertise in supporting customers develop their supply chain management expertise, should you wish to explore or discuss this further please visit our website.
