With the globalisation of markets and ever-increasing complexity of global supply chains, companies have to assess the risks associated with supply chains to ensure business continuity. The effect of the global supply chain in creating safety and quality risks and vulnerabilities is an ongoing concern and something that organisations must take seriously. The COVID-19 pandemic has challenged the resiliency and stability of supply chains in withstanding unpredictable and unprecedented conditions and has highlighted just how fragile the interdependencies of supply chains really are.
One thing that companies have had to do to survive is accept change and be proactive in managing their supply chains. The resiliency of a company’s supply chains depends on a strong supplier management program along with constant monitoring for developing or ongoing supply chain risks. Sometimes, the most cost-effective sourcing of materials may not be possible because of geopolitical events, the continued impacts of the COVID-19 pandemic or other outside factors.
So, what are some of the supply chain risks that companies should be prepared for in 2022 and beyond? Everstream Analytics recently published its 2022 Annual Supply Chain Risk Report, which identified threats in five major areas in which companies should concentrate their comprehensive risk assessments and the development of flexible response plans:
- Worldwide water instability
Water is a key component of just about every production industry. According to the United Nations, Five of 11 global regions now see water stress values above 25%. The threat is accelerating because of population growth, rapid urban and industrial expansion, and an increase in extreme weather events such as droughts and floods. Key waterways such as the Panama River in South America and the Rhine River in Europe have experienced record low water levels, impacting inbound and outbound transportation of raw materials and finished goods. Limited water supply also causes prices to surge and can threaten operations across multiple industry sectors.
- Ocean freight bottlenecks
As we have seen throughout the pandemic, the global ocean cargo industry continues to suffer from port congestion and delays. Factors such as low inventory, strong consumer demand and the ongoing impacts of the COVID-19 pandemic on resources and logistics issues continue to create disruption to supply chains. Temporary closures of terminals or entire ports are causing long waiting times for vessels. And, even if vessels are able to make it to shore, many companies are having problems unloading their cargo, creating product quality concerns for products with shorter shelf lives. In March 2021, the six-day blockage of the Suez Canal halted maritime traffic, impacting supply chains throughout the system and demonstrating how vulnerable and fragile global supply chain infrastructure can be.
- The great resignation
In what has been referred to as the “great resignation,” workers are leaving supply chain-related jobs in record numbers. Employer threats to permanently replace striking workers no longer carry the same weight. Shipping and transportation companies are at considerable risk of disruption from strikes due to warehouse capacity being pushed to its limits, labourer and truckdriver shortages, delays at ports, and the fallout effects of the COVID-19 pandemic.
- A change of just-in-time strategy to just-in-case
Over the years, just-in-time strategies have proved to be a cost effective and efficient method of production and inventory management. Amid the effects of the COVID-19 pandemic, companies are shifting their mindsets to a just-in-case model, maintaining increasing safety stock of critical components and materials and inventory of high-demand items. A just-in-case strategy increases inventory levels along with the need for more warehouse space, additional labour and increased insurance in addition to creating the possibility of an increase in obsolete inventory, thereby increasing costs. Continued lockdowns and border closures will delay any return to a just-in-time inventory practice.
- Regulatory scrutiny impacting global supply chains
Social responsibility and sustainable business practices can develop into a considerable business risk. Environmental, social and governance (ESG) performance is a key driver for safeguarding reputational risks. Some countries have passed supply chain laws on human rights, and it is expected that other countries will follow suit with laws that will hold companies and their suppliers accountable for human rights violations. The enactment of these laws will assess significant penalties for companies that violate the provisions of these laws, including fines, the seizure of shipments or even exclusion from public procurement for several years.
If companies are to maintain steady business operations, threats in the global supply chain will require immediate attention. Control Risks works with clients around the world on these issues and believes that there are steps that companies can take to mitigate these threats and risks. Please note that this is not a comprehensive list but, rather, a sampling of some key measures that companies should consider.
Companies need to be agile enough to transfer suppliers to those closer to home, where possible, in order to ensure a steady stream of materials. This can be a daunting task in balancing availability, costs, risks and potential growth. The use of risk models and technology can help companies make informed decisions when it comes to meeting company objectives. The assessment and scrutiny of suppliers will be essential in ensuring compliance with product safety and quality standards. Potential and current suppliers should also be vetted for other potential liability exposure.
Common actions that companies have taken to adjust to the erratic supply chain environment involve building flexibility in sourcing and distribution strategies. A crucial step is conducting supplier audits to better understand suppliers, build trust and verify performance against contractual agreements and ensure that suppliers are managing their business relationships. Supplier audits can uncover gaps in suppliers’ processes that could lead to a product safety issue, an incredibly important step given the supply chain issues noted above. Especially since, as we have seen with strained resources, some quality and safety standards have slipped. Where gaps are identified, corrective action is necessary or alternative methods of sourcing materials may be required.
Another strategy adopted by companies is the modernisation of their operations. Having real-time data at your fingertips that provides full visibility into your supply chain will make your company better prepared to handle a disruption in the supply chain and be proactive to whatever extent possible in the avoidance of slowdowns or downtime that can have a ripple effect on the supply chain, resulting in increasing business disruption. Optimising productivity and the balancing of resources will help with on-time deliveries and managing capacity constraints, both of which can help mitigate associated product quality risks. In order to maintain or improve on-time deliveries, production, inventory and safety stock may need to move from a just-in-time to a just-in-case strategy and practice. Substitutions or redesign of a product may be another strategy to engage when demand for materials cannot be fulfilled for a sustained period of time. Products with shorter shelf lives, such as foods, are at risk of spoilage or bacterial growth if inventories and safety stock increase. If companies need to rely on substitutions of materials, risk assessments will be required to ensure product quality, safety and adherence to regulations.
Something that can be easily overlooked is the importance of a predictive and preventative maintenance program. With the long lead times and delivery schedules for critical machinery parts used in manufacturing products, a thorough preventative maintenance program can help avoid unnecessary downtime for critical assets. In addition, if machinery continues to operate beyond its maintenance schedule, there is a risk of inferior product and an increased risk of foreign materials contaminating the product.
Companies will continue to be challenged by revised government mandates and new regulations. Conducting social responsibility and sustainable business (e.g., ESG) audits will become increasingly important in order to comply with new regulations regarding human rights in the supply chain. Companies that have engaged in unethical business practices, whether knowingly or unknowingly, are at a greater risk for government sanctions, product recall for substandard or unsafe products, fraudulent products, and the deterioration of brand and company reputations. Companies will also need to stay current with ever-changing product safety regulations in order to avoid non-compliance and risks of recall, fines and government sanctions.
Companies are looking for better ways to trace product through the supply chain by leveraging new and emerging technologies to create a safer and more traceable product in the global supply chain system. Especially in the food industry and with regard to the FDA’s New Era of Smarter Food Safety initiative, traceability is a key factor in helping keep food products safe. Achieving end-to-end traceability involves every actor in the supply chain because, if there is a product safety issue, it is essential to quickly trace all affected product throughout the system. An exchange and interlinking of data throughout the supply chain offers significant product visibility as well as insight into solving traceability challenges while also providing the means to protect consumers from harmful products.
With all of the supply chain disruptions companies have experienced over the past few years, the threats that companies can expect going forward and the unavoidable variability and risks in the supply chain, it is essential that companies have visibility into their supply chain and systems that capture data. Companies need to reassess supply chain risks and have an effective strategy to avoid, mitigate or respond to these risks in addition to reviewing and updating supply chain management programs in order to prepare for any number of circumstances. Readiness and flexibility will be key to the resilience of your company’s supply chain.