Global supply chains received a stark wake-up call when COVID-19 impacted various industries and manufacturing sectors, fundamentally altering perceptions of supply chain risk across all enterprises.
Consider supply chains as the continuously operating engine of a company. They drive the manufacturing of products and facilitate sales, generating vital revenue. Any disruption in the supply chain can be likened to a sudden halt in a perfectly tuned and oiled machine, causing significant operational challenges.
In the years following COVID-19, there has been a noticeable shift in the types of supply chain risks that enterprises commonly face. These risks often originate from third-party vendors, known as third-party risks, or from internal mismanagement and non-compliance, leading to significant disruptions.
To combat these risks, organizations have adopted various strategies, including third-party risk management and comprehensive supply chain risk management. However, as the landscape of supply chain risks continuously evolves, it becomes crucial for companies to adopt flexible and dynamic risk mitigation strategies. Such adaptability is key to enhancing resilience against unforeseen challenges.
Gartner’s recent study highlights a shift in business approaches towards risk resilience. Richard Howells, Vice President of Solution Management for Digital Supply Chain at SAP, emphasizes this evolution:
“Supply chains are transitioning from a focus on low cost and optimization to prioritizing risk resilience and sustainability. This shift requires a delicate balance to maintain reasonable costs without compromising efficiency or company profits. Embracing risk resilience involves preparing for a wide range of potential scenarios.”
In this article, we delve into the current definition and implications of supply chain risk. As the years progress, staying informed about the evolving risk factors that significantly impact supply chain stability is more crucial than ever.
What does Supply Chain Risk mean today?
Not long ago, supply chain risks were somewhat peripheral concerns for organizations. However, today, due to the expanding diversity of risk factors, supply chain risk management has ascended to a central role in the operational strategies of most global organizations.
The pandemic served as a critical wake-up call, but it’s the growing issues like escalating cybersecurity threats, data privacy concerns, and economic inflation that have propelled supply chain risk management to the forefront of business operations. These elements underscore its importance in today’s corporate world.
The evolution of technology, while beneficial in many ways, has also contributed to this heightened concern. As supplier networks become increasingly interconnected and complex, it poses greater challenges for companies to identify and mitigate risks, especially during disruptions.
Our research indicates a pattern in the types of supply chain risks currently manifesting in the market. These risks are indiscriminate, potentially impacting any business, regardless of the model or efficiency of its supply chain.
In the following section, we will delve into specific supply chain risks that organizations should be prepared for in 2024.
Supply Chain Risk you should keep an eye out for in 2024
1. Global Political Unrest or Geopolitical Risk
Global political unrest significantly contributes to supply chain disruptions worldwide. High-profile conflicts like the US-China trade war or the Russia-Ukraine conflict are prime examples of how global events can ripple through supply chains, often with detrimental effects.
Such geopolitical dynamics create unpredictable operating environments, leading to increased costs, added complexity, and reduced efficiency in supply chains. They also impact global logistics routes and can escalate cross-border tensions.
Geopolitical risks aren’t limited to the global stage; they also pose significant challenges within individual countries. For instance, a global issue such as the US-China trade war can have far-reaching effects, causing a domino effect that impacts supply chains in countries like India or the UK. This interconnectedness means that global geopolitical unrest invariably affects each nation.
Domestically, internal political dynamics, including conflicts between political parties, rallies, worker strikes, and other events, significantly disrupt supply chains. Despite these obstacles, companies find ways to maintain operational continuity. A key to resilience lies in not overly relying on a single supplier for a large portion of your products.
By diversifying the supplier base, companies can make more flexible decisions and allocate resources optimally within their supply chains, staying proactive in the face of risks.
Employing technologies like AI and predictive analytics can enhance supply chain agility. By swiftly identifying the most favorable links within the supply chain, businesses can mitigate risks and adapt to changing circumstances more effectively.
2. Economic Challenges and Dealing with Inflation
Inflation has long been a significant factor influencing supply chain risks across various industries. During the pandemic, global supply chains experienced a surge in demand for consumer products. However, meeting this demand became increasingly challenging as lockdowns worldwide disrupted logistical operations, leading to higher production and transportation costs.
Additionally, the pandemic-induced labor shortage, compounded by the need for strict health standards, created complex management scenarios within supply chains. This ongoing labor shortage is a critical concern, leading to slower production rates, disrupted distribution, delayed deliveries, and ultimately, customer dissatisfaction.
From an economical perspective as a supply chain risk factor, the rising costs of raw materials, freight, and labor, which are not anticipated to return to pre-pandemic levels, continue to exert pressure on manufacturing costs.
These escalating costs represent a significant challenge for companies, compelling them to rethink and restructure their supply chain strategies to maintain profitability and efficiency in an inflation-impacted economic environment.
The overall supply chain is expected to experience a substantial rate increase, estimated at 2.9% from January to December 2024. This escalation is attributed to ongoing economic and geopolitical market changes, a new norm in supply chain cost pressures, and persistent supply chain disruptions. The inflationary environment has notably shifted the dynamics within supply chain operations.
Where previously operations and productivity programs could offset inflation, the recent years have seen inflation rates ranging from 7 to 10 percent year over year, making such offsetting increasingly difficult. This high inflation rate imposes additional demands on supply chains and organizations to maintain and enhance productivity under these challenging conditions.
3. Disruptions due to climate change and being complaint with ESG standards
In the 21st century, the stark realities of climate change have imposed significant challenges on supply chains, forcing them to adapt to new environmental norms.
The increasing frequency and severity of climate-related hazards, such as extreme weather events, are expected to cause more disruptions in global supply chains. These disruptions can interrupt production, raise costs and prices, and negatively affect corporate revenues.
The complex system of interdependent supply chains, supporting world trade in goods worth almost $20 trillion annually, is particularly vulnerable to these climate hazards. Extreme weather events, made more frequent and/or severe by climate change, increase the likelihood of supply chain disruptions beyond the resilience of current manufacturing assets.
Specific supply chains, such as those for semiconductors and rare earth metals, are highly concentrated in geographies with an increasing probability of relevant climate hazards.
Implementing sustainable practices is increasingly seen as a vital strategy for mitigating risks associated with climate change. However, this requires significant upfront investments, which can be challenging for organizations with tight budgets.
While keeping climatic conditions in mind companies are constantly pushed towards adapting a sustainable approach when working with suppliers. Investors and customers in today’s marketplace demand for companies to adapt to ESG and sustainability standards and maintain the practice within their supplier network.
This approach can lead to a much greener sourcing practice but on the other hand can also hamper supplier diversification and can harm the company by limiting them to only work with suppliers with the capabilities to follow sustainable norms.
To thrive in this era of climatic uncertainty, it’s imperative for suppliers to embrace sustainability practices. This alignment is not only crucial for their survival but also instrumental in helping companies achieve their sustainability goals.
4. Evolving Cyber Threat Landscape
The cyber threat landscape, particularly between companies and their third-party suppliers, is undergoing rapid evolution. As global supplier networks become increasingly interconnected, it’s critical to carefully consider how proprietary data is shared with suppliers.
The complex nature of these networks, often involving numerous fourth parties, presents an ideal target for hackers due to reduced traceability and transparency. An appropriate example is the Okta hack that took place in January 2022.
In this cybersecurity incident, hackers exploited vulnerabilities in the supplier’s system to infiltrate the broader supply chain network. Their goal wasn’t just to extract data from the vendor but to access the primary company (Okta) to breach its system and steal customer data.
This episode highlights the extent to which a supplier’s cybersecurity measures (or lack thereof) can expose your organization to risks. Ensuring robust cybersecurity isn’t just about protecting your own systems; it’s equally important to verify that suppliers are also implementing stringent cybersecurity measures.
In present day companies are using technologies like Internet of Things (IoT) in supply chain management. Though these technologies will widen the ease of managing a supply chain network for companies, on the other hand, these technologies can open up new ways for hackers to attack.
This necessitates a robust governance framework and risk management approach. While AI-driven security solutions and threat intelligence can significantly bolster your ability to predict and identify cyber threats, it’s worth noting that these technologies are also being exploited by cybercriminals to refine their attack methods.
To keep safe from these growing threats, it’s important for companies to work together with their partners. They need to create a strong security plan that includes always being on the lookout, choosing where to focus based on how big the risk is, teaching employees about security, using strong passwords and security checks, keeping their systems up-to-date, and making sure everyone in the supply chain knows how important security is.
In the End
As 2024 approaches, the supply chain risk landscape is evolving rapidly, presenting new challenges and opportunities. In this dynamic scenario, adaptability and proactive risk management are crucial for organizational resilience.
Advancements in technology, especially in AI, IoT, and blockchain, are pivotal. These innovations enhance supply chain visibility and responsiveness, aiding in better anticipation and management of disruptions. For example, blockchain technology can significantly improve transparency in supplier networks, helping identify and address vulnerabilities more efficiently.
Sustainability and ESG compliance are increasingly integral to supply chain management. With growing consumer awareness and regulatory demands, integrating sustainable practices is essential, not just for risk mitigation but as a foundational business principle. This shift towards sustainability paves the way for new market opportunities and innovation.
Effective risk navigation in these complex landscapes requires collaboration and shared information among supply chain partners. A culture of trust and transparency is vital to collectively withstand various risks, including cyber threats and geopolitical changes.
In summary, as supply chains continue to intersect with these multifaceted risks, companies must stay alert and agile. Continuously refining risk management strategies is key to not only protecting operations but also exploring new avenues for growth and innovation in a globally connected ecosystem.