3 ways to help prevent geopolitical risks from disrupting your supply chain
March 21, 2016
With the dramatic increase in global political unrest and cyberattacks, creating a resilient supply chain is even more critical for North American companies.
Globalization has brought many new opportunities to North American businesses, but the political, geographic and social insecurities that go along with it also have increased the risk of disruptions. One effect of this heightened risk environment is that supply chain resources that have been taken for granted—such as access to raw materials, cyber infrastructure and secure financial transactions—are now more vulnerable. This represents a paradigm shift in planning for many North American companies: the need to give closer scrutiny to the interconnections between geopolitical exposures and their supply chains.
Each year, Zurich works with the Business Continuity Institute on a study about business interruptions stemming from supplier disruptions. Again this year, the data suggests that the fragility of global supply chains is intensifying. The Supply Chain Resilience Report 2015 includes some key insights:
- For the past six years, over 75% of companies reported having supplier disruptions, with half suffering more than one break per year.
- More than one third of organizations (35%) report having more than 21 key suppliers, making risk management a more challenging task.
- Nearly 50% of disruptions do not originate with direct / contractual suppliers, but stem from Tier 2 or other indirect / component / raw material suppliers.
- For the first time, cyberattacks and data breaches made it into the top three causes of supply chain disruption.
- Nearly 60% of companies do not yet insure against supply chain disruptions, despite the recent development of "all risk" supply chain insurance that can cover a plethora of physical, financial and other damages across the value chain.
Perhaps the most revealing fact in the Supply Chain Resilience Report: 72% of companies do not have full visibility of their supply chain. This means that they do not have the ability to track parts, components or products in transit from the manufacturer to their final destination. They may also not engage in best practices such as firm-wide reporting of supply chain incidents.
Whether you are an organization with global operations or a US-based company that sources from overseas suppliers, here are three ways to help build more supply chain resilience for your organization:
- Get top-management commitment.
Supply chain issues need to be addressed at the highest levels of an organization—the C-suite and the Board. These highest executive levels need to own the risk agenda for supply chain issues, because it is so inherently intertwined with business strategy, planning and profitability. - Develop more collaboration around business continuity.
Since the 1990s, more businesses have sourced from emerging markets, where much of the geopolitical risks and social unrest is rapidly increasing. It’s now becoming evident that risk assessment and disaster recovery plans aren’t keeping up with these new risk scenarios. Assessing the likelihood and repercussions of supply chain failures before they happen is the first step to proactively enhancing corporate business continuity planning. - Obtain assurance from key suppliers.
Organizations can close gaps in supply chain resilience by maintaining a robust system of assurances from suppliers. In the Supply Chain Resilience Study, almost half of organizations (49%) ask for supplier alignment to recognized standards like ISO 22301, as well as validation of each supplier’s own business continuity plans. It is also beneficial to validate their backup plans through joint scenario testing to ensure that you can partner well during a crisis.
Overall, what’s key to creating a resilient supply chain is having a holistic, integrated enterprise risk management process which involves various functions in a common business goal. An organization can’t afford to have different risks managed by different people and policies; there is too much potential for risks causing a cascading effect across both the physical and digital realms.
Author’s note: To learn more about the relationship between geopolitical risk and supply chain, listen to Zurich’s podcast, “Geopolitical risks hitting closer to home for North American companies.”