Supply chain resilience: Are you ready for 2017?
With the growth of "nation-first" political sentiment across Europe and the United States, Karina Rodriguez-Diaz, Head of Crisis Management Aon Risk Solutions, looks at how Australian companies should be re-examining their supply chains, and preparing for the impact of a possible rise in protectionist trade policies
The scope for geopolitical risk is growing
In the past, the focus of geopolitical supply chain risk has centred largely on developing countries where issues such as terrorism, corruption, political instability and a weak regulatory environment pose the greatest threats. Now, the rise of nationalistic, antiestablishment parties across Europe (where there will be a number of significant elections this year), coupled with the continuing uncertainty about the full impact of Brexit, and an anticipated shift toward protectionism in the United States, are posing a new threat to established global supply chains.
Perhaps one of the most immediate risks is simply uncertainty. How much political rhetoric will actually become policy? However, rather than just hope for the best, Australian organisations need to understand the potential impact on their business supply chains, should multilateral trade deals be scrapped, or a trade war erupt between the U.S. and China.
When everyone is connected, everyone is impacted
In the past, a political risk in one particular country did not necessarily impact another country on the other side of the world. Yet through globalisation, which has prompted an increasing reliance on complex supply chains for greater competitive efficiencies, organisations have become more vulnerable to a number of direct and indirect supply chain risks.
If these risks are now overlaid by growing political uncertainty, supply chain resilience will become even more crucial in enabling organisations to respond quickly to emerging threats.
Some of the consequences of supply chain interruption include:
- Being unable to supply products to your customers
- Experiencing unexpected increases in costs of products or components
- An inability to source raw materials
- Being unable to meet the timelines of your contracts and agreements
Quality control, and brand and reputation risks
If you are forced to make sudden changes to your supply chain, quality control can become a critical risk. You need to know where the product is being outsourced to, in what sort of conditions it is being outsourced, and how it was manufactured. This means being able to track and verify compliance with quality control specifications not only those set by minimum regulations, but also the standards your clients have come to expect (and now demand) from your organisation.
An example of this risk is the European horse meat scandal of 2013. Here, due to the high input price of meat, suppliers subcontracted to smaller suppliers without taking the necessary steps to ensure the meat was compliant not only with quality specifications but also generally safe for human consumption. The impact of this lack of quality control escalated right through the supply chain and up to the retailers, creating massive financial losses and severely damaging the brand and reputation of numerous wellestablished and previously wellregarded businesses.
Analysing your supply chain
An analysis of your supply chain should include the following:
- Who are your suppliers?
- Where are they located?
- If you have an overseas facility, what happens if political instability or trade wars force you to close down that facility?
- What if the cargo or logistics companies you rely on aren't able to ship your goods?
- Do you have alternative suppliers and shippers?
- What will be the financial impact of switching to a Plan B?
In addition to the direct outcomes of geopolitical supply chain risk such as the impact on your contracts with suppliers in countries subject to turmoil, there are also indirect ones.
For example, if your product incorporates components that have been sourced in China and you export that product to the US, how will a deterioration in trade between the US and China affect your company?
And of course you also need to know who supplies your supply chain.
How Aon can help
The Aon Risk Consulting team can assist you analyse the vulnerability of your supply chain, and quantifying the impact of disruption to one or more links in that chain.
We also have specialists who can help you determine the possible financial impact of a specific type of threat, such as a product recall, cyber risk, political risk, marine cargo risk and more. By working with you to analyse and understand your supply chain and your reliance on each link, we can help you develop risk mitigation strategies and provide appropriate insurance solutions.