The digital consumer, the Internet of Things, climate change, aging infrastructure, fluctuating energy prices and the actions of governments are having a profound impact on supply chain risk.
All the risks listed below are evolving, some in ways that may be contrary to accepted wisdom and some in ways that significantly increase risk and its complexity.
Supply chains can either be a potential target of an attack or the means through which an attack is propagated. Cyber criminals are becoming savvier, and supply chains are often optimized for speed and cost—not for security. If orders can’t be placed because a system is down, a disruption will occur. With a cyber attack, there’s no geographic boundary as there is with a severe weather event.
[Related: The 5 hidden risks in your supply chain]
A different but more present concern is the theft of intellectual property. This risk may worsen as the capital investment needed to manufacture goods is reduced by the increased availability of 3D printing.
2. Natural catastrophes
Images of recent disasters in Japan and Thailand are still fresh in peoples’ minds. Yet the absence of a major catastrophe in other parts of the world doesn’t mean that risks there are reduced. Climate scientists generally agree that weather patterns are becoming more extreme, not less. The good news is that many companies have learned from their own or their competitors’ experiences and have strengthened business continuity plans. Some are starting to adopt a quantitative approach to risk assessment, so the cost of risk can be made part of the total cost to serve and achieve more balanced supply chain optimization.
As aging infrastructure supports higher volumes of freight, the cracks are beginning to show. Add to this the dependency that suppliers, manufacturers and other companies have on major hubs and ports. Then consider the cyber and physical risks that a facility with old IT systems might face at sea level, and port risks can rise high on the list of concerns. In the historic tsunami of 2011, some 15 Japanese ports were located in the disaster zone, four of which were destroyed. Unlike an earthquake—which can sometimes come without warning—some risks are visible at a distance and can give companies with more flexible planning capabilities an advantage. The same advantage can be gained for uncertain events through the use of probabilistic modeling, as was demonstrated in the different ways in which companies responded to the recent slowdown in West Coast ports.
It was a labor slowdown that highlighted the American economy’s dependence on West Coast ports, but workforce risks exist at every point in a supply chain. The scarcity of vehicles to move goods in and out of ports gives a glimpse of the consequences from the looming truck driver shortage in the United States as regulations for drivers’ hours on the road meet the reality of an aging workforce. A different but no less challenging workforce risk comes when a supplier abuses workers’ rights. This can be hard to detect—and harder to control—but nevertheless damaging to the brand that comes from such a business.
“It takes a lifetime to build a good reputation, but you can lose it in a minute.” Never have Will Rogers’s words seemed more true. Whether the issue is labor abuses, use of harmful chemicals in a product, or even a product recall—the speed with which negative news spreads to customers and shareholders is faster than ever before. And some customers aren’t waiting for news to make brand decisions; they’re actively seeking information about how a product was made and where the raw materials come from. As with any risk, this also presents an opportunity for companies that can identify those customers and provide them the information they seek.
Long-term sustainability is an area where reputations can be built—and lost. California’s drought, for example, is highlighting the risks around water, and more consumers may soon take a greater interest in the supply of water used in sourcing, manufacturing, and delivering products. Many supply chain managers already have an intense focus on water quality and availability where its loss would likely cause supply disruption.
7. Regulatory noncompliance
Environmental risks drive some of the growing list of government regulations through which companies must comply, even when much of the process is out of their direct control. Supply chain managers often face ever-expanding demands at the intersection of global regulations, raw materials and the location and type of use for those materials. Companies that get ahead of these requirements can build reputational equity, and some are even leveraging the data collected. By staying on top of compliance operations, they can enhance visibility to improve the resilience of their supply chains.
There are many other ways in which governments can have a big impact on supply chains. Seizure of assets has affected companies operating in certain countries, particularly in industries where sovereign resources are being extracted and major investments have been made. Depressed oil prices may be good news for many in the supply chain, but not for governments that rely heavily on oil tax revenues and who may be looking to review the terms of their deals with oil companies.
Emerging technologies, shifts in markets, and environmental changes are intersecting to alter the profile of supply chain risk. Companies that understand, prepare, and are able to respond quickly to the evolving risk landscape stand to win business and protect their profitability.
David Shillingford is senior vice president of Supply Chain Solutions at Verisk Analytics (Nasdaq:VRSK).