Executive Briefings

Unprepared Supply Chains Are 'Driving Blindfold' Toward Disaster

What's the biggest risk to global supply chains today? Natural disasters? Terrorism? Supplier failure? Port strikes? How about ignorance?

Unprepared Supply Chains Are 'Driving Blindfold' Toward Disaster

For all the talk of heightened supply-chain risk today, nearly one in 10 organizations don't even know who their key suppliers are. And seven in 10 lack full visibility over their supply chains.

Those findings come from the new Supply Chain Resilience Report, published late last year by Business Continuity Institute and supported by Zurich Insurance Group. And lest you think this one report might be an anomaly, check out Zurich’s Third Annual Global SME Survey, in which half of the responding small and medium-sized enterprises say they don’t believe that the loss of a main supplier would have any impact to the business. This despite the fact that 74 percent of organizations experienced at least one supply-chain disruption within the past year, and 14 percent of that group suffered losses of well over $1m as a result.

Clearly, there’s a serious disconnect within the executive suite of companies large and small. Zurich states the obvious: “The conflicting data implies that too many businesses do not fully understand the level of exposure facing their supply chains … and overlooking these risks can be extremely costly.”

Without a doubt, the world is becoming a riskier place for global business. The 2015 edition of the Global Risks report from the World Economic Forum puts it in frightening terms: “Indeed, our self-perception of homines economici or rational beings has faltered in the aftermath of the financial crisis, whose effects are still unfolding socially, as persistent unemployment, ever-rising inequality, unmanaged migration flows and ideological polarization are among the factors stretching societies dangerously close to the breaking point.” This growing social fragility, the report argues, “is even threatening geopolitical stability, as breakdowns in cooperation within states make relations between states more difficult.”

It’s a megatrend that appears to have escaped the notice of many global business executives. Companies wake up in the immediate aftermath of a flood, tsunami or earthquake, but they quickly return to their state of studied obliviousness – at least until the next disaster. Toward which, in Zurich’s words, they are “driving blindfold.”

Linda Conrad, director of strategic business risk with Zurich North America, blames the situation in part on a lack of coherence within organizations. Companies speak of the need to achieve a holistic view of their operations, but many continue to function as a collection of silos. Individuals working in finance or risk management might be unaware of what’s going on within purchasing or procurement.

Moreover, when companies say they expect to be minimally impacted by a disruption, they aren’t accounting for the full cost of recovery, Conrad says. Such “hidden” expenses might include the need to retool the factory to accommodate a part that doesn’t meet specifications. Or they have to pull research and development engineers away from the development of new products in order to help with recovery efforts, causing them to miss crucial release targets.

All of this can have a direct impact on a company’s market share and stock price. Yet corporate executives often fail to trace the plunge to the original disruption that led to cascading costs.

The awareness is there, Conrad says, but only at ground level. Those working in purchasing, for example, know all too well the consequences of failing to obtain parts, products and services when they’re needed. The C-suite, meanwhile, will have a clear enough view of purchasing costs, but might not understand their relationship to disruptions.

The awareness gap can be especially acute when a company is manufacturing or supplying product to the customer in a just-in-time mode. The slightest disruption can have a monumental impact. Conrad says top executives need to bolster their JIT strategies with backup plans that will ensure the continued flow of product in the event of a temporary interruption. Often that will entail the need for strategically placed buffer stock, or the designation of alternative suppliers that can step in at a moment’s notice. The number of companies that source critical items from a single supplier, or multiple entities within the same geographical area, is alarmingly high.

Good business-continuity planning might seem an obvious move, but too many companies lack a “Plan B,” says Conrad. The evidence lies in the damage that gets done to unprepared organizations experiencing major disruptions. Those that are narrowly focused on day-to-day operations tend to view a glitch as a singular, unlucky event. They should be treating potential problems as regular occurrences. Unlikely though it might seem, there’s a black swan in everyone’s future.

SMEs, defined by Zurich as those with up to 250 full-time employees, need to take special note of the need for holistic risk management. They’re the ones that are likely to be hurt the most, when product pipelines become clogged. Take the longshore labor slowdown that caused serious delays at West Coast ports last spring. The biggest shippers had the leverage and ability to seek alternative gateways. “The little guys got stuck on the boat,” says Conrad.

The problem will only get worse. “The increasing complexity of the supply chain probably means there will be more disruptions that occur going forward,” Conrad says. She hopes more companies will wake up to the need for better continuity planning. Maybe they’ll be convinced by BCI’s finding that 40 percent of companies experiencing long-term disruptions will go out of business. Or maybe not. Ultimately, the lesson will be learned. The only variables are how soon, and what the price will be for waiting too long to act.

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For all the talk of heightened supply-chain risk today, nearly one in 10 organizations don't even know who their key suppliers are. And seven in 10 lack full visibility over their supply chains.

Those findings come from the new Supply Chain Resilience Report, published late last year by Business Continuity Institute and supported by Zurich Insurance Group. And lest you think this one report might be an anomaly, check out Zurich’s Third Annual Global SME Survey, in which half of the responding small and medium-sized enterprises say they don’t believe that the loss of a main supplier would have any impact to the business. This despite the fact that 74 percent of organizations experienced at least one supply-chain disruption within the past year, and 14 percent of that group suffered losses of well over $1m as a result.

Clearly, there’s a serious disconnect within the executive suite of companies large and small. Zurich states the obvious: “The conflicting data implies that too many businesses do not fully understand the level of exposure facing their supply chains … and overlooking these risks can be extremely costly.”

Without a doubt, the world is becoming a riskier place for global business. The 2015 edition of the Global Risks report from the World Economic Forum puts it in frightening terms: “Indeed, our self-perception of homines economici or rational beings has faltered in the aftermath of the financial crisis, whose effects are still unfolding socially, as persistent unemployment, ever-rising inequality, unmanaged migration flows and ideological polarization are among the factors stretching societies dangerously close to the breaking point.” This growing social fragility, the report argues, “is even threatening geopolitical stability, as breakdowns in cooperation within states make relations between states more difficult.”

It’s a megatrend that appears to have escaped the notice of many global business executives. Companies wake up in the immediate aftermath of a flood, tsunami or earthquake, but they quickly return to their state of studied obliviousness – at least until the next disaster. Toward which, in Zurich’s words, they are “driving blindfold.”

Linda Conrad, director of strategic business risk with Zurich North America, blames the situation in part on a lack of coherence within organizations. Companies speak of the need to achieve a holistic view of their operations, but many continue to function as a collection of silos. Individuals working in finance or risk management might be unaware of what’s going on within purchasing or procurement.

Moreover, when companies say they expect to be minimally impacted by a disruption, they aren’t accounting for the full cost of recovery, Conrad says. Such “hidden” expenses might include the need to retool the factory to accommodate a part that doesn’t meet specifications. Or they have to pull research and development engineers away from the development of new products in order to help with recovery efforts, causing them to miss crucial release targets.

All of this can have a direct impact on a company’s market share and stock price. Yet corporate executives often fail to trace the plunge to the original disruption that led to cascading costs.

The awareness is there, Conrad says, but only at ground level. Those working in purchasing, for example, know all too well the consequences of failing to obtain parts, products and services when they’re needed. The C-suite, meanwhile, will have a clear enough view of purchasing costs, but might not understand their relationship to disruptions.

The awareness gap can be especially acute when a company is manufacturing or supplying product to the customer in a just-in-time mode. The slightest disruption can have a monumental impact. Conrad says top executives need to bolster their JIT strategies with backup plans that will ensure the continued flow of product in the event of a temporary interruption. Often that will entail the need for strategically placed buffer stock, or the designation of alternative suppliers that can step in at a moment’s notice. The number of companies that source critical items from a single supplier, or multiple entities within the same geographical area, is alarmingly high.

Good business-continuity planning might seem an obvious move, but too many companies lack a “Plan B,” says Conrad. The evidence lies in the damage that gets done to unprepared organizations experiencing major disruptions. Those that are narrowly focused on day-to-day operations tend to view a glitch as a singular, unlucky event. They should be treating potential problems as regular occurrences. Unlikely though it might seem, there’s a black swan in everyone’s future.

SMEs, defined by Zurich as those with up to 250 full-time employees, need to take special note of the need for holistic risk management. They’re the ones that are likely to be hurt the most, when product pipelines become clogged. Take the longshore labor slowdown that caused serious delays at West Coast ports last spring. The biggest shippers had the leverage and ability to seek alternative gateways. “The little guys got stuck on the boat,” says Conrad.

The problem will only get worse. “The increasing complexity of the supply chain probably means there will be more disruptions that occur going forward,” Conrad says. She hopes more companies will wake up to the need for better continuity planning. Maybe they’ll be convinced by BCI’s finding that 40 percent of companies experiencing long-term disruptions will go out of business. Or maybe not. Ultimately, the lesson will be learned. The only variables are how soon, and what the price will be for waiting too long to act.

Comment on This Article

Unprepared Supply Chains Are 'Driving Blindfold' Toward Disaster