Supply chain management is a core skill for any business, especially one with a physical product. It is complex and detailed work, and yet, in spite of this, chief executives rank it way down the list as a source of business risk.
Our own survey shows that supply chain risk remains consistently near the bottom of the C-suite’s risk ranking, with only 8% of executives ranking it as a key concern in spring 2018. Although companies expect an upgrade in focus in Autumn ‘18, it is very striking that companies persistently rank supply chain as a future, rather than a current risk. This important area seems to be always the bridesmaid and never the bride.
Supply chain disruptors are numerous
Meanwhile, the triggers for supply chain disruption are growing more numerous and severe. For example, this spring’s harsh weather events closed at least six UK ports. In another case there was a well-publicised shortage of supply of some fresh foods, including lettuce, after bad weather meant crops failed in Spain in 2017.
Cyber hackers disabled Maersk, one of the world’s largest global logistics businesses for two weeks last summer and impacted company results. Repercussions from the Hanjin Shipping insolvency caused widespread instability threatening the collapse of the world cargo market and there is concern in some quarters that there may be more to follow.
Both the World Economic Forum and the IMF, in its latest Global Financial Stability Report, highlight the potential risks posed by the build-up of global indebtedness. The IMF is concerned that non-financial sector debt in the G20 (i.e. the debt held by households, governments and non-financial companies) had risen to US$135 trillion in 2016, up from US$80 trillion in 2007.
In this just-in-time world, many supply chains are run so lean that any change made by the business, potentially to trim costs, may be enough to trigger a significant failure. The recent closure of Kentucky Fried Chicken stores in the UK following the switch to DHL is a case in point.
For now, focus on Brexit
However, for UK companies all these concerns are dwarfed by the looming short-term supply chain challenges of Brexit – which should, by rights, bring supply chain to the top of the risk agenda for many corporates. Brexit will bring about changes to three aspects of supply chains, all of which need to be worked through.
The first issue is financial: costs will change because of changing import tariffs and VAT levels. Companies need to think through their supply chain footprints and understand at both the second and third supplier level how these may affect costs, including how their goods travel through supply chain hubs, and where they are located.
Big Four consultant PwC has noted, for example that: “A UK retailer importing from outside the EU might think there’s no issue... But their goods would incur costs if they first entered into the EU en-route; which may be how the supply chain is currently set up.1”
The second point is timing. Increased customs paperwork and checks mean slower import times. Companies must recognise the impact on margins of longer lead times – particularly for fresh goods and industries that rely on speedy turnaround from manufacture to point of sale.
Finally, there are many EU grants and incentives in place, and these may be supporting lower prices in parts of a supply chain. Knowing that they exist, and what the future holds for costs is critical to managing supply chain risk.
Brexit is a huge game changer for supply chain managers and it is part of a bigger picture - businesses ignore supply chain risk at their peril.
Perhaps this is partly because the issues are complex. Mark Wing of Clyde & Co, notes that: “It is relatively easy to perform deep vetting on a company’s known main suppliers… The challenge is for companies to get their arms around the broad network of suppliers, transport agents and smaller businesses supporting these main contractors.2”
Nevertheless, and complex as it is, companies must brace themselves and focus on supply chain risk management, in the context of both Brexit and longer term global economic disruptors such as climate.
Anthony Williams
Chief Risk Officer, CNA Hardy
1 : https://www.pwc.co.uk/the-eu-referendum/beyond-brexit-insights.html
2 : https://insuranceday.maritimeintelligence.informa.com/ID1121561/The-industry-must-make-the-case-for-supply-chain-insurance