Supply chain models were initially designed based on forecasting that has now become obsolete since COVID. Many changes took place during the pandemic that impacted certainties around consumption and sales. There is a sense of fragility that was induced by globalization and the interdependence of the entire production chain. The question then becomes: can we limit the effects?
The significance of supply chain risks
The supply chain encompasses everything that allows companies to deliver their products and services to customers — from the logistics and transportation methods to the supplies and suppliers — with criteria for quantity, quality, deadlines and costs. It includes all of the physical, informational and financial flows that help the process move. As the company’s leading cost center, the increasing complexity makes the supply chain both a performance driver and one of the biggest risks.
A company’s risks can be categorized into three main categories specific to the organization and strategy, assets and imposed systems. Within systemic risks lies natural disasters, geopolitical challenges and supply chain risks.
Previously seen as ‘stable’, some supply chains have changed drastically since the pandemic. Health risks have not been completely eliminated, the geopolitical situation has fired up, inflation has created disruptions — the list goes on. Throughout France, capability risk — also known as the inability to serve customers due to missing parts on your end — is seen as a primary concern. Then come cyber risks, planning issues and the geopolitical situation, which weigh on the industrial world.
We had already had a few occasional warning signs, including Fukushima for semiconductors and the fire at a supplier of interior coatings for the automotive industry that is bringing the production of vehicles of the majority of European manufacturers to a standstill. Ideally, the supply chain organization would have flexibility in the design of procedures so that when needed, they can bypass a step if issues arise and still move forward.
Gaining control through partnership
Better control of supply chain risks requires a better knowledge of the place where each element is manufactured, and therefore the geolocation of suppliers. It also means asking suppliers about their own risk prevention measures. Establishing a partnership strengthens trust and encourages cooperation. However, there is a limit to this depending on contractual agreements. If the RC guarantees insurance information from its suppliers, it becomes impossible for the suppliers’ suppliers. Progress is possible with Tier 2 suppliers, as demonstrated by the aeronautics sector, which are at the forefront of traceability issues. Even if it is a declarative compendium, this step promotes dialogue with the insurer.
The role of insurers
Insurance policies and insurers partially respond to these new challenges. Although it does not offer a complete solution because there is not always adequate coverage. Many supply chain risks are not be insurable. Insurance companies can only give deficiency guarantees to clients, and this now applies exclusively to first-tier suppliers, for example.
Insurers’ demands are on the rise when it comes to prevention, and companies must be transparent to maintain their trust. If the risk manager can rightly question the complexity of managing a mass collection of information, the solution may come from technology.
Thanks to artificial intelligence (AI), currently being tested, we can hope to analyze these multiple and long reports in an automated way to bring out the critical elements. This will also make it possible to make faster decisions and therefore improve responsiveness and flexibility.
New paradigms
This widespread shift towards greater flexibility strengthens the function of a risk manager. We are moving from a purchasing benchmark at the best price to that of planning that anticipates the risks of disruption and shortages. This complexity is an integral part of risk management. Thus, supply chain risks should gradually be considered in general management, the purchasing department, finance and more.