Hidden risks in global supply chains

Do you think you already have enough to worry about with the obvious and known risks and have no time to address hidden risks? Rethink that approach. The risk of doing nothing could be disastrous to your business.

There is no “set and forget” button in supply chain management. Supply chain leaders must be aware, informed, and active participants in every link of the chain. At every connection and partner in the supply chain, there’s the potential for risk. Understanding these risks and being prepared has become an integral part of the supply chain manager’s job.

Today, we can’t expect that things will ever be back to what we used to think was “normal.” The pandemic may be under control, but the supply chain risks that it exposed should give us clues to change the way we do business.

The obvious risks

By now, most supply chain managers should be aware of the obvious risks in their supply chain and have developed ways to address them. These include the following.

Risk of single/sole source suppliers: Addressed by developing alternate sources, particularly for strategic parts and long-lead items, and rethinking inventory policies and safety stock.

Risk of single manufacturing locations: Addressed by developing redundant manufacturing in different parts of the world.

Risk of strikes at ports, and other labor unions and freight carriers: Addressed by planning for alternate routes/ports/freight carriers to keep the supply chain moving.

Risk of natural disasters: While these are unpredictable, your general response can be planned including emergency communications and developing an emergency organization.

The hidden risks

The hidden risks are different from those that are already known. These risks are unpredictable and can cause chaos in your global supply chains. As if supply chain managers didn’t already have enough to worry about, along comes the hidden risks.

1Supplier financial risk,
bankruptcy, facilities. Supplier financial risk may be hidden by private companies or buried in financial statements. It’s not enough to simply ask a supplier about their financial situation, you need to dig deeper to verify what the supplier is telling you, through public documents, research, and references. This is particularly important for foreign suppliers.

You may need assistance from someone on your finance team to evaluate financial statements or to ask the right questions. Financially unstable suppliers must be monitored closely or avoided altogether.

When your Chinese supplier goes bankrupt, there usually is no remedy after the fact. Bankruptcy in China is rapidly becoming more common as customers decide to reshore and decouple from their Chinese suppliers and operations. Chinese bankruptcy typically consists of a company shutting down in the middle of the night and its owner fleeing to another town or country.

If you’re unable to obtain financial information from a supplier, you may want to find an alternative or second source to mitigate your risk. If you’re purchasing critical parts for production, or evaluating a logistics provider, ask for updated financials annually. Changes in financial conditions year over year may be cause for alarm. In any case, being aware of the risks is helpful in planning.

Facilities where manufacturing is done may also have hidden risks. Remembering Rana Plaza, the disastrous four-story building collapse in Dhaka, Bangladesh, where 1,134 people died is a poignant reminder. Reportedly, many of the brand companies using the sewing factories in Rana Plaza had conducted visits and periodic audits of the factories for a few years before the collapse.

But clearly, these checklist reviews and the results of these audits had not forced sufficient changes to the working environment by the factory operators. Sub-standard or unsafe factories exist around the world and are hidden risks.

2Tier 2, 3, 4 suppliers. The biggest risk is probably not in your tier 1 suppliers, but in your supplier’s suppliers. A hidden risk of bankruptcy in the supplier ranks can be a disaster further down the line with parts shortages and unfulfilled orders. Evaluating 100% of your suppliers and all of their suppliers is a monumental task and probably unrealistic. But investigating Tier 2, 3, and 4 suppliers for your most important and strategic parts is certainly possible.

To undertake such an effort, start with your top 20 most strategic suppliers. Work with these tier 1 companies to identify all of their sub-suppliers. Along with obtaining financial documents on your tier 1 suppliers, you should evaluate their sub-suppliers’ financial condition as well. Tier 2, 3, 4, and so on, can add additional risk should they fail to deliver parts or go bankrupt.

3Political risks that are often secret. Geopolitical risk is often known through publicly available information, such as the potential risk of China invading Taiwan, or trade sanctions on Russia. But beneath the public information, there may be other drama.

For example, in China, the Chinese Communist Party (CCP) may play a role in the management of a company and alter the decisions made by the company’s executives. This information is never made public and a customer may be left wondering why there was a change in direction.

Local laws and processes may also be a factor in evaluating risk. Bribery may affect how a factory or logistics provider operates in some countries. Bribery of foreign officials is illegal for Americans under the Foreign Corrupt Practices Act, but among locals in many countries, bribery is common practice to facilitate the movement of goods.

4Climate change. We are beginning to understand what effect climate change has on our weather. In the past several years, we’ve experienced extreme heat, cold, drought, wildfires, floods, hurricanes, and other unusual weather events. This hidden risk, while generally acknowledged, is not often taken into consideration.

For example, if you have suppliers in Florida, you might consider alternate sources in case of hurricanes or floods. The same is true for Oklahoma during tornado season, or California during wildfire season.

The Panama Canal has placed restrictions on shipping companies, as a regional drought has lowered water levels at its main lake to a four-year low. Supply chain delays are expected as cargo carriers are queuing up to pass through the canal. In Europe, water levels for the Rhine River, a major transport waterway, have fallen to record lows, particularly affecting shipments of petroleum.

These kinds of climate change risks should be included in risk assessments of suppliers and logistic providers. Some bad weather patterns can be predicted, such as hurricane season on the East and Gulf Coasts of the United States. However, other weather events are unusual and surprising.

5Global counterfeiting. Global counterfeiting has become an enormous issue for most recognizable brands. According to the Organisation for Economic Cooperation and Development, (OECD), global counterfeiting is the largest criminal enterprise in the world representing $4.5 trillion per year, with much of the profits going to terrorists and arms traders.

Automotive, aerospace and defense, electronics, cosmetics, footwear, and luxury goods are particularly vulnerable. Counterfeits not only represent the loss of revenue for the true brands, but they may also pose safety hazards.

Counterfeit parts that don’t operate as expected in airplane avionics or a car’s steering mechanism are a danger to everyone on board. Counterfeit cosmetics and pharmaceuticals may include dangerous chemicals. Although many companies have anti-counterfeiting initiatives and staff, finding counterfeiters is sophisticated detective work.

The risk of doing nothing

Do you think you already have enough to worry about with the obvious and known risks and have no time to address hidden risks? Rethink that approach. The risk of doing nothing could be disastrous to your business.

The key to addressing supply chain risks is to be proactive in planning and preparing should something go wrong, suppliers go bankrupt, the geopolitical situation changes, or the effects of climate change wreak havoc. While every situation can’t be imagined or planned for, there are some basic things to do.

  • Start thinking through as many what-if scenarios as your team can imagine. For each scenario, develop response strategies like shifting operations to a different manufacturing location, developing alternate suppliers in different regions, and considering alternate logistics providers.
  • Think through budgeting during emergencies so that funds are readily available if needed.
  • Prepare a communications plan for employees and suppliers to keep them apprised of changing situations.
  • Practice and train for your responses including setting up organizational structures and war-room planning. 

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