Understanding the Dynamics of Supply Chain Threat

by John Manners-Bell on 2012-06-26 03:51:08

External threats to supply chains have received considerable attention following the well-publicised natural disasters in Japan and Thailand.  However, understanding of these risks is at a very early stage. A survey, undertaken for the World Economic Forum, found that 30% of respondents estimated losses of 5% of annual revenue from supply chain disruption. However, over a quarter of respondents were not able to place a figure on the financial impact of a disruption.

It is not that the risks themselves have become more acute. After all, there have always been wars and natural disasters. Rather, it is the evolving supply chain and production strategies of the major global manufacturers which have changed, leading to a re-balancing of the risks inherent within various parts of the supply chain.

When people talk about supply chain risk, they usually mean 'external' threats. What is often overlooked though is that the relation between external and internal risk is very close. For example, increasing inventory levels increases 'internal' risks (redundancy, wastage, financing etc), but mitigates external risks (the impact of a disruptive event on supply). The corollary of this is that reducing 'internal' risks can increase 'external' risks.

External threats to supply chains can be divided into four main categories:

 • Environmental (including weather, earthquakes, floods, volcanoes etc

 • Geopolitical (such as the present tensions in the Middle East and even Piracy

 • Economic (supplier failure, for example, during a recession)

 • Technological (ranging from power outages to 'cyber attacks')

However the most disruptive supply chain events are those which have not or cannot be planned for. Therefore, it is perhaps more useful, rather than look at past events in order to gain some insight into the future, to identify weaknesses in supply chains instead. Addressing vulnerability is the best way to mitigate the impact of a disruption, although there still remains the issue of how much time and money should be invested on each perceived weakness.

The development of information technologies will play an important role in the mitigation of supply chain threats. There is little prospect that these risks will diminish – some may even increase. Therefore the ability to react to events will become the key competitive differentiator, and technologies which enable an enhanced level of supply chain agility will become highly sought after.

John Manners-Bell MSc FCILT
Chief Executive
Transport Intelligence Ltd