The Weather Forecast – Supply Chain Risk Will Be High On the Agenda!

As I look outside on this bright, sunny morning, it is hard to believe that just a week ago I could hardly get out of the drive, trains weren’t running and much of the country was paralysed by snow. But at this very moment, it is snowing again further north in England, and some people in the north-west are still unable to get out of their remote properties because of 3-metre high snowdrifts.

So, the procurement professional’s thoughts turn to supply chain risk management of course, and our thoughts turn to the series of short briefing papers we wrote last year in conjunction with risk management platform providers riskmethods. Here is an extract from one of the five papers – you can probably guess which one! (You can download the papers here from the riskmethods website).

 

Natural Disasters - How to Mitigate Unavoidable Risks

The Allianz Risk Barometer consistently has “natural disasters” in the top handful of risk types, and says that this accounted for $175bn in economic losses in 2016, a four-year high, with insured losses totalling some $50bn. Businesses are also more concerned about climate change and increasing weather volatility impact year-on-year. A report by the ClimateWise coalition warns of a $100bn “protection gap” from the rising impact of climate risks, and according to analysis by Munich Re, 2016 saw more floods in the US than in any year since records began in 1980 ….

Consequences for Customers  

This type of risk can lead to many negative outcomes for customers, ranging from the slightly inconvenient to the devastating.

Supply interruption – natural disaster type events often lead to short or longer-term supply interruption for the buyer when supplier’s premises such as factories, transportation routes or even their own supply chain are affected by flood, earthquake or other natural events.

Loss of short-term sales – such supply interruptions may cause just inconvenience for the buying organisation, but often they lead to production shortfalls or even shut-downs, which ultimately drive a loss in sales and profit.

Need to re-source materials – buyers find themselves having to secure additional supply from other unaffected existing suppliers, or find, verify and approve new suppliers quickly to maintain production. This in itself carries a number of challenges and risks for all parties.

Loss of good suppliers / market dynamics change – at the extreme, supplying firms may even disappear altogether or operate at reduced capacity for a considerable time. This can change the balance of power in the market, leaving other suppliers in a more powerful position to the detriment of the buyers.

Suggested Actions and Mitigation Strategies

No buying organisation can “avoid” this risk entirely because it is based on natural events. But steps can be taken to reduce the impact it will have on the business. There are two types of action that can be taken here. The first set of actions relates to how the organisation can reduce or minimise the risk in the first place. This means careful analysis and paying attention to the risks based on an understanding of supplier locations, and the probability of related issues arising from floods, earthquakes, or extreme weather conditions. Trusted third-party data from various sources can be invaluable here to aid understanding.

Understanding that situation and the probability of events means the buyer can look to achieve a spread of supply, certainly for mission-critical items or services. It may be that the buyer chooses to accept the risk that an excellent supplier is situated on the San Andreas Fault, but it would probably make sense to ensure that the back-up supplier is not also in the same vicinity. Insurance is another potential mitigating action.

The second set of actions relate to the response to risk events when they happen … (download the paper for more insights and ideas!)

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