Supply chain risk was at the forefront of delegates minds at Davos with the publication of a new report looking at boosting resilience globally.
Business and governments are increasingly concerned about the lack of resilience that exists in global supply chains, according to a new report from the World Economic Forum, “Building Resilience in Supply Chains”.
The report, an initiative of the World Economic Forum’s Risk Response Network in collaboration with Accenture, reveals that 80 per cent of companies worldwide see better protection of supply chains as a priority, given persisting external threats and vulnerabilities such as oil dependence and information fragmentation.
Top supply chain risks identified in the report by corporate and government executives included conflict and political unrest, and natural disasters and extreme weather conditions such as the effects of Hurricane Sandy, which closed ports and airports in the north-eastern US in November 2012 and prompted localised fuel rationing, and the floods in Thailand in 2011 and 2012. The report also found that cyber risk and rising insurance and trade finance are emerging areas of concern.
It said: “On a global level, cyber risk to supply chains has become a priority issue. Concern is growing about systematic attacks on financial institutions leading to reduced ability to make and receive payments. The effects would be extremely severe across industries and regions alike.
“The high cost of disruptions has led insurers to reduce coverage and increase premiums. Trade finance, another traditional buffer, is under pressure from Basel III reforms. Supply chain managers want to better understand the new rules to reduce premiums and target coverage effectively.
The report also noted that many traditional supply chains are evolving into digital supply chains. This trend is evidenced by the double digit compounded annual growth rate (CAGR) predicted for e-book sales (30 per cent) and electronic health record systems (12.6 per cent). At the same time, innovations such as 3D printing promise to shorten at least some linkages in the physical supply chain.
“This transition poses risks to certain supply chain actors – notably logistics providers whose role could shift markedly within an evolving digital supply chain. It also introduces new cyber risks to the supply chain itself. Supply chain actors need to demonstrate they can master digital resilience to assure the upsides of digital supply chains, such as greater accessibility and faster fulfilment times. Given the growth in non-physical supply chain flows, their inherent cyber risks must be understood and incorporated into overall resilience approaches.
The report also pinpointed differences in perspectives that stem from government responsibility for public security and long-term risks compared to industry’s focus on ensuring that supply chains work effectively on a day-to-day basis. Differences in regional perspectives – attributed to local experiences with supply chain disruption and growth expectations – underscored the need to develop a harmonised resilience framework supported with common supply chain standards.
To help government, industries and consumers cooperate, the report calls for a common risk vocabulary, improved data and information sharing along and between supply chains, and more flexible response strategies.
And it points to a trends in supply chain to move away from agnostic outsourcing towards long-term partnerships. In such relationships, resilience can be built via improved security, information sharing and knowledge exchange.
“At a broader level, better knowledge of a partner can enable more targeted risk management; this is already the basis of authorised economic operator programmes developed by customs authorities worldwide. Both government and business-driven partnerships must retain open architectures with harmonised standards to allow accessibility and competition.”
And Sean Doherty, director of supply chain and transport industry at the World Economic Forum, says: “Improving co-operation on risk and resilience remains a hard thing to do, but is particularly important for supply chains, as they are a critical and strategic part of national infrastructure.”
The report also points out that governments can foster the co-operation and marshal the resources needed for major responses. “Experts agree that governments should aim for maximum flexibility during times of disruption while providing incentives for resilient behaviour during times of stability.”
Conclusions- Danger of complacency
There is a danger of complacency now that the global economic crisis is receding and concerns about Europe and the US are subsiding, global business and civil society leaders warned participants in the closing session of the 43rd World Economic Forum Annual Meeting.
“The optimism for recovery is there,” Axel A Weber, chairman of the board of directors of UBS, Switzerland, and a meeting co-chair, said. “The feeling is that the worst is behind us. But the mood bordered on complacency. On Wednesday, people talked about how the tail risk had been reduced. By Friday, the tail risk was removed!”
A key challenge for business, government and civil society is to restore trust in both public and private sector institutions. The crisis and the austerity measures that governments have introduced to address fiscal deficits have undermined confidence in corporate and political leaders. Implementing reforms and recovery plans fully – without letting politics stall them – is essential.
World Economic Forum- Shaping the agenda
The World Economic Forum is best known for its annual meeting at Davos which attracts the world leaders from business and politics. It was founded by Klaus Schwab, pictured, as an independent international organisation committed to improving the state of the world by engaging business, political, academic and other leaders of society to shape global, regional and industry agendas. Incorporated as a not-for-profit foundation in 1971, and headquartered in Geneva, Switzerland, the Forum is tied to no political, partisan or national interests.
Programmes- Four steps to boost resilience
The WEF report calls for four steps to help integrate resilience thinking into supply chain management:
1. Institutionalise a risk assessment process rooted in a broad-based and neutral international body
2. Mobilise international standards bodies to develop and harmonise the adoption of resilience standards
3. Incentivise organisations to follow agile, adaptable strategies to improve common resilience
4. Expand the use of data-sharing platforms for risk identification and response
Carbon Disclosure Project- Climate change threat
Coincidentally, another report, this time from the Carbon Disclosure Project which is not directly connected with the WEF, has highlighted the risks to business from climate change. It found that Seventy per cent of companies believe that climate change has the potential to affect their revenue significantly, a risk which is intensified by a chasm between the sustainable business practices of multinational corporations and their suppliers, according to research published today
The study, “Reducing risk and driving business value” by the Carbon Disclosure Project and Accenture, is based on information from 2,415 companies, including 2,363 suppliers and 52 major purchasing organisations who are CDP supply chain programme members.
Climate change presents near-term risks to businesses, according to the report. Fifty-one per cent of the risks that disclosing companies associate with drought or extreme rain are already having an adverse effect on company operations, or are expected to within five years, say those businesses.
Of the 678 companies investing in emissions reduction initiatives, three quarters (73 per cent) say they feel that climate change presents a physical risk to their operations; just 13 per cent identify regulation as a sole driver.
The study also found that suppliers are significantly less prepared than their clients in responding to climate change, potentially threatening customer relationships and heightening supply chain vulnerability. Suppliers demonstrate a lower level of ambition to mitigate climate change risk, with just 38 per cent setting emission reductions targets in comparison to 92 per cent of purchasing companies. Similarly, at 27 per cent, the percentage of suppliers investing in activities to reduce emissions is less than half that of CDP member companies (69 per cent).
CDP members are more likely to yield results from their environmentally sustainable business practices than suppliers, according to the survey. They are more than twice as likely to accomplish year-on-year emissions reductions (63 per cent vs 29 per cent) and are better positioned to capitalise on the financial benefits of carbon management. While 73 per cent of members are achieving monetary savings, only 29 per cent of suppliers are enjoying such returns.
Paul Simpson, the CDP’s chief executive officer says: “This research illuminates fragility in the global supply chain model. The marked difference in the sustainable actions of companies and their suppliers highlights a missed opportunity for suppliers to reduce energy costs and risks.
“The 61 per cent of suppliers that failed to provide information through CDP are an even greater concern since they and their clients are unable to make a full assessment of the substantial climate risks or opportunities they face.”