At a time when supply chains are increasingly more exposed to risk, companies are moving the management of that risk down on the list of priorities.
That’s what global management consulting firm A.T. Kearney and financial health assessor Rapid Ratings found in a new study, “Is Your Luck Running Out? Managing Supply Risk in Uncertain Times.”
De-prioritizing risk preparation means supply chains are little more than a step away from a major disruption.
“For most organizations, it is not a matter of if but when a supply chain disruption will occur,” said Carrie Ericson, vice president of A.T. Kearney Procurement and Analytical Solutions and co-author of the study. “Although most acknowledge this fact, few have invested in the systems and programs needed to respond.”
Even procurement leaders struggle with latent risk in extended supply chains, according to the study. Supply managers’ range of responsibilities have expanded in the last decade to include collaborating with internal stakeholders to define business requirements and identifying top-tier suppliers to partner with, but many have found themselves butting up against lack of bandwidth and budget to manage the things they need to.
“Overlooking risk management—or, rather—getting by with a strategy of ‘hoping our luck holds out’—leaves procurement organizations especially vulnerable in today’s tenuous geopolitical and economic environment, where many public and private companies are in precarious financial positions,” the report noted.
What’s needed, rather is an approach that uses the right tools to filter out noise and focus on the valuable information and resulting insights well ahead of that luck running out. Because, whether ready or not, supply chains are entering a world with more risk.
The study identified 12 macro trends that stand to play a major role in shaping the operating environment for global supply chains. Some will have immediate implications, and others that are newly emerging will have more long-term effects.
Geopolitical instability is ramping up in the Middle East, North Africa and South Asia, specifically, and the U.S., Russia and China continue to compete for global influence on everything from cyber security to territory.
According to the International Monetary Fund (IMF), Brazil, India, Indonesia and China will be among the world’s 10 largest economies by 2020.
“This increased power will put more pressure on resources and escalate overall competition for top-tier suppliers, although it may be partially offset by weakening prices for the commodities that many of these countries’ economies depend on,” the study noted. “Companies that have not implemented strategies to ensure continuity of supply could find themselves on the losing side of the supply-demand equation.”
Continued global violent extremism
Terrorism is an ongoing issue, but has been more concerning of late.
The National Consortium for the Study of Terrorism and Responses to Terrorism said global terror attaches have increased sixfold from 2,750 in 2006 to more than 16,000 in 2014. Today, companies are at risk of their funds and goods being channeled to terrorism or criminal organizations, too.
“As governments work to stamp out illicit activities, tighter rules and regulations will impact international banking laws and shipping routes, potentially affecting speed and ease of use of these networks for lawful business purposes and causing longer lead times and potential supply interruptions,” according to the study.
U.S. Economic resurgence
The U.S. economy, which is in the midst of a resurgence, is expected to continue realizing 2 percent growth annually through 2020, and the dollar is appreciating against other major currencies.
“While this makes U.S. exports less competitive abroad, imported materials and services that go into U.S. products (cost of goods sold) are also less expensive, which improves the competitiveness of supply chains,” the study noted.
The “2020-Seven” growth economies
While global markets managed to recover quickly from the 2008-09 financial crisis, many saw growth decelerate in the four years that followed, owed to weaker external demand and inadequate responses to a shifting global landscape.
Global growth drivers, according to the study, are shifting toward the Pacific Basin, and seven new markets have the potential to see strong growth in the coming years: Chile, China, Malaysia, Mexico, Peru, the Philippines and Poland.
“A focus on these seven markets offers firms significant opportunities to leverage the supply power of these emergent leaders and to restructure their value chains to serve these growing consumer markets,” the study found.
A new resource slump cycle
Supply and demand factors have encouraged what researchers in the A.T. Kearney/Rapid Ratings study say will be a 13- to 15-year period of lower commodity prices. Oil is in excess, China’s slowing economy has meant a dip in its import commodity growth, and energy efficiency has increased meaning a decline in the amount of oil needed for energy.
“Supply chains that rely on these resource-exporting countries could be at risk for supply interruptions from political instability resulting from slower economic growth,” according to the study.
Accelerating global climate change
More than 7,500 floods, storms, droughts and incidents of extreme temperatures have occurred around the world between 1980 and 2012 and the economic costs of climate change are growing.
“This volatility not only has a negative impact on the input costs for industry’s raw materials, but also has the potential to cause second-order problems such as social unrest,” the study noted. On a positive note, melting ice in the Arctic has opened up new shipping lanes, but competition for sovereign rights in the Arctic will complicate things.
Outward migration and brain drain will weigh on emerging markets, but rapid aging in developed markets will have the greatest effect on depopulation. United Nations World Population Prospects estimates point to global population growth decelerating from 1.8% in the latter half of the 20th century to 1.1% from 2000 to 2025.
“Two major impacts of depopulation on the supply chain are labor shortages and weakening or failing transportation infrastructures,” according to the study. “As labor shortages drive up the wages that employers must pay to attract workers, they also decrease tax revenues that governments use to build and maintain transportation and business infrastructure.”
IT revolution 2.0
Uber and like-minded models have altered the traditional business model and have ended up with more nimble and cost-effective supply chains. The study argues, however, these types of companies are more susceptible to supplier and partner risk that could disrupt the whole business. The rise of the sharing economy will mean new regulations, like a shifting of liability and risk with insurance, and will create more complexity for supply managers.
Rise of the machines
Technology has already reshaped companies and consumers’ lives, and digitized objects, or the Internet of Things (IoT), will grow from fewer than four billion in 2014 to 25 billion in 2020.
“These devices have the power to supercharge our supply chains by supporting the use of sensors and machine-to-machine communications, combined with advanced analytics so products can talk to each other throughout the supply chain, allowing products and services to move dynamically as market demands change,” according to the study.
Evolving artificial intelligence
Artificial intelligence (AI) has become advanced enough that some wonder whether machines will start to replace people in supply chain positions, and while some positions may eventually be without need for humans, it remains to be seen whether AI will have a fundamental effect on the correlation between productivity and employment.
“The timeline for achieving human-like AI continues to shift, making it hard to know how much of a game changer it will be,” the study explained. “Regardless of the timeline, the impact will reverberate through our supply chains by decreasing overall costs and allowing for a more efficient allocation of resources.”
Losses as a result of global cyber crimes are expected to fall in the $375 to $575 billion range every year, affecting major markets like the U.S., Germany, Japan, France and the UK.
“The growing IoT lacks strong security systems and is highly vulnerable to data theft,” according to the study. “Implications for our global supply chains include the need to manage privacy, secure intellectual property, and protect from revenue loss—all challenges that will result in higher costs.”
The changing nature of power
The widespread access to information and new technology has increased consumer expectations for services, transparency and change. The rise of the global middle class has also led to increased desire for customized services. And this more demanding population is gathering in cities. The United Nations estimates that in 2015, 54 percent of the world’s population lived in urban areas, and that number is expected to rise to 58 percent by 2025.
“By then, the world will have 36 megacities with more than 10 milion inhabitants each,” according to the study. “With cities growing and multiplying, new challenges and opportunities arise, including traffic congestion and more concentrated customer markets, requiring us to rethink our supply chains to align with the shifting nature of power.”