In today’s globalized economy, a well-oiled supply chain is the lifeblood of any business. But what happens when hidden dangers threaten that supply chain? This blog delves into how these hidden threats can manifest, the impact they can have on your company and, most importantly, what you can do to identify and mitigate them before they escalate into a full-blown crisis.

WHAT YOU NEED TO KNOW

How to identify the dangers in your supply chain   

While the modern supply chain has evolved to be more efficient and interconnected, it has also become susceptible to a myriad of risks, many of which can go unrecognized until they turn into significant disruptions. In 2024, the need to address these risks has never been more critical. By their very nature, supply chain risks can be exceptionally hard to pinpoint. Fortunately, most supply chain risks can be sorted into one of three categories.   

1. Geopolitical tensions   

Geopolitical tensions caused by trade wars, regional conflicts, social unrest or even changes in government can disrupt the smooth flow of goods. These events can cause delays, shortages and price fluctuations that impact everything from raw materials to finished products.   

a. Tariffs and trade disputes  

Tariffs, essentially taxes on imports, increase the cost of materials and goods brought in from other countries. This can force companies to scramble for new suppliers—often at higher prices—which impacts a company’s bottom line and its ability to deliver products to customers on time and at cost.   

b. Regional conflict  

Regional tensions can create material shortages that wreak havoc on a company’s supply chain. When these disruptions affect exports of key materials, companies struggle to acquire what they need to manufacture their products. This can lead to delays and even complete halts in production. The scramble for limited resources can also drive up prices, squeezing profit margins and forcing companies to adapt their operations or even product designs. The most prominent example is the Russia-Ukraine war that began in February 2022. The conflict has had significant consequences for the global supply chain, including disruptions to the flow of essential materials like oil, gas, wheat and metals.  

c. Social unrest and political instability  

Social unrest and political instability can trigger a domino effect that cripples a company’s supply chain. Protests and strikes by disgruntled workers demanding better pay or working conditions can halt production at factories.   

A recent example can be seen in the 2011 Arab Spring uprisings, which led to political instability in several countries in the Middle East and North Africa. This created disruptions in the supply of oil, which had a ripple effect on the global economy. Transportation costs rose, impacting everything from shipping to airline tickets. Manufacturing processes that rely on oil became more expensive. This translated to higher prices for consumers around the world. 

 2. Hidden dependencies  

Third-party vendors, while vital for many businesses, are hidden dependencies that can introduce risks into your supply chain. Since they operate independently, their security practices, data handling or even financial stability might be unknown. This lack of transparency can leave a company vulnerable to disruptions, data breaches or even counterfeit parts without realizing the vendor is the root cause.   

a. Subcontractors and third-party vendors  

If you don’t know who your suppliers rely on, you can’t anticipate problems that arise further down the chain. Since you don’t directly control these hidden players, you can’t expect them to adapt or prioritize your needs if there’s an issue. This can lead to delays, shortages or stockouts if something happens to a vital subcontractor.   

The semiconductor shortage continues to impact various industries that rely on computer chips, like automobiles and consumer electronics. While many companies source their chips directly from big manufacturers like Taiwan Semiconductor Manufacturing Company, there are hidden dependencies on smaller, lesser-known companies that supply the raw materials and specialty gases needed for chip production.   

The automotive industry found this out the hard way in 2021, when a fire at a Renesas Electronics plant in Japan led to production slowdowns and significantly impacted the already stressed supply chain for automakers. 

While automakers knew Renesas as a supplier, they were not aware of this plant’s critical role or the lack of redundancy in producing vital automotive computer chips. This limited awareness of a crucial source within the supply chain network had a ripple effect throughout the auto industry and highlights how seemingly isolated events within a complex supply chain can have widespread consequences.  

b. Single sourcing  

Many businesses underestimate the complexity of their supply chains and the number of hidden dependencies they have. For example, a company may source a key component from a supplier in China, but that supplier may in turn rely on a sub-supplier in Taiwan for a critical raw material.   

If there is a disruption at the sub-supplier level, it could have a major impact on the company’s ability to produce its products. That’s exactly what happened to Takata, a Japanese automotive parts supplier that dominated the market for airbag inflators. It relied heavily on single sourcing for a key chemical component used in its inflators.  Unfortunately, this component was linked to at least 28 deaths and hundreds of injuries worldwide. The scandal erupted when automakers were forced to recall millions of vehicles due to the defective Takata airbags.   

3. Environmental factors  

Environmental factors like extreme weather events, rising sea levels and resource scarcity can significantly disrupt production and logistics. For example, a drought in a distant country could disrupt the supply of a key material, causing unexpected delays and price hikes. By ignoring environmental factors, companies expose themselves to hidden vulnerabilities that can cripple their supply chains.   

a. Climate change and natural disasters 

Natural disasters like earthquakes, hurricanes, floods and wildfires can severely disrupt supply chains by damaging infrastructure, halting production and impeding transportation. These events can destroy manufacturing plants, warehouses and distribution centers, leading to immediate shortages of goods.   

That’s what transpired in 2017, when Hurricane Harvey devastated parts of Texas, including Houston, a major hub for manufacturing and shipping. One of the key impacts was on the supply chain for building materials. As people began repairs and rebuilding efforts, the demand for these materials skyrocketed. However, with limited supply due to the disruptions, there were shortages and price hikes that rippled throughout the region. 

FOR MORE CONTEXT

The effects of unrecognized risks on customer trust and brand loyalty  

When lurking risks go undetected, a seemingly minor disruption in one corner of the globe can cascade into a major crisis. The effects of that crisis can leave your business scrambling and your customers facing empty shelves.   

A perfect example is Peloton. In 2020, the fitness equipment company saw a surge in demand due to the home workout trend during the COVID-19 pandemic. To meet this unexpected demand, Peloton rapidly increased production. However, this rapid increase exposed vulnerabilities in their supply chain. 

  • High costs and production issues: Peloton relied heavily on manufacturing in Asia. When faced with delays because of the pandemic, they were unable to quickly switch production, due to a lack of supplier diversification. They eventually acquired a U.S.-based manufacturer, but this took time and significant investment.   
  • Inventory issues and shipment delays: Rapid production changes led to mismatched inventory levels that left Peloton with excess inventory of some items and shortages of others. They also experienced a backlog of orders for bikes, which went for months without being filled. The exercise company invested over $100 million in air freight and expedited ocean freight to improve order-to-delivery windows.   

Peloton has taken steps to improve its supply chain, including diversifying suppliers and investing in forecasting tools. However, the company is still working to recover from the financial losses incurred due to emergency sourcing and last-minute changes.   

Companies can mitigate the financial and reputational risks associated with supply chain disruptions by proactively identifying and managing potential risks. This includes diversifying suppliers, building buffer stock and implementing robust contingency plans.   

WHAT YOU NEED TO DO

How to improve risk recognition and mitigate threats to your supply chain  

While pinpointing every potential risk in a supply chain is impossible, you can strengthen your ability to recognize risk and mitigate threats to your network. In this section, we highlight the tools you need to enhance your risk recognition capabilities and effectively mitigate potential threats to your supply chain.   

  • Multifaceted insights  

Standard supply chain analysis often focuses on cost optimization. But a single-minded pursuit of the cheapest option can leave you exposed. Multifaceted insights consider factors like a supplier’s labor practices, environmental record and even their political climate. They also enable your team to leverage data analytics to track global events (natural disasters, political unrest, etc.) and predict their potential impact, allowing you to proactively develop contingency plans.  

  • Real-time risk monitoring  

Traditional risk management often relies on static data and reports, leaving companies vulnerable to unforeseen events. Real-time risk monitoring bridges this gap by providing a constant stream of information on potential threats.  This can include weather forecasts that could disrupt transportation, news of political unrest near a manufacturing facility or even social media sentiment towards a particular supplier. Early detection allows you to proactively mitigate risks  and, ultimately, build a more resilient supply chain. 

  • Compliance management  

Consumers are increasingly concerned about ethical sourcing and social responsibility. News of unethical labor practices, use of conflict minerals or environmental damage by suppliers can severely tarnish a company’s reputation. Compliance management not only ensures a company’s products are made according to regulations and ethical standards; it also acts as a shield against the various legal, financial and reputational threats lurking within the supply chain. 

ADDITIONAL INFORMATION

How to build a more resilient supply chain   

By now you know the global landscape is ever-changing and supply chain disruptions are a constant threat to smooth operations. But there are ways that you can build greater resilience into your supply chain.  

  • Diversify your network   

Don’t put all your eggs in one basket. Spread your sourcing across multiple suppliers and geographical locations. This reduces your dependence on any single point of failure. Research alternative suppliers who can step in if your primary source faces challenges.   

  • Cultivate strong supplier relationships   

Your suppliers are partners, not just vendors. Invest time in building strong relationships with your key suppliers. Open communication fosters trust and allows for early warnings of potential disruptions. Collaborate on contingency plans and explore opportunities for joint risk mitigation strategies.  

  • Learn from the past and prepare for the future   

Every disruption is a learning experience. Analyze past challenges to identify vulnerabilities in your supply chain. Use these insights to develop contingency plans for future disruptions. Regularly review and update your plans to ensure they remain effective. 

  • Transparency is key   

A siloed approach is a recipe for disaster. Encourage transparency throughout your supply chain. Share information about demand forecasts, potential risks and disruptions with all stakeholders. This level of supply chain transparency allows everyone to react quickly and efficiently when challenges arise.   

  • Continuous monitoring  

Continuous monitoring is crucial for any business aiming to safeguard their supply chain and build resilience. By constantly tracking your network, you can identify potential risks like delays, disruptions or fraudulent activity in real time. This allows for immediate intervention and course correction, minimizing the impact of these issues. This proactive approach helps to build a more robust supply chain network that can adapt to unforeseen challenges and maintain smooth operations. 

  • Collaboration is king   

A supply chain is only as strong as its weakest link. Break down information barriers and foster collaboration across all participants in your supply chain. Work together to identify and mitigate risks, develop contingency plans and continuously improve efficiency and resilience.   

By implementing these steps, businesses can create a more resilient supply chain that can adapt to changing circumstances and withstand unforeseen shocks. Remember, a resilient supply chain isn’t just about weathering disruptions, it’s about emerging stronger and more prepared for the future.  

Don’t wait for a crisis to expose the vulnerabilities in your supply chain. Start by reviewing your risk management strategies and implementing steps to improve supply chain transparency as soon as possible. Contact Sphera to learn how we can help.  

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