Over the past year, we have seen global supply chain disruptions cause significant impacts on global distribution trade and other areas, affecting more than 90% of people worldwide and leading to significant brand impact for companies involved. Also, given the vulnerability associated with geographical concentration risks, 86% of respondents are concerned about the concentration of suppliers in a single area of the world.
The reality is a single affected element can expose interdependencies in the supply chain process and as one operation becomes contaminated, so do others, causing an unstable chain reaction. Subsequent crises, found within disrupted elements, ultimately lead to contagious ripple effects in the face of threats. As a result, these disruptions have forced companies to reexamine their global footprint to build greater resiliency.
Andrea Little Limbago, Ph.D, NightDragon portfolio company Interos’ Senior Vice President of Research and Analysis has kept a close eye on the shifts in the current state of the supply chain and how they have collapsed, rebuilt, and been strengthened throughout company trade. Concerned with the current positioning and foreseen consequences, in particular, her research team has dug into the impacts of critical events over the past year on global supply chains.
NightDragon sat down with Andrea to discuss some of her findings and what the implications are for global enterprises today:
YOUR TEAM AT INTEROS HAS DONE SOME FASCINATING RESEARCH INTO THE STATE OF THE GLOBAL SUPPLY CHAIN OVER THE PAST YEAR. WHAT WERE SOME OF YOUR KEY FINDINGS?
At a very high level, the main findings fall into one of two areas. First, ongoing supply chain disruptions continue to have a broad impact. Over 90% of survey respondents experienced significant disruption over the last year and connected these disruptions to a loss of revenue and damage to brand reputation. Geographic concentration risks also continue to be a major vulnerability, with over 86% of respondents concerned over their concentration of suppliers in one area of the world.
These disruptions and vulnerabilities together lead to the second major finding – companies are reassessing their global footprint to build greater resilience against the wide range of disruptions and a major component of this involves a global restructuring of their supply chains. Onshoring garners the most attention, with a focus on returning sourcing to a company’s home country, but the global transformation of supply chains is much more nuanced than that. Reshoring is often synonymous with onshoring but also reflects the deliberate movement toward core regions, while allyshoring entails a transformation of sourcing toward countries that share similar rules and values. Given the hyperspecialization and complexity of global supply chains, there are significant challenges with onshoring that can be addressed by also including allyshoring and regional reshoring as part of the transformation to progress toward more resilient and diversified supply chains.
WHAT IMPACTS SPECIFICALLY DID YOU TRACK AROUND THE PANDEMIC?
Throughout my research at Interos, we’ve identified the pandemic’s involvement with the fragilities and insecurities of the supply chain; and how the disruptions that came along with these inflections, for example the Russia-Ukraine conflict, invited exacerbations to its natural order. Consequently, the global supply chain has undergone significant alterations as companies and countries seek greater resilience. After decades of hyper-specialization, just in time delivery, and efficiency optimization, the events of the last few years are prompting organizations to rethink their global footprint and adopt new strategies on par with these challenges and seeking greater operational resilience.
We are likely in the beginning stages of critical alterations; and as technology transformations, geo-economic persists, and geopolitical topple formalities, the global supply chains will continue to be in flux. As a result, companies are forced to reimagine their supply chainReimagining and its processes are tedious efforts that can be a big step toward efficiency. Nevertheless, we are in a time of hasty instabilities, and methods to combat risks that may have been sufficient in the past years are incapable in the emerging new environment. Risks must be looked at through a broader lens that encapsulates the assorted factors contributing to supply chain disruption.
WHAT ARE THE MANY TYPES OF FACTORS THAT A COMPANY SHOULD CONSIDER WHEN IT COMES TO RISKS TO THEIR SUPPLY CHAIN?
We are in a time of rapid transformations and volatility, and so approaches to risk that may have been adequate a few years ago are insufficient in this emerging new normal. Companies now must eliminate silos and look at risk through a broad lens that encapsulates the wide range of factors that can cause supply chain disruption, including six core factors:
Financial risk and the impact of ongoing global economic volatility and its impact on supplier insolvency and related disruptions.
Cyber risks are also a significant challenge, with next-generation supply chain attacks increasing over 600% yearly, not to mention the dynamic digital regulatory environment that creates a patchwork of digital and data risks.
Environmental, social, and governance (ESG) risk is another regulatory risk driven by both the ESG investing boom and consumer demand and corporate responsibility in sustainability and addressing climate change.
Not only does a firm’s impact on climate change introduce risk, but climate change itself is a growing risk to supply chains, as disruptions continue to occur due to historic floods, wildfires, freezes, and other natural hazards. These hazards also include the ongoing impact of COVID-19 across the globe as it impacts the workforce, lockdowns, and economic stability.
Geopolitical shifts are yet another risk and source of global transformations, as we’ve seen with Russia’s invasion of Ukraine and concern over geographic concentration risk in China.
Finally, the growing implementation of industrial policy is a direct repercussion of these geopolitical shifts. The U.S. Department of Commerce has restricted over 500 Chinese companies and almost 500 Russian companies over the last few years due to national security risks or human rights violations. This number expands significantly when including additional prohibitions within the U.S., such as the recent UFLPA, and those implemented across the globe.
HOW CAN AN AFFECTED FACTOR IN THE SUPPLY CHAIN CAUSE A DISRUPTION IN ANOTHER, CREATING MULTIPLE CHAIN REACTIONS?
This is a great question and highlights the various concerns associated with supply chain risks. Let’s look at geopolitical instability. In addition to the humanitarian catastrophe, Russia’s invasion of Ukraine has had numerous ripple effects, ranging from food insecurity in Africa to energy price volatility to a significant uptick in cyber attacks to Russian default risk. These second and third order effects have forced thousands of companies to leave Russia, alter logistics from Asia to Europe, and assess how growing food insecurity could impact their extended supply chain in Africa.
Another example of a disruption in one factor affecting another is the impact of cyber attacks on a firm’s finances. Depending on their incident response and extent of the attack, public companies may see their stock prices drop while over half of small businesses go out of businesses within a half year following a cyber attack. A single breach could cost millions of dollars in damages.
WITH THESE FINDINGS AND RECENT AND CURRENT EVENTS, HOW WOULD YOU ASSESS THE OVERALL STATE OF THE GLOBAL SUPPLY CHAIN?
The pandemic exposed the fragility, opaqueness, and insecurity of global supply chains, which has subsequently been exacerbated by a wide range of disruptions, including the Russia/Ukraine conflict, natural disasters, and regulations, to name a few. Given such uncertainty, global supply chains are in a major state of transformation as firms and countries seek greater resilience. I view 2020 as a major inflection point for globalization and the international order, and global supply chain transformation and restructuring is a direct consequence of this inflection point. After decades of hyperspecialization, just in time delivery, and efficiency optimization, the events of the last few years are prompting organizations to rethink their global footprint and adopt new strategies on par with these challenges and seeking greater operational resilience. We are likely only in the beginning stages of these major transformations, and global supply chains will remain influx for the foreseeable future as geo-economic, geopolitical, and technological transformations upend the status quo, forcing companies to reimagine their supply chains and prompting a renewed focus on resilience.
WHY DO COMPANIES SUFFER WHEN OPERATING SUPPLY CHAINS WITHOUT APPROPRIATE PLATFORMS?
Too often supply chain risk management consists solely of spreadsheets and manual documentation, causing companies to lack a competitive advantage, visibility, and productivity when failing to leverage software platforms. Manual documents fail to prepare companies for current and foreseeable disturbances across supply chains; a proactive alternative is SaaS platforms that provide companies with the visibility and innovation needed for operational resilience. The average global supply chain and its thousands of suppliers make it anything more than complex for spreadsheets and manual documentation to be prescient like SaaS Platforms sources.
IN YOUR RESEARCH INTO THE IMPLICATIONS OF THE RUSSIA-UKRAINE CRISIS, HOW HAVE YOU SEEN SANCTIONS ON RUSSIA AFFECT THE SUPPLY CHAINS IN CORRESPONDING COUNTRIES AND SHOWCASED DEPENDENCY?
In addition to the humanitarian catastrophe, Russia’s invasion of Ukraine has had countless ripple effects. The volatility of energy prices and the increase in cyberattacks on Russia forced companies to evacuate Russia, reform logistics from Asia to Europe, and evaluate how an inflow of food insecurity could interrupt their supply chain to Africa.
In the first half of 2022, roughly 40 companies globally issued over 600 sanctions against Russian companies as a response to the Russia-Ukraine crisis. The Russia-Ukraine crisis contributed to a significant number of the disruptions currently in the supply chain and has exposed numerous dependencies, including their 90% loss in microchip imports. An example of such is Russia’s shutdown of the Nord Stream 1 pipeline and Germany’s freeze on the Nord Stream 2 pipeline. Russia’s temporary shutdown of the Nord Stream 1 pipeline triggered partnerships between the United States, Europe, and Canada to stabilize its impact on their economy.
A decline in natural resources, and rises in food prices due to sanctions contributed to this ongoing instability. Russia’s invasion contributed significantly to the severe food crisis and hyperinflation in Sri Lanka, which worsened due to the shocks to the wheat supply and other staples. Like any chain reaction in the supply, food shortages were at an all-time high; this led to protests that caused the Sri Lankan government to collapse. And in addition to the dependencies of outsourced countries, Russia finds itself in a dependent state due to sanctions and restrictions. The sanctions amplified economic contractions in Russia concerning debt default risk; this is still an ongoing issue. With the global restrictions on core technological components, such as microchips, sectors in Russia face substantial disruptions in aviation, military, and automotive.
WHAT CAN A COMPANY DO TODAY TO MAKE SIGNIFICANT PROGRESS MITIGATING THE CONSEQUENCES OF SUPPLY CHAIN RISK AGAINST TODAY’S LANDSCAPE?
Strengthen the entire ecosystem! Mitigating supply chain risk requires innovations across people, processes, and technology. Companies cannot foster supply chain resilience without collaboration within and across companies. This is the notion behind collective resilience as the complexity and interdependence of these networks depends on collaboration within and across relationships to strengthen the entire ecosystem. There is a movement toward fostering trusted networks and it depends on human-to-human interaction for everything from information sharing to logistics coordination. Process improvements should focus on breaking down these silos and bringing internal stakeholders together to ensure a company has full visibility across its entire supply chain, create short and longer term plans that address all stakeholders, and create playbooks for minimizing but also preparing for future disruptions.
Finally, technology should be a great enabler across these changes, facilitating collaboration, prompting both technological as well as process innovation, and providing visibility across the entire supply chain ecosystem. This human-computer communication is fundamental for ensuring that core pain points are addressed and that software platforms supply efficiencies.