Five years have passed since governments worldwide first imposed lockdowns to curb the Covid-19 outbreak, a crisis that deeply impacted global supply chains and reshaped risk management strategies.
According to Moody’s, traditionally, these systems were tailored towards minimizing costs and streamlining operations with lean inventories and just-in-time production, focused largely around major global production hubs.
Today, the landscape of global supply chains has significantly altered. Organizations are now advocating for a comprehensive understanding of third-party network risks, a shift that underscores the importance of resilience and agility in their supply chain frameworks.
The onset of the pandemic saw a dramatic plunge in global trade. Countries not only shut their borders, affecting travel and trade, but also faced acute shortages of essential raw materials and consumer products due to lockdowns. This led to increased export controls, particularly of healthcare supplies as the world scrambled to secure personal protective equipment (PPE) and medical essentials amidst a global health crisis.
These disruptions presented a stark picture across different regions:
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In the United States, the automotive industry suffered as shortages of semiconductor chips and other raw materials from Asia halted production lines at companies like Ford and General Motors.
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Europe encountered severe logistical issues, especially in container shipping, leading to hefty delays and spiked shipping costs. The lack of nearshoring options and reliance on single-source suppliers compounded these challenges.
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The Asia-Pacific region saw significant impacts due to factory shutdowns in major manufacturing hubs, which affected the global supply of various essential goods.
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Meanwhile, in the Middle East, reduced travel due to lockdowns led to a drastic drop in oil demand, pushing prices down significantly, with West Texas Intermediate crude briefly hitting a record low of -$37 a barrel.
Faced with such unprecedented challenges, the transparency and resilience of supply chain management systems were put to the test. Companies began adopting new analytical tools and processes to better quantify and address these risks.
In response to the pandemic’s disruptions, there has been a strategic pivot in supply chain management. The focus has shifted from cost optimization and offshoring to enhancing risk management by diversifying suppliers and increasing visibility within supply chains. More businesses are opting to increase their inventory levels, adopting a ‘just-in-case’ approach to buffer against demand fluctuations and maintain continuity in production. This strategy, however, requires substantial internal support, especially during periods of high interest rates.
Regulatory changes have also influenced supply chain strategies. Laws such as Germany’s Supply Chain Due Diligence Act, the UK’s Modern Slavery Act, Australia’s Modern Slavery Act, and Norway’s Transparency Act have increased the need for companies to conduct thorough due diligence on their supply chains. These regulations mandate transparency in operations to address issues related to forced labor, human rights, and environmental risks.
Businesses are increasingly moving towards refreshing their third-party risk management programs to better assess and mitigate risks. Tools like Value at Risk (VaR) are being utilized to provide a measurable, quantitative approach to evaluating how risk management strategies can safeguard revenues. Comprehensive, enterprise-level data aids organizations in calculating VaR, helping to inform business decisions and prioritize resource allocation efficiently in today’s complex global environment.
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