Managing supply chain risks in times of crisis

Global supply chains for goods and services continue to be at risk from disruption caused by global threats and climate change. The fallout from disrupting events of recent years – from the Covid-19 pandemic, wars in Ukraine and the Middle East, China-US tensions, the drought crisis of the Panama Canal, rapid interest rates changes, a cost-of-living crisis, to a chaotic revolving door of Prime Ministers – has led to drastic changes in the supply and demand for goods and services, causing significant challenges for business operations. 

Decision makers should be thinking critically about potential risks, at home and abroad, and how these might practically impact supply chain sustainability and business continuity and their response. Domestically, this might include continued economic stagnation, the ongoing effects of Brexit, industrial action, and changes to the tax regime as the new Labour government implements its economic policy. On a global scale, issues might include regional conflicts, a flagging Chinese economy, and the expansion of the intergovernmental BRICS alliance. What is key is that such issues are identified, their potential effect evaluated, proactive steps are taken, and strategies implemented, to limit their effect.

As discussed in our article 'Audit and corporate governance reforms', businesses will also be subject to increasing audit and reporting obligations, which will include scrutiny of its supply chain and the consequent human rights and environmental impact. In addition to the need for regulatory compliance, businesses need to consider brand and reputational damage caused by potential exploitative practices of their suppliers. 

Businesses should adopt pre-emptive risk management and mitigation. Supply chain issues can have a significant impact on cashflows, result in losses, sour business relationships and erode reputation. Financial distress is the major risk and directors need to tread carefully to ensure they balance the best interests of the company against ensuring they act in the best interests of creditors when the cash starts to run out (see our article 'Maintaining financial health in the face of global and domestic pressures'). 

Data analytics can be used to achieve greater transparency, which can aid in forecasting risks, assessing their likelihood, and implementing contingency measures. Technology can also be used in innovative ways in the supply chain, and decision makers should consider employing tools that can help future proof their businesses. One example is the use of blockchain, which has already proved beneficial in supply chains where parties are less trustful of each other. This technology may prove resistant to global hostilities between countries.

Blockchain can strengthen global supply systems by predicting risk; enhancing visibility and traceability for critical product components; increasing data accuracy, immutability, and trust. Furthermore, the technology is mature enough to interface with other emerging technologies such as smart contracts (pieces of code stored on a blockchain) and artificial intelligence to provide a supply chain which is more secure, dependable and resistant to external threats.

To navigate disruption effectively, a prepared business should have appropriate measures in place to deal with supply shortages, inconsistent demand, cash flow issues or reduced productivity.

Early warning signs that a business is in financial difficulty include falling gross profit, changes to the business's contractual obligations, failure to supply goods and services or pay on time, or stakeholders taking steps to protect their positions. Finally, it's important to ensure there's a disaster plan in place to enable businesses to meet these challenges head on and most importantly survive what undoubtedly can be very stormy seas.

Adapting and using new techniques and tools will likely be imperative for the future of supply chains. Longer term, businesses should consider opportunities for diversification to guard against the risk of reliance upon a small number of supplier or customer relationships.