Supply chains are essential to the survival of businesses. It's what allows them to meet customer demand by ensuring uninterrupted access to the products they need.
However, the risks associated with the supply chain are numerous and can lead to production or delivery disruptions, and interrupt the flow of goods.
In order to avoid risk of disruption to the supply chain, companies must take action to improve their resilience against possible interruptions.
I. What is a supply chain disruption?
Supply chains are complex, and rely on the collaboration of those operating within them to operate efficiently.
When these systems fail, whether as a result of human or machinery error, disruptions can occur, and sometimes these halt the supply chain entirely.
As supply chains are increasingly interconnected, the interruption of just one component can have serious consequences to the entire chain.
For example, if a company's warehouse is damaged by flood or fire, it immediately disrupts the supply chain. The business then suffers an immediate loss of inventory, which could result in lost sales and reduced revenue. Additionally, other companies in this supply chain might also be affected because it depends on the first company's products as part of its own production process.
When a link is broken, the entire supply chain suffers.
II. Why are supply chains so vulnerable to disruption?
The supply chain is a complex system which makes it vulnerable. Many factors can contribute to this. For example:
A supply chain is made up of multiple companies and organisations that are connected to one another. These organisations are interdependent because they exchange products, services and information. If the supply chain is disrupted at a single point, the whole chain suffers.
The supply chain is dependent on energy, transport and communication infrastructure (the internet, for example). These vulnerabilities can produce cascading effects on the entire supply chain.
Supply chains are becoming more and more automated. While automation has become an essential part of the modern supply chain, it is also a potential weakness. When a computer system that controls an automated system fails, the remedy can be complex, often taking a lot of time to get up and running again.
III. Risks that can interrupt the supply chain
The complexity of the supply chain is what makes it particularly vulnerable to risk. In particular:
Natural disasters: floods, fires, earthquakes or even tsunamis can interrupt the supply chain for months, or even years! Completely unnpredictable, these events are often catastrophic for supply chains, because it can be impossible to anticipate them. With accelerating global warming, businesses around the world will increasingly face this risk in the coming years.
Terrorism and armed conflicts: When a conflict breaks out, the entire supply chain is jeopardised: shortages, increased delivery times, rising prices... Whilst some companies may keep their supply chain intact, others may have to find new suppliers, or even relocate their activities. In the case of the conflict between Ukraine and Russia, many companies have experienced supply difficulties. Impacts include rising prices or ceasing some activities entirely. Many have been forced to move their activities from Eastern to Western Europe as a result.
Political instability: This can be due to a number of factors such as: corruption, social unrest (strikes, etc.), revolutions, political coups or even government policies that affect the economy (such as trade restrictions or embargoes). In the case of the Egyptian revolution of 2011, an estimated 80% of all goods were affected by political instability. This led to significant delays and shortages in supply chains across the region.
Financial crises and the collapse of stock markets can affect both the ability of suppliers to invest in their business activities, and the consumer who sees their purchasing power diminish. This can lead to payment defaults, or temporary closures of businesses unable to cope with the fall in consumption. The financial crisis of 2008 had a significant impact on world trade. According to the World Trade Organisation (WTO), international trade fell by 11% between 2008 and 2009 due to declining demand for exports from developed countries and increased protectionism among member countries.
Social disputes between workers and employers over wages and benefits or working conditions. Strikes or slowdowns in the pace of production has a direct impact on the supply chain and can even interrupt it.
Lack of resources (including raw materials). This may be all the more serious if these raw materials are also used by other industries for their production processes. This is what happened during the recent Covid-19 pandemic, with the global shortage of semiconductors. A number of sectors, including the automotive and video game sectors have had to deal with a significant lack of raw materials which has caused a very sharp slowdown in production and difficulties in meeting demand.
Pandemics, as mentioned above, can have significant repercussions on the supply chain: slowdowns in production, shortages, reduction in the workforce available to work, reduction in consumption, etc.
The causes of supply chain interruptions are numerous and are difficult to avoid. Read further to discover what the impacts of such interruptions can be to your supply chain.
IV. The consequences of a supply chain distruption
The risks of disruption to the supply chain are wide ranging, and the repercussions can sometimes be dramatic.
1. The financial costs of an interruption in the supply chain are significant
The monetary cost of a supply chain disruption actually involves multiple factors and can be difficult to quantify. There are for example:
Lost sales: These are sales that were lost during the disruption because your products were not available. This value can be quantified based on an average sale price and the number of days it took your business to recover from the disruption to its supply chain.
The cost of repairing damaged equipment. This includes costs related to the replacement of parts or equipment used to produce your products or services.
The cost of finding new customers. If your business has suffered a long disruption in its supply chain, some customers may lose confidence in your ability to meet their needs. Often in this case, they will go to the competition. In turn, you then have to expend additional costs and effort to win them back, or find new ones to replace them and maintain your pre-existing level of activity.
Penalties and late fees that result from a break in the supply chain. These are often governed by contractual obligations between suppliers and customers. For example, if a supplier fails to deliver an order on time due to circumstances beyond its control (such as accident or fire), then it may be obligated under the terms of the contract with its customers to pay penalties or late fees for the breach.
2. Supply chain disruption leads to lower productivity
Supply chain disruption can also cause production levels to fall, and the time it takes to ramp it back up can have a significant impact on a company's productivity.
Indeed, the longer it takes to restore production, the longer it takes to make up for the shortfall and to meet demand. As a result, customers are more likely to find the product from a competitor, driving down sales.
It is therefore important that management not only focus on restoring the supply chain as quickly as possible, but also ensure that workers are ready to return to activity levels seen before the disruption.
3. The reputation of the company can be impacted
Supply chain disruption risks can also directly impact your company’s reputation.
- Via loss of revenue and customer loyalty. Customers will go elsewhere if they can't get what they need, when they need it, or if the service is substandard because your business has been disrupted by an external event.
- Via damaged reputation and brand value. When there is no guarantee that customers will receive products and services on time, they may decide not to do business with you and opt for your competitor instead.
V. Avoiding supply chain interruption risks
Here are some ways to avoid supply chain disruption:
Establish a risk profile. To understand how likely you are to be affected by disruptions in your supply chain, you need to know what resources your business depends on and how much volume is needed to operate normally. You will also need to determine if there are other providers or other options for each essential element of your business.
Develop contingency plans and use risk management. When making contingency plans, it's important to consider what the impacts could be, and how you will overcome any issues.
It is sensible to include multiple alternatives. If one should fail, another option can be used without incurring any downtime costs or subsequent management costs (such as lost productivity due to recovery time, etc.)
Supply chain disruption is a very real risk that can have widespread consequences. The potential repercussions are many:
loss of credibility in the eyes of suppliers
loss of confidence in the eyes of clients
significant economic loss for the company
loss of productivity
It is essential for any company to use risk management techniques to mitigate interruptions in their supply chain. By developing a risk profile and an appropriate contingency plan, companies can take action to reduce the risk of disruption, and reduce the impact it could have on their supply chain in the future.
If you would like to discuss your logistics issues with our business experts, you can contact them here. You can also access our other blog articles to learn more about the supply chain and pallet pooling.