Cutting Supply Chains: How to Achieve More Reward with Less Risk

Cutting Supply Chains: How to Achieve More Reward with Less Risk
Trade

05 of 11

This insight is part 05 of 11 in this Collection.

July 26, 2023 14 mins

Cutting Supply Chains: How to Achieve More Reward with Less Risk

Cutting Supply Chains: How to Achieve More Reward with Less Risk

Unexpected global changes have shaken supply chains, exposing the fragility of a complex system. While some businesses search for stability, others are harnessing the power of improved data, analytics and AI to strengthen their resilience and opportunities for growth.

Key Takeaways
  1. Vulnerabilities exposed during the pandemic, compounded by macroeconomic headwinds, magnify the fragility of complex global supply chains.
  2. Supply chain businesses are contending with a range of evolving threats that require a revised approach to monitoring, forecasting and managing risks.
  3. Knowing where and how risk impacts the supply chain can help businesses prepare, finance and respond to unplanned events and volatile supplier performance — strengthening supply chain resilience.

Supply chain risk is complex and multifaceted. It can cause material, financial and reputational harm to a business, resulting in lost sales, relationships, revenue and sometimes the future of the business itself. But there’s a raft of processes that can be embedded into an organization to significantly reduce both the cost and impact of disruptions.

Manufacturers continue to compete for limited supplies of key commodities and logistical capacity, leading to long purchase lead times for consumers. Through increased awareness and a need to maintain competitiveness, companies are addressing their long-standing supply issues and re-engineering product specifications. In doing so, they are shaping more resilient and cost-effective supply chains that can be better positioned against future disruptions.

The Growing Complexity of Supply Chains

The interconnected network of manufacturers, transport and storage firms involved in today’s supply chains has become considerably longer and more complex. The intricacies of these structures not only increase the risk of bottlenecks and other disruptions but create ripple effects that agitate global trade flows.

Third-Party Reliance

Many businesses still have their strongest relationships with only a couple of major suppliers. However, they are aware of the need for a broader list of suppliers, alternative markets/customers, and alternative transport and logistics providers. Supply chain leaders are now realizing the value of third and fourth-party risk monitoring to address inherent, emerging and residual challenges in cyber and counterfeiting risks. The use of new technologies including trading systems, planning and analytics capabilities, as well as additional logistics requirements enable increased flexibility and better cost control.

Investing in Technology

Good investments include intelligent automation used to enable efficient, effective and safe operations, including stores, warehouses, manufacturing facilities and even corporate office buildings. Recently we’ve seen accelerated investments in advanced digital enablers, such as cognitive planning and artificial intelligence (AI)-driven predictive analytics. These solutions add greater integrity and visibility, utilizing track-and-trace and blockchain technologies. Organizations are also using advanced technologies to significantly improve visibility across supply chains and boost their response to major disruptions and variables within their domestic, regional and global supply chains.

Commodity Pricing

To overcome the challenges around leveraging commodities, there’s heightened reliance on digital and AI technology. In addition to ensuring a seamless flow of information across the value chain, the use of advanced tools enables more efficient insights-driven decision-making. Consolidation of spend is enabling improved buying, leverage and negotiating power, while also driving reductions in wastage support, environmental, social and governance (ESG) policies and shareholder concerns.

Workforce, Talent and Labor

The onset of new technology has dramatically changed the way supply chains operate globally. Today, consumers are becoming more demanding, driving the transformation of supply chains at a faster rate. Modern operations are focused on technology and innovations which are blurring the lines between the skill sets of blue and white-collared professionals. Supply chain and manufacturing operations now demand a blend of physical and technological skills to sustain and grow both now and in the future.

The changes in demographic are also impacting the overall resource pool. Recruitment of Gen Z, who will soon form a significant part of the workforce, needs to be constantly reassessed to keep the motivations and aspirations of new generations inspired.

These colliding forces are creating global volatility and driving organizations to rapidly reevaluate their operations and strategies around established and clearly-defined risks, as well as newer evolving and emerging threats. This article takes an industry approach to explore the current challenges for food, agribusiness and beverage (FAB), life sciences, renewables, and construction and infrastructure businesses.

Industry Insights

Food, Agribusiness and Beverage

The success of the FAB sector is closely tied to geopolitical events and environmental conditions. Global conflicts, the pandemic and notable rising incidents of extreme weather have highlighted an increase in vulnerabilities. Crop failures, raw material shortages, livestock health, and the safety and security of supply have contributed to rising inflationary pressures, threatening food security globally1 and presenting a unique set of challenges for the industry.

The complex, lean, highly automated, and often just-in-time structure of FAB supply chains means the current labor constraints have become a considerable risk factor for the sector. A lack of workforce stability can severely undermine operational efficiency, compromise quality and heighten pressures on existing workforces. All of this comes at a time when regulation is increasing, stakeholder pressure is intensifying and the transition to net-zero is driving a rise in ESG disclosures.

While the accelerated and evolving use of technology, such as automation, robotics and AI, enables the industry to realize new efficiencies, it also comes with the increased risk of cyber breaches. Even though cyberattacks in the form of ransomware and malware are not new risks, these threats are evolving rapidly. The FAB industry fell victim to more attacks in 2022 than any other manufacturing sector,2 with major manufacturers experiencing significant breaches that caused substantial losses due to ransom payments and operational downtime.

Why Act Now?

Future growth within the FAB sector is being driven by consumers and investors looking for climate and health-friendly solutions through an ESG lens that considers sustainability, ethical sourcing and social value. While many FAB companies committed to transition to net-zero,3 delivering on this commitment will require a fundamental and accelerated shift at the start of the FAB value chain. Although much of the climate disclosure around supply chains is currently voluntary, regulators in certain jurisdictions are proposing disclosure obligations and mandatory reporting.

49.7%

FAB businesses that have suffered a loss due to commodity price risk and scarcity of materials.

Source: Future Global Risks in the Food, Agribusiness and Beverage Sector, Aon, 2021

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Life Sciences

The pandemic underscored the life sciences sector's dependence on particular geographical regions for critical materials and products. The fallout of these challenges has highlighted the need for diversification within the industry’s supply chains to mitigate against future geopolitical and pandemic-related risks.

The nature of temperature-sensitive products within the industry also adds complexity to the storing, handling and transporting of products under temperature-controlled conditions. A lack of warehouse space, substandard packaging or temperature control failure, for example, can cause catastrophic consequences for medically dependent patients. This then creates considerable financial and reputational risks for the businesses supplying them.

The complexity and reach of cold chains are growing while regulatory and environmental requirements are becoming increasingly challenging. Modern supply chains already account for 60 percent of greenhouse gas emissions, but cold transport can consume up to 20 percent more fuel because of refrigeration equipment4 — making sustainability an even greater challenge.

Reliability and quality are the cornerstones of supply chain management for the life sciences industry. These securities often trump price in the quest to maintain and grow organizational reputation. However, this has resulted in a heavy reliance on a limited number of key suppliers with skilled staff and specialist facilities. The heavily regulated environment of the sector also creates a prohibitive setting for new entrants, limiting capacity within the industry’s supply chain.

Life sciences companies are also looking to diversify capabilities, maximize revenue streams and simplify the supply chain, which is driving consolidation. Contract development and manufacturing organizations (CDMOs) have traditionally operated in a fragmented space, with the top five companies owning less than a 15 percent share of the market.5 However, the desire to expand development and manufacturing capabilities has resulted in an upswing in M&A activity as larger CDMOs seek out smaller, niche facilities in multiple locations6 — reshaping dynamics within the life sciences supply chain.

Why Act Now?

In a post-pandemic landscape, people have experienced the realities of drug and medical supply shortages. Today, stakeholders demand that lessons are learned to ensure life sciences supply chain players are better prepared to deal with the next global health emergency. Governments and regulators are pushing for increased local production to drive greater efficiency in the future while also supporting the sustainability agenda. For example, the U.S. government aims to produce 25% of active pharmaceutical ingredients for small-molecule drugs within the next five years.7

Leading organizations in the life sciences industry are now stress-testing their current supply chains and applying risk modeling techniques to understand how resilient they are beyond traditionally insured risks. This information is then used to inform the risk mitigation and financing strategies of supply chains that will support new products and build future growth.

$35B

Failures in temperature controls cost the life sciences industry 35 billion USD annually.

Source: Pharma Logistics: Boosting Resilience and Sustainability When Transporting Sensitive Goods, Maersk, 2023

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Renewables

Ongoing supply chain challenges in the renewables sectors hamper both new project development and operational assets. These challenges can be even more acute for international projects, where supplies are sourced from a wide range of countries.

A lack of critical plants and equipment, such as suitable installation and maintenance vessels for the offshore industry, has also slowed supply chains, lengthened project schedules and made some developments nonviable. Exposure to supply chain bottlenecks for existing assets can lead to operational downtime, compounding losses that may have occurred during the development phase.

Global political unrest has triggered a renewed urgency to reduce the global dependency on fossil fuels and deliver greater energy security. However, destabilized global economics escalate commodity, labor and freight costs for the sector, contributing to wind and solar power in major global markets increasing by almost 30 percent in 2022.8 Despite a global commitment to accelerate the development of renewable energy infrastructure, supply chain vulnerabilities pose a threat to the pace of development needed to reduce harmful global emissions.

Why Act Now?

Significant growth is predicted in the renewable energy sector,9 with many projects in development concurrently. However, without rapid expansion, supply chain challenges are only anticipated to intensify. Businesses in the renewables sector are well-versed in navigating the international regulatory conditions used to protect domestic industries, ensure national security or promote local economic growth. Yet, as global attitudes towards renewable energy shift, businesses across the sector are traversing a tightening regulatory environment. This adds an additional layer of complexity and risk to supply chain management, requiring continual assessment of the landscape to adjust strategies accordingly.

Corporate clients who operate or develop portfolios of assets can explore the feasibility of spare part pooling to mitigate supply chain risks. Standardization of technology in the sector also helps to reduce the number of suppliers that supply chains depend upon.

$1.2T

The International Energy Agency’s (IEA’s) 2023 clean energy study suggests $1.2 trillion of cumulative investment would be required to bring enough clean technology manufacturing capacity online for renewables supply chains to be on track with the Net Zero Emissions Scenario’s 2030 targets.

Source: Energy Supply Chains Between Transition and Disruption, IEA, 2023

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Construction and Infrastructure

While the construction and infrastructure industry has made strides to overcome the shortages, supply bottlenecks and project delays that emerged from the pandemic,10 the sector today finds itself grappling with an evolving set of challenges. Record-breaking levels of dry powder in the investment market have accelerated the demand for construction projects,11 fueling ferocious competition for materials and labor — driving up costs for the sector.

Geopolitical and economic volatility have stoked inflation, accelerating commodity, labor, finance and energy costs. Rising levels of flooding and catastrophic weather leading to supply chain delays have also been on the rise. For example, in the aftermath of Hurricane Ian, damage to ports, railroads and highways caused immediate logistical challenges. However, long after the wreckage, there are still considerable timber and drywall procurement challenges for developers looking to rebuild affected communities.

This intersection of factors has increased the cost of construction, while also making front-end projected project costs more challenging to predict — creating new financial risks for all parties within the construction and infrastructure supply chain.

The stakes can be even higher for businesses managing the supply chains of public entity projects. Stringent regulations, complex procurement processes and the typical scale of these projects can expose contractors to significant financial risks in the event of supply chain delays.

Why Act Now?

The schedule-driven nature of the construction industry means that any delays within the supply chain can result in costly losses for project owners, contractors, subcontractors and suppliers. Against the increasing incidence of severe weather events, rising costs and escalating nature of supply chain disruptions, businesses face considerable threats to their success. These evolving risks within the industry’s supply chain have intensified debates between project owners and contractors around the risk of delay. Financial penalties on projects can be significant and purchase agreements typically reject responsibility for consequential damages to the purchaser. It is therefore highly challenging for a contractor to recover the cost of a delay in the event of extreme weather disrupting the supply chain.

Balancing Efficiency with Resilience

Options available to industries to re-engineer their supply chains in response to an accelerating risk profile are limited. Leaders should take an enterprise approach to supply chain risk, delivering data-driven insights, analytics and advice that balances efficiency and resilience with assessment and monitoring.

Leaders can help build long-term resilience and efficiency by considering the following:

  • Operations should be flexible and resilient to adapt and adjust in real-time to changes in trade flows, new regulations, the impact of climate change, trade challenges and geopolitical unrest.
  • Technology should be invested in and effectively utilized to help reduce operating costs, provide visibility and diversify the way consumers’ needs are met.
  • Developing the capability to swiftly adapt to digital operations and drive actionable improvements from data is critical.
  • Fleet management and supply chain networks should be continually responsive to ever-increasing customer requirements.
  • Collaboration, supplier partnerships and ongoing risk monitoring are needed for more transparency and the ability to significantly de-risk the supply chain.

Innovate and Adapt for Future Supply Chain Success

The outlook for supply chains remains turbulent. In the face of disrupted and volatile market conditions, businesses must brace for the situation to worsen before it improves. Navigating the landscape of supply chain risks has always been complex, but today, businesses need to adopt a holistic and integrated approach that addresses the interconnected web of potential risks — from strengthening collaboration and cooperation with supply chain partners to embracing the transformative power of emerging technologies.

Proactive risk management must become an integral part of a business’s DNA to build more resilient and efficient supply chains capable of flexing to an ever-changing world where uncertainty prevails. Fostering a culture that embraces innovation and adaptation will empower workforces to seize opportunities for continued growth and improvement. With the right tools and support, businesses can reimage their supply chains to create dynamic and adaptable networks capable of withstanding inevitable future storms.

For further information and solutions related to global supply chain risk management, visit https://www.aon.com/en/insights/supply-chain-resilience


1 Food Security Update | World Bank Response to Rising Food Insecurity, World Bank, 2023
2 Tech Leaves Food Industry More Exposed to Cybersecurity Threat, Just Food, 2023
3 For a Livable Climate: Net-zero Commitments Must be Backed by Credible Action, UN, 2022
4 Pharma Logistics: Boosting Resilience and Sustainability When Transporting Sensitive Goods, Maersk, 2023
5 Outsourcing in Pharma & Biotech: Shifting to Contract Manufacturing and Development, Zymewire, 2022
6 Ibid.
7 From Cell Therapies to US-made Ingredients, White House Outlines New Drug Manufacturing Goals, Fierce Pharma, 2023
8 Global Renewable Power Prices Soar on Heavy Demand, Chaotic Supply Chain, Reuters, 2022
9 Renewable Power on Course to Shatter More Records as Countries Around the World Speed up Deployment, IEA, 2023
10 Will Construction Supply Disruption Continue? RICS, 2023
11 Construction Costs Soar in the Face of Global Market Challenges, Infrastructure Global, 2022

30.7%

30.7% of city markets reported construction inflation of 10% or more in 2022.

Source: Construction Costs Soar in the Face of Global Market Challenges, Infrastructure Global, 2022

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General Disclaimer

The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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