Once a year, just before the start of the New Year, the Ferrari Consulting and Research Group and the Supply Chain Matters Blog provide our series of predictions for the coming year. These predictions are provided in the spirit of advising supply chain organizations in setting management agenda for the year ahead, as well as helping our readers and clients to prepare their supply chain management teams in establishing programs, initiatives and educational agendas for the upcoming New Year.
In Part One of this series, we unveiled the methodology and complete listing of our 2014 predictions.
Part Two of this series summarized Prediction One related on what to expect in the global economy and Prediction Two, what to expect in procurement costs.
Part Three of the series summarized Predictions Three, continued momentum associated with the resurgence in U.S. and North America production, and Prediction Four, talent recruitment and retention as a continued challenge.
Part Four addressed some unique industry specific supply chain challenges in 2014.
Part Five predicted increased implications regarding current supply chain social responsibility strategies and practices.
In this Part Six commentary, we move on to the implications of increased supply chain risk.
Prediction Seven: Increased Dimensions of Supply Chain Risk and Major Disruption will Further Impact Global Sourcing Strategies
Since our inception in 2008 as both a supply chain social media based educational forum and industry analyst anchored consulting firm, we have continually raised awareness to the increased occurrence of major supply chain disruption and risk. Industry supply chains encountered the brute reality of such risks in the year 2011, with the industry supply chain effects of both the devastating earthquake and tsunami that struck areas of Northern Japan and the widespread floods in Thailand that impacted multiple production facilities.
Supply Chain Matters has moved to many other post 2011 commentaries addressing areas of increased risk and their potential implications to business performance. In the area of extraordinary climatic events, each passing year brings an unfortunate new meaning definition of historic magnitudes of storms. In 2013 alone, the world witnessed one of the largest and most destructive typhoons, which struck the Philippines. Across the U.S. Midwest, records were shattered in regards to the most powerful tornadoes ever recorded that brought associated destruction and loss of life. Risk also escalated in the occurrence of natural disasters including more powerful and frequent earthquake events, some of which have occurred in key component supply regions such as Taiwan.
In our previous publishing of annual predictions, we raised awareness to increasing threats and exposures. In 2012, we modified our prediction in this area to include effects of liability insurance costs as a new consideration factor in major sourcing decisions. Since that time, the voices echoing increased disruption risk across global supply chains has magnified with multiple consulting firms, insurance providers and corporate liability firms joining in the chorus of concern. Yet, we live in a world of shortened sound bites and in the moment memories. Recent surveys of supply chain executives indicate a lowered priority on risk management, probably because there are so many other challenges and priorities on the minds of industry supply chain executives.
Government and industry groups look to escalating climatic events as uncontrollable acts of nature which are the new normal. However, we have again added the challenge of major supply chain risk to our 2014 predictions primarily because of the implications of the various events that are occurring.
For a number of valid business reasons, major amounts of product design, test, and component and volume production are sourced across coastal regions of Asia. We all know these areas well: China, Singapore, Malaysia, Thailand, Taiwan and the Philippines to name just a few. Major customer service and support operations also stem from areas of Asia and Oceania. The countries that they are located within are today the most fragile in terms of extraordinary climatic events, natural disasters and flooding. Insurance providers and the re-insurance brokers that finance global risk threats are well attuned to these trends, and price liability or business recovery insurance rates based on risk probability. If you need reinforcement, read their global risk summaries and reports. A preliminary analysis of natural disasters in the first-half of 2013, performed by global re-insurance firm Swiss-Re, estimated $56 billion in economic losses from disasters. According to the Swiss Re analysis, flooding was a main-driver of natural catastrophe related losses accounting for nearly $8 billion in global insurance claims. Global insurance covered upwards of 35 percent of these losses, amounting to $20 billion.
Many corporations self-insure to some extent, under the guise of the probabilities of extraordinary events that would impact the business. Recent history of events, their impacts on the supply chain, and consequent impacts on revenues and profits have additional new meaning for corporate finance executives.
We believe that in 2014, the ongoing cumulative effects of increased financial and business disruption liabilities will compel more manufacturers, retailers and service supply chains to once again revisit global sourcing strategies, especially in the light of risk among strategic suppliers, both in upper and lower tiers of the value-chain. Dual or alternative sourcing strategies among strategic suppliers will become ever more important and will drive some new sourcing patterns that include different or diverse geographies to balance risk. Product development, sourcing and procurement teams must be proactive to implications of these developments and will need to depend on more sophisticated analysis tools to identify component risks in relation to overall revenue dependence and weighted risks for disruption in supply.
Suppliers that provide strategic components, products and/or services for key customers may well be fielding requests for considering the locating of facilities in different geographic areas that offset risk and provide contingency back-up to a major disruption. We believe the days of sourcing based on one-dimensional cost and labor dimensions are over and 2014 will bring new dimensions of analytical analysis, advanced information technology and consequent sourcing actions that balance as much as possible, global risk. This will be a far different dimension of supply chain risk management and mitigation and firms had best be prepared for the new shift.
This concludes Part Six of our 2014 Predictions series.
Keep your browser focused on Supply Chain Matters as in an upcoming posting, we will move on to Prediction Eight, which predicts further turbulence in global transportation carrier networks.
As always, readers are encouraged to add individual or their own organizational perspectives to these predictions in the Comments section associated to each of the postings in this series.
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