Managing risk in global supply chains

A version of this article originally appeared as partner content sponsored by FM in the Financial Times.

Supply chains are increasingly modular, dynamic and subject to seismic geopolitical shocks. Businesses that partner with risk experts to identify weaknesses can prevent disruption.

Global supply chains are ever more intricate, and exposed to disruption from factors including inflation, trade disputes, regulation, piracy, cybercrime, accidents and extreme weather. A 2024 survey by the Business Continuity Institute found that almost 80 per cent of respondents’ supply chains had been disrupted over the previous 12 months. According to a 2020 McKinsey report, a business can, over the course of a decade, expect disruptions to erase half a year’s worth of profits or more. This was memorably demonstrated by the 2021 Ever Given Suez Canal blockage which, at one point, was estimated to be costing the global industry $9.6bn a day.

Many industries are aware that they fall short in this area of strategic risk management, according to McKinsey. Its 2024 Global Supply Chain Leader Survey also revealed that only a quarter of respondents have formal processes in place to discuss supply chain issues at board level. Charlotte Hedemark is President of the Federation of European Risk Management Associations (FERMA), which represents 23 risk management associations across the continent. She understands better than most the damage that inadequate oversight can inflict. “Senior management must consider supply chain resilience as a strategic, not merely operational, priority,” she says. “Investing proactively in visibility tools, scenario planning and supplier diversification is essential. In today’s climate, amplifying the resilience of supply chains cannot be an afterthought.”

As methods for estimating and reducing exposure become increasingly sophisticated, consultants and insurers are recommending greater collaboration. “In the past, risk managers were less inclined to take concerns about large-scale supply chain disruption seriously,” says Kerry Balenthiran, Operations VP, Group Manager, Business Risk Consulting (EMEA) at global insurer FM. “There was a feeling that you were scaremongering but, given events over recent years, there’s been a mindset shift. We’ve gone from the early days of companies using risk assessment questionnaires to collaborations between clients, brokers and insurers to proactively manage their risks.”

Benchmarking resilience

FERMA actively encourages the 6,000 risk managers it represents across various sectors to seek third party support. “External partners often possess industry-wide data access, enabling companies to benchmark resilience and adopt best practices,” says Hedemark. “In an interconnected risk landscape, collaboration is not a luxury: it’s essential.”

Reinforcing supply chain links requires enterprises to assemble a detailed picture through a deep delve into business models and operations across all departments. The bigger a company is, the less visible its exposures tend to be. Few look beyond tier one and tier two suppliers, says Balenthiran – a worry when disruptions often originate further upstream, where risk awareness may not be as rigorous or subject to regulation. At the same time, significant changes to supply chains are difficult for large enterprises to make swiftly. Forward planning is often conducted years ahead, and establishing a new supplier or source can take just as long.

Yet companies that invest in supply chain analysis also gain competitive advantage, explains Dr Louis Gritzo, Chief Science Officer, FM. “It doesn’t require huge outlay, but it does take time, expertise and human effort,” he says. “The problem is that when things get tough, these are often the first things to get cut. And, too often, we see our recommendations not fully carried out or maintained. There has to be sustained diligence.”

A strategy for continuity

FM has dedicated business units and tools designed to help clients identify weaknesses and ensure business continuity. “Our analysis enables us to quantify the exposures based on revenue streams and our engineering risk score to produce a priority list to address,” says Balenthiran. “We also provide suggestions, such as holding more stock or materials, or avoiding dependency on a single supplier.” There will be a cost to these actions, but these can be considered in relation to the potential impact on a client’s financial statements. “It’s not unheard of for a company to buy a key supplier to control their risk.”

Investment in digital tools, such as advanced planning and scheduling systems, are also recommended for pulling together a strategy, particularly with AI making an impact on supply chain management software. “Real-time monitoring and predictive analytics can detect issues downstream earlier,” says Hedemark. It should, however, be seen as one component, rather than an entire solution, adds Gritzo. “AI is not a silver bullet. You can’t just pull the data down and run a model to analyze your supply chain; there has to be oversight from those with deep business knowledge.”

Supply chains can be significantly reinforced, and while absolute guarantees are impossible, identifying problems earlier can reduce the damage. “As insurers, we have to be optimists,” says Balenthiran. “Business involves risks and, to be successful, you have to manage those as best you can.

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