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Types of Risks Impacting Supply Chains in 2018

Risks can be categorized into three broad areas such as natural catastrophes, man-made and economic.

To look at what risks will affect the supply chain in 2018, Rob Savitsky of AIR Worldwide ( a member of the MIT Center for Transportation & Logistics Supply Chain Exchange program),  wrote a blog for MIT discussing three broad categories of supply chain risk.

1. Natural Catastrophes

In 2017 losses incurred from catastrophes such as hurricanes, wildfires, and earthquakes could make it one of the costliest years in history for the property insurance industry, Savitsky noted.

“These events also caused supply chain disruptions — although not all the effects may have been fully realized yet,” he said.  For example, an analysis carried out by AIR on the potential impact of Hurricane Harvey on regional manufacturing found that, based on percentage of the total potential revenue loss, the top three subsectors are petroleum and coal products manufacturing (37%), chemical manufacturing (13%), and oil and gas extraction (12%).

Hurricane Maria, which slammed into Puerto Rico on September 20, 2017, is a prime example of a catastrophe that reverberates through supply chains. It’s been reported, for example, that the destruction of medical device manufacturing capacity in Puerto Rico wrought by the hurricane has led to a national shortage of medical IVs, which has forced some hospitals to use alternative products and find new suppliers.

 2. Man-Made

Man-made events such as fire, product defects, cyber-attacks, labor and civil unrest, terrorism, utility failure, and piracy, are more frequent disruptors of supply chains but typically have a lower severity than natural catastrophes.

In 2016 several man-made disruptions affected the supply chain. He points to the late summer Gap warehouse fire in Fishkill, New York, which destroyed 30% of Gap’s total warehouse space and disrupted more than 10% of Gap’s orders. Another example is the Samsung Note cellphone battery recall, which was linked to problems in a battery supplier’s supply chain and had far-reaching consequences for the Samsung brand and their customers.

The past few years have seen an increasing prevalence of cyber-attacks. Most of these incidents, such as the high-profile Equifax data breach that involved the personal information of some 143 million Americans do not directly affect supply chains. However, they raise major red flags for supply chain practitioners.

 3. Economic

Economic situation can cause product or labor shortages.  Examples include sub-suppliers that perform poorly, financial insolvency, and trade or tariff. For example the   The 2016 Hanjin maritime carrier bankruptcy left workers, ships, containers, and product stranded at sea and in ports around the world.

Savitsky points to the example of a potential disruption that was averted. The 105-year-old, Massachusetts-based supplier Cutler-McDermott Co., that produced auto parts for GM and filed for Chapter 11 bankruptcy in 2016. The company’s insolvency threatened 19 of GM’s North American production facilities, and if not for a settlement of $2.9 million, could have cost GM “tens of millions of dollars” in losses.

 

Given all of these possibilities,  preparing proactively might be the best strategy for minimizing risks. Savitsky gives the example of the 2011 Tohoku earthquake, where Toyota learned from the event and responded by building information networks covering about 4000 auto parts.  When the 2016 Kumamoto earthquake occurred, Toyota was better prepared and able to identify which suppliers had been affected in a matter of hours, and then quickly shift parts production to alternative suppliers.

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