Category Archives: Risk Management

Risk 2011: Geopolitical

In our last post, we discussed the top three environmental risks facing your Supply Management organization that were chronicled in the World Economic Forum‘s 6th annual Global Risks report. Chronicling thirty seven types of risk divided into five categories, this report did a tremendous job of covering the types of risk that an average Supply Management organization needs to prepare for. Today, SI is going to continue its coverage of the report by discussing what it believes are the top three risks from a geopolitical perspective.

03: Corruption

Corruption can take many forms — bid rigging, bribery, collusion, fraud, embezzlement, organized crime, price fixing, and thievery just to name a few. Each of these can be devastating to your supply chain. Bid rigging, collusion, and price fixing can significantly increase your costs. Bribery and thievery can result in a loss of your IP and product plans which could negate years and tens of millions to hundreds of millions of research and development. Embezzlement and fraud could drain your organization of necessary operating capital and organized crime could result in an entire warehouse of inventory disappearing overnight. This is one risk that’s never going away.

02: Terrorism

Terrorism is on the rise, and terrorists are getting their hands on more powerful and destructive weapons by the day. And it’s not just religious extremists that you have to be afraid of. There’s also anti-establishment extremists, new-age radical groups, and anarchists. Each of these groups could decide that your goods or services are against god, pro-establishment, anti-progress, or too orderly and decide that your corporation needs to be taken down here and now. One well planned strike and your factory, or headquarters, is a smouldering crater.

01: Geopolitical Conflict

Civil unrest can often quickly escalate into civil war and civil war can quickly result in cities, counties, and even provinces becoming inaccessible and if the conflict escalates, entire borders will close. Once a border closes, nothing gets in our out. Your factories become cut off from the rest of the world, and all of your inventory, tying up all of your capital, becomes inaccessible for an indeterminate amount of time. And your supply management organization, like the goods in your cut-off factory, is at risk of total destruction.

Risk 2011: Environment

In our last post, we discussed the top three societal risks facing your Supply Management organization that were chronicled in the World Economic Forum‘s 6th annual Global Risks report. Chronicling thirty seven types of risk divided into five categories, this report did a tremendous job of covering the types of risk that an average Supply Management organization needs to prepare for. Today, SI is going to continue its coverage of the report by discussing what it believes are the top three risks from an environmental perspective.

03: Climate Change

Climate change may not seem like a big risk, but it can have drastic consequences on your operations. Not only can it increase the likelihood of (tropical) storms, floods, blizzards, and ice storms, which can destroy your factories, wash away your delivery trucks, trap your workers in the factory for a week, and take down entire power grids, but it can wreak havoc on your operations. For example, if you want to drill for oil in the oil sands, you need the ground partially frozen. If six months are required to extract a year’s worth of oil but by the time the ground freezes there will be less than four months of drilling time, problem. And if the risk of flooding is significantly increased, so are the chances of your supply chain being brought to a grinding halt.

02: Earthquakes & Volcanic Eruptions

The 9.0 magnitude earthquake in Japan back in March demonstrated the devastation that earthquakes could have on global supply chains. The earthquake and resulting tsunamis not only damaged or destroyed thousands of homes and hundreds of factories, which resulted in almost 20,000 deaths, but also resulted in the immediate declaration of a state of emergency at a nuclear power plant when dangerous levels of radiation escaped the Fukushima No. 1 (Daiichi) plant. In addition, it triggered the immediate shut down of 15 of Japan’s nuclear power stations and a crisis at the Tokai No. 2 Power station was narrowly averted.

However, this earthquake is nothing compared to what a well placed major volcanic eruption can accomplish. Not only can a major eruption near the edge of a tectonic plate trigger an earthquake, but it could launch enough ash into the air to make air travel through a region impossible for months. The recent volcanic explosions in Iceland are nothing compared to some of the eruptions that have happened in the last few thousands years. Not even the eruption of Mount St Helens in 1980 was very big. It only erupted 1 cubic km of lava. The largest eruption, in terms of java discharged, in the last 99 years was Pinatubo in the Phillipines in 1991. A whole 10 cubic kms of lava was released. The 1912 eruption of Katmai in Alaska released 12 cubic kms. And this is nothing compared to the 1815 eruption of Tambora in Indonesia that released 100 cubic kms of lava. And students of history are aware of how Mount Vesuvius buried Pompei under 4 to 6 m of ash and pumice. The eruption of Krakatoa in 1883, which was heard across the world, released so much ash into the air that it caused a volcanic winter. Temperatures worldwide dropped an average of 1.2° C for the next 5 years as a result of ash that was ejected 20,000 ft high. If this happened today, air travel would be interrupted for at least six months in the region. The interruptions in air travel as a result of the Icelandic explosions would be minor in comparison.

01: Flooding

The recent floods in Thailand are a perfect example of the significant impact that floods can have on global supply chains. With insurance losses expected to reach 20 Billion (Insurance Insight) with over 10,000 factories impacted to various extents, a single flood can cause so much damage that it could literally bankrupt an operation. The automotive sectors and electronic sectors were impacted the hardest — more than 400 Japanese companies in these sectors suspended operations or lowered output as a result of the floods.

And with global warming, which is causing many of the ice flows in the arctic to break up, the risk of flooding is greatly increasing. Many of the worst floods in history were ice-jam floods resulting from “breakup jams” which force ponding upstream and a rapid release of water when the ice dams breach. This is what happened in (April) 1952 on the Missouri River in (Bismarck) North Dakota where an eroding ice dam resulted in flow increasing from about 2,100 m3/s to more than 14,000 m3/s in less than 24 hours. The river rose 5 feet in less than 2 hours and submerged nearly everything south of US Highway 10. Fortunately, this was not a densely populated area, otherwise, instead of 200 houses being destroyed, there would have been 20,000 houses destroyed and likely thousands of deaths. If this happened near your factory, it would be wiped out almost instantaneously.

Risk 2011: Society

In our last post, we discussed the top three technology risks facing your Supply Management organization that were chronicled in the World Economic Forum‘s 6th annual Global Risks report. Chronicling thirty seven types of risk divided into five categories, this report did a tremendous job of covering the types of risk that an average Supply Management organization needs to prepare for. Today, SI is going to continue its coverage of the report by discussing what it believes are the top three risks from a societal perspective.

03: Economic Disparity

Economic disparity, also known as economic inequality, refers to the disparity in the distribution of economic assets and income. Economic disparity can negatively impact a Supply Management organization in a number of ways. An obvious impact is if the majority of the target population in the geographic regions in which the parent organization operates, and wishes to sell the product, cannot afford the goods or services being offered, than Supply Management will be stressed to lower the price point or risk serious resource cutbacks as the organization faces reduced revenues and operating resources. A less obvious impact is that economically disadvantaged groups may also have restricted access to food and water. This in turn increases the severity of the top two societal risks to your supply chain.

02: Food Security

People need to eat. As a result, they need access to safe, secure sources of staple foods at an affordable price point. If they don’t have access to safe, secure sources of staple foods at an affordable price point, they riot — as we have seen in Tunisia, Algeria, Bangladesh, Mogadishu, India, China, and even the UK and Canada this year. When people riot, property gets destroyed — property that could include your delivery trucks, your goods in your warehouses, and even your production plants. Try ensuring supply with no distribution mechanisms for raw materials, no working production lines, and no warehouses to store anything.

01: Water Security

Not only do people need water, but supply chains need water. First of all, supply chains need energy. Energy production requires water (as per the Water Energy Nexus). For example, in the USA, about 2 US gallons of water evaporates to create one kilowatt hour of energy. Steel, which is a component of many goods, requires 62,000 gallons of water for the production of a single ton. Semi-conductor fabrication plants often require up to 2,000 gallons of water per minute. No water, no goods, no components, and no energy. And if water gets too scarce, so is food. And a vicious downward societal cycle will begin.

Risk 2011: Technology

In our last post, we indicated that the World Economic Forum had recently released its 6th annual Global Risks report, it’s 2011 edition. This report was filled with risk, thirty-seven types of risk divided into five categories to be precise. Today, we are going to discuss what Sourcing Innovation thinks are the top three technology risks from a Supply Management perspective.

03: Threats from New Technology

Your business depends on its profit margins. Its profit margins depend on keeping revenues up and costs down. Revenue often depends on having the best product for your target customers at the best price point. Keeping costs down usually depends on a lean, streamlined process which, in turn, often depends on leading-edge technology to keep it running as efficiently as possible.

If your competitor identifies, latches onto, and implements a new technology before you do, then your competitor may be able to lower its production and operating costs well below your production and operating costs. If this happens, it will be able to lower its price point, and increase its revenue at the expense of yours. Then your organization will face declining revenues with higher costs. Profits will quickly disappear. Given the rapid pace of progress in many technology verticals, this could happen overnight if your organization doesn’t at least keep up, if not stay ahead of, the curve.

02: Online Data and Information Security

Every week we hear about another data breach at another retailer. What we don’t often hear about, because consumers aren’t directly affected, is yet another network intrusion at a Global 3000. While the average hacker might want your credit card, the average hacker employed by organizations that resort to corporate espionage wants your data – and your Supply Management related data in particular. What are you making? What are the specifications? Where? With who? When are you shipping? From Where? With what carrier? If any of this data finds its way to your competition before you’re ready to release a new product, the losses could be crippling. What if your competitor is able to use your plans to jump-start their development of a better version and beat you to market? What if thieves intercept your critical shipments and sell your product on the black market? While a consumer’s financial solvency depends on her credit card information being kept secure, your organization’s financial solvency often depends on your Supply Management data being kept secure.

01: Critical Information Infrastructure Breakdown

Let’s face it, it’s impossible to manage a global supply chain without modern supply management systems and the information infrastructure that supports them. What happens if your primary data centre gets taken out? What happens if your headquarters loses power for 48 hours? What happens if the land lines fail and the one satellite that carries cellular signals for your (remote) location stops responding? The minute your internet goes down, your business stops. Literally. And since your information infrastructure could breakdown as the result of a (power) grid overload, a data centre failure, an environmental disaster, or a terrorist action, all of which can not be predicted (or prevented in many situations), this is a significant risk that requires risk mitigation plans be in place and ready to go at a moment’s notice.

Risk, Risk, Risk: 2011 Did Not Improve Matters Any

The World Economic Forum recently released it’s 6th Global Risks report, 2011 edition, and it’s filled with economic, environmental, societal, geopolitical, and technological risks that are plaguing global supply chains across the globe. Some of these have not changed since SI first reviewed the 2nd edition back in 2007, and some are new. However, they all have the potential to bring your supply chain to a grinding halt. In this series, we will review each category of risk, focus on a few risks of immediate relevance and discuss how they could impact an average supply chain.

At a high level, the risks identified were:

Environmental

  • Air Pollution
  • Biodiversity Loss
  • Climate Change
  • Earthquakes & Volcanic Eruptions
  • Flooding
  • Ocean Governance
  • Storms & Cyclones
 Technological

  • Critical Information Infrastructure Breakdown
  • Online Data and Information Security
  • Threats from New Technology
 Societal

  • Chronic Disease
  • Demographic Challenges
  • Economic Disparity
  • Food Security
  • Infectious Diseases
  • Migration
  • Water Security
Economic

  • Asset Price Collapse
  • Extreme Commodity Price Volatility
  • Extreme Consumer Price Volatility
  • Extreme Energy Price Volatility
  • Fiscal Crisis
  • Global Imbalances & Currency Volatility
  • Infrastructure Fragility
  • Liquidity / Credit Crunch
  • Regulatory Failures
  • Retrenchment from Globalization
  • Slowing Chinese Economy (<6%)
 Geopolitical

  • Corruption
  • Fragile States
  • Geopolitical Conflict
  • Global Governance Failures
  • Illicit Trade
  • Organized Crime
  • Space Security
  • Terrorism
  • Weapons of Mass Destruction

That’s a lot of risk to consider, spread across five categories and thirty-seven risk types, each of which could manifest in dozens, or hundreds, of ways across your global supply chain. In the next five posts we’ll discuss what SI thinks are the top risks in each category and why.