Threats to Global Supply Chains
Threats to Global Supply Chains and Reducing the Risks
Natural Disasters
Global supply chains are exposed to a wide range of threats, causing companies to examine risks and minimize potential impacts.
Disruptions can have both short-term and long-term implications on company performance.
Earthquakes and Tsunamis
The 'Great East Japan Earthquake' in 2011 was the fifth most powerful ever recorded and the most powerful experienced by Japan.
It caused thousands of deaths and massive infrastructure damage, including to nuclear plants, leading to evacuation zones.
The disaster had a huge impact on global supply chains.
The automotive industry was badly affected in Japan and other countries relying on Japanese parts; cars have up to 15,000 parts, and failure to supply one can halt production.
Examples:
Toyota factories in Japan closed for a month.
A Merck factory producing a special paint pigment (the only one in the world) was shut down, affecting BMW, Chrysler, Ford, GM, Toyota, and Volkswagen.
Honda facility closed in Japan; production reduced in Canadian, Indian, UK, and USA plants.
GM suspended production in the USA due to electrical components from Hitachi in Japan.
Ford plants in China, Europe, Philippines, South Africa, Taiwan, and USA closed.
Floods
Severe floods in Thailand in 2011 disrupted automotive and ‘high tech’ (hard disk drive) supply chains.
Thailand produces 40% of the world’s hard disk drives.
Examples:
Honda's second biggest production facility in Asia (outside Japan) was badly flooded.
Honda plants in India and the UK reduced production.
Ford’s production plant in Thailand was affected.
Thailand produced 300,000 fewer cars than forecasted in 2011.
Toshiba stopped hard disk drive production in Thailand.
Dell and Intel missed sales targets due to hard disk drive shortages.
Volcanoes
The 2010 eruption of Eyjafjallajökull volcano in Iceland disrupted the aviation industry due to airspace closures.
Passenger aircraft carry large volumes of cargo, in addition to dedicated cargo aircraft.
Supply chains originating in East African markets were affected as perishable air cargo (fruit, flowers) backed up at airports.
Shortages of temperature-controlled storage resulted in heavy write-offs.
Pandemics
In 2009, Swine Flu in Mexico led to suspended production in some industrial locations.
Air links are often suspended when diseases break out.
The 2014 Ebola outbreak affected transport links to and from parts of West Africa.
216 of 590 monthly flights to Guinea, Liberia, and Sierra Leone were suspended.
Senegal closed its borders to Guinea.
Supply chains to the USA were disrupted where some US companies relied on parts manufactured in Mexico.
In 2019, COVID-19 had a huge impact on global supply chains.
Global manufacturing output was substantially reduced as factories closed.
Retail outlets closed.
Online ordering increased significantly.
Delivery problems arose due to driver shortages.
Countries looked to reduce reliance on imports and develop domestic manufacturing.
Minimizing Risks from Natural Disasters
Use more than one supplier for specific components.
Have suppliers of similar products in different countries.
Avoid suppliers in coastal areas vulnerable to flooding.
Have contingency plans for rerouting cargo.
Have contingency plans for using different modes of transport.
Carry higher inventories of products from suppliers likely to suffer from natural disasters.
Politics, Civil Unrest, and War
Political differences within and between countries can disrupt supply chains.
Wars can have a serious impact.
Trade sanctions on Iran led to threats to close the Strait of Hormuz.
35% of seaborne oil passes through the Strait.
GCC countries rely on imported products shipped via the Strait.
Tensions between Ukraine and Russia resulted in Russia cutting off gas supplies to Ukraine in June 2014.
Ukraine threatened to block gas supplies to EU countries via pipelines from Russia crossing Ukraine.
Airlines avoided Ukrainian airspace after the downing of a Malaysian passenger aircraft in July 2014, disrupting air cargo movement.
Minimizing Risks from Politics, Civil Unrest, and War
Avoid sourcing from politically unstable countries.
Reduce dependence on a specific country.
Develop alternative routes and/or modes of transport.
Example: The Abu Dhabi Crude Oil Pipeline bypasses the Strait of Hormuz.
Opened in July 2012, 370 km long.
Capacity to handle 65% of UAE oil exports.
Piracy
Nearly 297 ships were attacked worldwide in 2011 (down from 339 in 2010).
Piracy is a problem off the coasts of East and West Africa, especially Somalia.
The cost of Somali piracy was estimated at in 2012 (security, increased speeds, military operations, insurance, labor, re-routing, ransoms).
Approximately 8% of world trade passes through the Suez Canal, passing the high-risk area of the Horn of Africa.
Shipping rates on routes threatened by piracy are subject to upward pressure, affecting delivered cargo costs.
Even with a 6-year lull, two boats were seized in December 2023 by suspected Somalian fishermen aggrieved by Somalia granting 300 fishing licenses to Iranian boats.
Approximately 12% of world trade passes through the Suez Canal, passing the high risk area of the Horn of Africa.
Shipping rates on routes threatened by piracy are subject to upward pressure, affecting delivered cargo costs.
Maersk Alabama (890 teu capacity) was seized by Somalian pirates in 2009 and rescued by the U.S. Navy after 4 days.
Minimizing Risks from Piracy
Increased use of security equipment and guards.
Increased speeds.
Re-routing.
In 2013, five shipping lines, BP, and Shell donated to create jobs in Somalia.
Various governments provide military support to protect ships in vulnerable areas.
Terrorism
Aviation is particularly vulnerable.
Security expenditure has significantly increased since 9/11.
The vulnerability of global air cargo was demonstrated in October 2010 when two US-bound shipments containing explosives were intercepted in the UK and Dubai; the parcels originated in Yemen and involved UPS, FedEx, and Qatar Airways.
Flights from Yemen were banned, and restrictions were placed on cargo from other countries.
Minimizing Risks from Terrorism
The aviation industry has invested heavily in more sophisticated security controls.
Some airports screen cargo in transit from airports with less efficient security.
Some airports screen all cargo and mail.
Currency Fluctuations
Significant currency fluctuations can lead to supply chain reviews.
If a supplier’s currency strengthens, imported products become more expensive, potentially making them uncompetitive.
In the late 1980s, Porsche passed exchange rate costs to consumers, and USA sales plunged.
BMW absorbed the costs, impacting profits.
Minimizing Risks from Currency Fluctuations
Avoid sourcing from countries with volatile currencies.
Establish operations in overseas markets.
In 1990, BMW set up a plant in the USA and later in India, China and the USA
This reduces exposure to exchange rates and achieves shorter lead times.
Corruption
Emerging markets are particularly susceptible to corruption.
Examples:
Importers pay bribes to speed up customs clearance.
Customs officers are bribed to clear illegal products.
Customs officers are bribed to prevent investigations.
Suppliers and consignees under-declare the value of goods to reduce duty payments.
Minimizing the Risk of Corruption
Avoid doing business in countries with a poor reputation regarding corruption.
Avoid using entry/exit points known for irregular practices.
Governments are taking stronger action:
Rotating officials.
Undertaking random checks.
Payment of higher salaries to Customs officials.
Stricter penalties for persons engaged in corrupt activities.
Industrial Action
Strikes within the transport sector can be damaging.
Strikes at seaports, airports, railways, and trucking companies can have a huge knock-on effect.
In 2007, Italian truck drivers struck over rising fuel costs, blocking the French border, leading to food shortages and petrol running out.
In August 2014, striking truck drivers brought Ningbo Port, China to a standstill for a week, affecting large volumes of traffic to the USA and other destinations.
Minimizing Risks from Industrial Action
Avoid sourcing from countries or companies with poor industrial relations records.
Have contingency plans for using alternative ports and airports.
Consider using third parties to reduce the risk posed by internal disputes (external contractors for drivers, vehicles, warehouses, production capacity).
Ethical Issues
Fashion retailers source products from countries with low labor costs to remain competitive.
Some companies are accused of using suppliers that exploit workers, damaging their reputation.
In April 2013, a clothing factory in Rana Plaza, Bangladesh, collapsed, killing over 1,000 workers due to very low wages and unsafe building structure.
Critics claimed the low-cost model of Western retailers sourcing from this factory indirectly led to staff exploitation.
Minimizing Risks from Ethical Issues
Proper screening of suppliers' factory conditions.
Gain an understanding of employees’ working hours.
Avoid suppliers using child labor.
Use purchasing leverage to encourage suppliers to improve working conditions.
Primark has warned it could pull clothing manufacturing operations out of Bangladesh unless safety standards improve.
Primark, Zara, and Next contribute a year over 5 years to independent safety inspections of Bangladeshi factories.
Conclusion
Companies should undertake periodic risk assessments of their exposure to supply chain threats.
Don’t over-commit dependence on specific sources of supply.
Have contingency plans for alternative supply routes/modes of transport.
Enhance visibility of inventory and shipments using information technology.
Ensure your suppliers assess their suppliers' continued ability to maintain supplies.
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