Exclusive: A risk profile of the global supply chain

Economic, societal and geopolitical influences are altering global supply chain risk profiles, writes Dorota Jilli, Senior Underwriter, TT Club.

The challenges inherent in today’s international trade and the supply chains that service it, are painfully obvious – higher prices of energy and food, shortages of and delays in delivering manufactured goods, dynamic changes in markets and sourcing regions.

2020, 2021 and the first half of 2022 has been an extraordinary period in the context of the global supply chain; one that will live long in the memory of those directly and indirectly employed, affected by and reliant upon the industry.

A series of unexpected events have literally scrambled the traditional means of supply. The ongoing effects of the pandemic, the war in Ukraine, a large containership wedged in the Suez Canal and, in Europe, Brexit, have proved to be catalysts to ignite underlying economic and environmental trends that will continue to fuel long term changes in the pattern of global supply and demand.

TT Club is convinced that a thorough understanding of the practical risks is vital in mitigating the dangers to safety and security that are a consequence upon these dynamic factors.

We are suffering from a disappearing ability to absorb short term shocks to the supply chain because of fundamental societal and geopolitical changes to the global equilibrium. Yes, COVID-19 and the other black swans that have taken flight across the world have been disruptive and are driving up prices, but the longer term trends of production cost increases in Asia and stricter demands of Environmental, Social and Governance (ESG) policies mean that cheaper goods and transport services are features that are fast disappearing from the global economy.

The future will contain increased unreliability of supply, affecting primary commodities, fuel, manufactured goods and their components, food and more. In short, anything that is moved over significant distances will be subject to delay, unavailability and loss. 

Stability and disruption

Supply chains have always been subject to disruption. We have lived through pandemics in the past and many thought that the world would quickly move on from COVID-19 and that supply chains would return to ‘normal’ – but it has not turned out that way.

Global supply chains operate well in a stable environment, in times of peace. There will always be unexpected disruptions but, generally, in the past, we had been able to rely on trade and international money flows to act as ‘shock absorbers’. After the Cold War, international trade was thriving, benefitting from peaceful relations between developed and developing countries. This helped many countries develop and raise living standards whilst shifting towards democracy.

Overall, world trade gained from economic growth of the primary trading blocs, North America, Europe and Asia. Because goods produced in some parts of the world were so cheap, in comparison to production costs in consuming regions, it made sense to produce in excess; this provided a steady flow of supply, a buffer protecting from short term fluctuations and disruptions.

These buffer stocks are however far less likely in the future as the cost of production continues to rise and cheap labour from countries with traditionally large, young populations is becoming a thing of the past. 

There is also another element ever-stronger in all our considerations – ESG. Its goals and those of supply chains (which are optimised for cost and speed), are not necessarily always aligned. So, as and when we prioritise ESG, we have to anticipate altered risks to the existing patterns of supply.

Supply chain trends

So, what are the features of this less secure supply chain of the future? Trends in cargo theft are in flux, with more essential goods such as food and beverages being targeted and luxury goods and electronics not so much as in the past. 

Cargo at rest, either at ports or inland staging areas, some of which have been hurriedly pressed into service as overflow facilities, is increasingly subject to theft. With shippers looking for ‘workarounds’ to reduce costs or avoid congestion, thieves have been quick to adapt their methodologies and the use of online means of deception is on the increase. 

It has to be accepted that freight crime pays and therefore there will always be those with criminal intent who will be motivated to target and steal cargo through the supply chain. They will inevitably always target the most vulnerable points.

TT’s current data on theft shows that fraud is being widely experienced, whether this be a simple ‘mandate fraud’, or a case where criminals pose as legitimate operators in the supply chain to gain access and steal. Insider risk has also appeared to increase through this period.

Claims data shows that port congestion creates a number of additional opportunities for criminals: With cargoes stowed to overcapacity, port operators and other cargo terminals must stay vigilant so as not to let criminals exploit these vulnerabilities.

The correct use of data to analyse these trends is of crucial importance and TT is utilising its own claims experience, along with theft reporting agency information, to maintain and expand the all-important industry awareness of the evolving dangers. This – in addition to developing technologies to support the supply chain and offer predictable and resilient sourcing without the geopolitical risks of foreign suppliers and other disruptions – is seen as a primary mitigator in the management of the developing, modern, longer term risk profile.

Understanding risks

Increased safety concerns are also impinging on the overall security of the world’s complex system of supply. One of the headaches creating safety issues is the prevalence of abandoned cargo. When goods are delayed through periods of congestion, or lockdown, the percentage of those which are simply abandoned increases.

Dangerous goods are particularly concerning. It is crucial that such cargo is handled correctly and many aspects of supply chain disruption legislate against this. At rest, in ports and various storage locations, it is vital to ensure that dangerous goods are segregated and protected. The tragic explosion at the port of Beirut in August 2020 is a vivid reminder of the dangers of leaving certain cargoes to deteriorate. Here, 2,750 tonnes of ammonium nitrate was left unclaimed for many years.

The explosion and consequent fire killed 218, injuring over 7,000. More recently, events at a storage facility in Chittagong (Chattogram), Bangladesh also give evidence to the consequences of poor operational practices.

In terms of improving resilience within the new parameters of supply chain reality, it seems that the future lies in supportive technologies – offering predictable and resilient sourcing without the geopolitical risks of foreign suppliers and other disruptions.

It is expected that supply chain technology could be the big winner for future investments as companies drive to mitigate their supply chain challenges. AI machine learning and other cutting-edge tools are likely to come to the aid of manufacturers and their customers so that they can react more swiftly to supplier hiccups, monitor raw material availability and efficiently deal with the bureaucratic red-tape of cross-border trade.

In conclusion, practical measures can be taken immediately. It is important to ensure that adequate risk assessments are undertaken across the full breadth of supply chain operations in order to thoroughly understand the various risks and, where appropriate, develop mitigating actions and controls, together with effective continuity plans, to protect businesses.

For more information, visit: www.ttclub.com

This article was originally published in the August edition of International Security Journal. To read your FREE digital copy, click here.