Issue Briefs

How can businesses build greater supply chain resilience to minimise risks?

Building the resilience of global trade in the midst of multiple challenges has emerged as a priority for businesses of all nations in the post-Covid era. The disruptions experienced during economic lockdowns remained on the burner through a series of natural and manmade disasters, global conflicts, chokepoints on global trade routes and shortages of key inputs such as chips and containers. In fact, the last few years have severely tested the capability of businesses to deal with shocks and at the same time, enhanced their awareness on risk management for supply chains.

According to the 2024 Global Risk Report, disruptions in supply chains of critical goods and resources were cited as a material crisis on a global scale by 25% of respondents even several years after the pandemic-induced lockdowns. Supply chain exigencies on a continuous basis impart huge uncertainties to global trade, especially for developing countries depending on trade as a road to their economic growth:

• • A significant impact of such disruptions is visible in inflation, with a lagged effect which can persist for a longer period.
• • Export sectors face higher risks, discouraging entrepreneurs from entering the international trade avenues.
• • Price fluctuations and goods movement restrictions upend business operations, creating issues in repayment of credit, managing cash flows, and planning ahead. They also require shifts in inventory management and delivery times.
• • Employment in industries with high export content is volatile and loss of jobs due to supply chain issues reverberates across the economy.
• • Industries with high import content are unable to meet their market obligations, leading to declines in total production.
• • Specific sectors may get impacted such as automotives, pharmaceuticals electronics, etc. For example, the auto sector suffered prolonged issues during the Covid period.
• • Freight rates go up due to supply chain disruptions as well. Since April 2024, the container freight rate has increased from USD 2706 for a 40-foot container to a peak of USD 5937 in July, which has since declined to USD 5428 in August¹.

According to WTO, the effect of Covid-19 on global trade and supply chains appears to be waning, with world merchandise trade volume expected to expand 2.6% in 2024 and 3.3% in 2025 after a contraction of -1.2% in 2023. Global value chains are seen to be contracting as well. The WTO finds that the value of trade in non-fuel intermediate goods dropped by 11% between the second quarter of 2022 and the fourth quarter of 2023, while the share of such goods in world merchandise trade came down from 58% to 54%.

How can businesses build resilience

a) Businesses must be aware of emerging risks and set up access to expertise in risks such as trade wars, political instability, and regulatory changes. Larger businesses would do well to invest in tracking risks and consulting with geopolitical and climate experts to determine potential threats to their operations. In this, the entire world would need to be assessed on an ongoing basis as flashpoints in one country or region can impact not only proximate neighbourhoods but also geographically distant countries or regions.

b) Most supply chain experts suggest that companies should attempt to diversify markets and sourcing to avoid overdependence on a single market or source. However, in practice, this may be challenging, as companies would often not have the resources to undertake such diversification, which can be expensive as well as time consuming. In a hyper competitive marketplace, this could imply loss of markets and revenues as well.

c) Many global companies deploy risk assessment tools and measures that provide analytical inputs to strategy development. New tools such as big data, artificial intelligence, blockchain and distributed ledger technology can be used by companies. The top leadership of a global company may also rely on intuitive assessments to consider various risk management options.

d) Constant monitoring of regulatory changes in different regions and detailing potential changes to supply chains, including for lower-tier vendors in other countries, can help businesses get a sense in advance of future supply chain developments. Tax changes and regulatory changes are a continuous feature of most governments for positive reform, better corporate governance, and transparency and accountability.

e) In recent years, ESG compliances have also added to the regulatory mix and businesses must factor in more such requirements in key markets and supplying countries. These bear the possibility of restructuring of supply chains if certain countries or production hubs are slow in meeting the compliances.

Managing risks for small businesses

Small businesses face a unique set of challenges when it comes to risk management related to supply chain disruptions. They particularly need to institute effective strategies for both resilience and survival.

As key suppliers in the overall supply chain at the last mile, SMEs must be supported in building their resilience by larger companies, who rely on a vast network of SMEs. Government measures to build resilience for SMEs can also be a key factor in keeping supply chains robust. One major measure would be availability of finance as was provided by various governments following Covid-19 lockdowns.

Supply chain insurance can be considered by SMEs including for climate disasters and business interruptions. Keeping adequate cash reserves can help SMEs tide over temporary disruptions in markets or suppliers.

One of the major sources of support during the pandemic for SMEs in low-income economies, was community support, which was particularly valuable for micro enterprises or household enterprises. Extension of repayment times, informal credit, and loyalty and adaptation from buyers kept many SMEs afloat.

Advance planning, forecasting, and preventive monitoring can help businesses better manage their supply chains. According to Tata Consultancy Services (TCS) India, an ecosystem approach can be led by insurance companies to aid in building resilience and mitigate risks across the supply chain. This model would deploy digital twin technology to understand processes across the value chain and take preventive action.

Data sharing platforms that bring together suppliers, buyers, and intermediaries such as logistics providers and distribution centres along with insurance companies can also identify potential disruptions in advance. A modelling framework for risk modelling and scoring would help provide actionable insights. Other parts of the ecosystem could include reward platforms and digital engagement platforms, as identified by TCS.

Conclusion

With supply chain disruptions a fact for businesses, raising awareness and building resilience should be strategic considerations for large and small businesses. Governments too need to be aware of such potential threats to their industry sectors and maintain measures to support enterprises, particularly small enterprises, through information, credit and other policies.

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