As trade challenges peak, focus on supply chain risk is urgent

Leaders should be seeking to renew their resilience strategy and put supply chain risk management

Leaders should be seeking to renew their resilience strategy and put supply chain risk...

In today’s complex geopolitical landscape, companies are facing multiple risks to supply chain stability. Trade wars, tariffs, ESG agenda, labour shortages, and inflation among others pose significant threats to businesses in Europe, including Luxembourg, potentially threatening their operational continuity.

Leaders are certainly aware of rising supply chain risks, with the KPMG 2024 CEO Outlook survey revealing the supply chain was CEOs’ top global threat to growth. While this recognition is notable, it is common for leaders to respond to each risk in isolation, rather than holistically, which can be problematic in today’s environment.

Increased risk exposure

When risks are interdependent, it is easy to see how the consequences on the supply chain are amplified. For example, if a supply chain leader is alerted to threatening shipping activity in a key transport route, they may decide to reroute their shipment of goods via new territories. This could bring with it new geopolitical, regulatory, tariff, tax, cost, or working capital related risks.

In another scenario, if a key supplier goes out of business and a replacement is selected with urgency, this may expose the business to new third-party issues such as environmental or human rights risks, cyber risks and data breaches, or impersonation scams.

In either of these scenarios, any resulting delivery delays could lead to margin erosion, working capital or cash flow risks, customer satisfaction risk, and trust and reputation risks.

Interdependednt risks in action

The need to change your shipping route due to geopolitical tensions could open the following risks:

01

New tariffs, taxes or regulatory requirements, and incorrect updates to trade documents
02

Increased shipping, domestic transport and storage costs, and margin erosion
03

Increased working capital and inventories in transit
04

Cyber or data privacy risks
05

Delivery delays, distribution center or plant shortages, and/or lost sales (due to missed deliveries)
06

Customer dissatisfaction, reputation and trust risks

Renewed strategies required

Understanding interdependences

It is essential to understand the interconnectedness of the risks within the supply chain and the broader ecosystem. This can enable leaders to better predict shocks and the impact of those risks beyond the more obvious consequences.

Solving risks holistically

Supply chain leaders who continue to solve supply chain risks in isolation may find some initial, even immediate relief. Yet, this approach is more likely to fail, as it does not address the interconnectedness of the risks. When the root causes and flow-on effects are not resolved, these risks can return and worsen over time.

Being agile and responsive

Key to resilience is having greater agility and responsiveness, delivered through a more holistic supply chain risk framework. This can provide both the structure and clarity to guide risk management efforts, regardless of the type and number of supply chain challenges faced.

Alternative scenarios

Supply chain leaders always need a ‘Plan B’. This requires being able to predict risks deep in the supply chain and be alert to how those risks will unlock other risks. Then, it requires adequate preparation with risk mitigation or management scenarios.

Capability and capacity

A critical factor in supply chain resilience is people, and creating sufficient capability and capacity to identify and respond to supply chain challenges and risks. Everyone in the organization needs to appreciate and understand that they are operating in a deeply interconnected risk environment. While it is not necessary and possible for everyone to know every issue, having an awareness can help teams to be part of the solution. Emphasis should be placed on getting real time risk data into the hands of decision makers.

Leveraging technology and data

Achieving a renewed approach to resilience requires leveraging technology and data. Leaders should ensure supply chain risk management is ‘always on’ by automating any manual and repetitive risk management processes. These could be supply chain risk assessments, compliance checks, and data collection and monitoring. Leveraging technology and data could also include identifying patterns, trends, and potential risks in operations that would be difficult or impossible for human risk managers to detect and providing real-time risk reporting for the best possible decision making.

Innovative approaches

KPMG firms can support a renewed approach to supply chain risk with our Dynamic Risk Assessment. With Dynamic Risk Assessment, we take an outside-in view, looking at risk holistically rather than in isolation. We aim to explore the structure of an entire risk system to understand the connections between risks, the speed at which risk impacts could occur, and their likely impact on operations. This helps leaders recognize risks, prioritize, and plan.

At KPMG, we also engage our Supply Chain Predictor tool, which is designed to bring together external and internal data points in a live digital platform, offering a broad-ranging overview. Our KPMG Future of Supply Chain opens in a new tab survey revealed that 87 percent of executives see supply chain visibility as critically important, and Supply Chain Predictor can help to deliver on that need. It acts as a supply chain ‘control tower’, helping leaders create a ‘digital twin’ of the supply chain, model different risk scenarios, and enabling agile decision-making. In addition to spotting and reducing risks, it can deliver visibility into impacts on inventory, service levels, and lead time, and better ways to manage warehousing, cost optimization, forecast accuracy, and inventory.

A step ahead of risk

With challenges rising, and risks more interconnected and accelerated, leadership should put supply chain risk management at the top of the agenda. It is important to know what risks could unfold, and have a strategy in place ahead of time, as the cost of any delay in remediation can be significant. Being a step ahead of risk, leaders can uphold the supply chain as a core driver of value to the business.