Article

Retail supply chain risk: Why uncovering the truth about your tiers matters

Retail businesses have always contended with shifts in global trade patterns, and with supply chain shocks such as war or natural disaster. But the frequency, severity, and diversity of such challenges have all increased this century, straining even the most resilient supply chains.

Retail businesses have always contended with shifts in global trade patterns, and with supply chain shocks such as war or natural disaster. But the frequency, severity, and diversity of such challenges have all increased this century, straining even the most resilient supply chains.

The sheer range of potential supply chain threats is daunting. They include economic and geopolitical issues such as: the conflicts in the Middle East; trade sanction challenges; cybersecurity events like the CrowdStrike incident; ethical issues such as human rights violations; natural disasters, most recently the Spanish floods; and the need to prepare for the impact of the changing climate, for instance on raw material and food sources.

“Moreover, the structure of the system is exacerbating supply chain disruptions. Welcome to the world of bottlenecks – corporate overdependence on a few key suppliers or access routes,” says Cathy Cyphus, Sentrisk Risk Advisory lead at Marsh.

“Supply chains have developed complex and opaque network webs over time, removing risk visibility within the network and therefore the ability to manage those logistical or reputational risks, but more importantly exposing retailers to bottlenecks and concentration risks.”

That can be catastrophic if natural disaster, political upheaval, or other hazards strike, a good example being the impact of attacks on Red Sea shipping, which led to a two thirds decline in Suez Canal traffic.

At the same time, there is increasing pressure from legislators, customers, and investors for organisations to ‘own’ their risks, take proactive measures to mitigate them, and demonstrate what they are doing to protect people and the environment. It’s unsurprising, then, that supply chain risk management is moving rapidly up corporate board agendas. However, most organisations are underprepared and at worst highly vulnerable to supply chain risk.

Do you lead or lag in your supply chain risk management?

A major supply chain risk and resilience survey conducted by Marsh sister business Oliver Wyman found widespread evidence, particularly of poor visibility and a lack of understanding of the risks hidden within supply chains. The consequence is that companies “are forced to be reactive to risks rather than proactive and find it difficult to stay ahead of the game,” reports James Crask, Head of Multinational Clients at Marsh.

The survey categorised participating organisations as ‘leaders’ or ‘laggards’, based on the amount of time and capital they spent on managing supply chain risks. But it also highlighted that such investment pays off, with leaders enjoying significant tangible business benefits.

For example, leading businesses saw an average 8% more top-line growth than laggards and were better at absorbing cost increases, with 19% higher profits on average. And they managed working capital more efficiently through smarter inventory strategies, with a 21% edge in performance.

Three strategies for strengthening retailers’ supply chain risk management

So, what exactly does good look like when it comes to supply chain risk management for retail businesses? “There are three key elements,” says Cyphus.

First, businesses need a clear strategy at board level for managing risk, based on a proper understanding of where within the supply chain those risks lie and what form they take. “It needs investment and attention from the top,” she stresses.

That perspective can then enable them to build tactical resilience against disruption, for instance by identifying and removing or mitigating potential risks in the supply chain or adapting products so that they don’t rely on existing vulnerabilities.

Finally, given that external disruptions are bound to occur, it’s important to be able to deal with them quickly and efficiently.

Underpinning every aspect of supply chain risk management is the need for end-to-end supply chain transparency and control. The trouble is that typically businesses only have visibility into their most immediate (Tier 1) suppliers and are having to build supply chain maps manually – a time-consuming process.

In response, Cyphus and her team have built an AI-powered solution called Sentrisk, a Marsh McLennan proprietary supply chain tool that enables clients to map their supply chain and assess the potential for bottlenecks and network disruption. It can also be used to look at supplier risks at the site level, such as natural hazards, geopolitical issues, or potential biodiversity issues.

One example commonly raised in the retail industry is modern slavery, which tends to be covered up by suppliers given the potential financial and reputational consequences. “And if it’s hard to spot, it’s even harder to manage,” says Crask, with a tendency for organisations to do nothing until negative media forces them onto the back foot.

Visibility upstream is key to an effective risk assessment, but it’s a layering process. Companies need to able to pinpoint not just where their raw materials and products are coming from, but what sort of processes are being used, and all the businesses involved along the supply chain in order to identify potential flash points.

“That visibility needs to be achieved as quickly and efficiently as possible, so that you can put the bulk of your time and energy into working out how to manage the risks,” Crask adds. “If you don’t do it, then some pressure group will, and it could spiral into a potential reputational issue.”

Of course, budgets are tight for most retail businesses at present, so they are having to strike a balance between the need for cost efficiency and the need for resilience.

The danger, as Crask explains, is that typically there is too much emphasis on strong capital management at the expense of supply chain resilience, leaving them open to extremely costly disruptions.

“Using Sentrisk, we found that, astonishingly, 65% of companies have at least one location supplying something critical in their supply chain that would cause catastrophic disruption to the business if it failed. Many have more than one,” Crask said.

What’s needed, Crask argues, is not a big splash of cash across the entire business, but “a highly forensic risk assessment to target investment to the weak points where disruption could have a massive financial impact.”

Such targeted resilience building should not only enable retail businesses to weather coming storms, whatever form they take, but also help position them as leaders in terms of key financial metrics.

If you would like to discuss any topic raised in this article, please reach out to your Marsh contact or get in touch.

Article

Retail supply chain risk: Why uncovering the truth about your tiers matters

Retail businesses have always contended with shifts in global trade patterns, and with supply chain shocks such as war or natural disaster. But the frequency, severity, and diversity of such challenges have all increased this century, straining even the most resilient supply chains.

Do you lead or lag in your supply chain risk management?

Three strategies for strengthening retailers’ supply chain risk management

Our people

James Crask

Catherine Cyphus

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Retail supply chain risk: Why uncovering the truth about your tiers matters

Retail businesses have always contended with shifts in global trade patterns, and with supply chain shocks such as war or natural disaster. But the frequency, severity, and diversity of such challenges have all increased this century, straining even the most resilient supply chains.

Do you lead or lag in your supply chain risk management?

Three strategies for strengthening retailers’ supply chain risk management

Our people

James Crask

Catherine Cyphus

Related insights

Evaluating business interruption in a nuanced retail landscape

Explore safety best practices from new retail industry study

3 major supply chain risks retail, food and beverage companies must navigate

Reducing claims costs for retail, food & beverage companies