Counting the cost of supply chain disruption

Nick Wildgoose , Global supply chain product leader at Zurich Insurance Group

Ineffective supply chain management leaves organisations open to severe disruptions and can incur high financial costs as a result.

A report published by the Business Continuity Institute and supported by Zurich Insurance Group found that one in three organisations experienced cumulative losses of over €1 million during the last year thanks to supply chain disruptions.

The report showed that, despite a decrease in the percentage of organisations who experienced disruption, down from 74 to 70 per cent, those organisations that did suffer disruptions, suffered more of them; the percentage of organisations that experienced at least eleven disruptions during the year increased from seven to 22 per cent.

Unfortunately, the cost of disruption also increased, and this can be attributed to greater productivity losses, the cost of working and damage to brand or reputation, all as a result of supply chain disruptions. Most worrying of all, 43 per cent of organisations do not insure these losses, meaning they are bearing the full brunt of the cost themselves.

Maintain visibility
Arguably, one of the reasons for the greater number of disruptions, is that fewer organisations are maintaining adequate visibility over their supply chain; the percentage of organisations that do so has decreased from 72 per cent in 2015 to 66 per cent. This could have major consequences when it comes to managing the supply chain and ensuring that disruptions are minimised.

According to the report, supply chain visibility remains one of the biggest challenges, with increased dependency between suppliers and downstream organisations reinforcing the need for businesses to understand their supply chain in more depth, identify key suppliers and improve disruption reporting.

Top management commitment is required to drive supply chain resilience and performance. The findings affirm how leadership input can significantly influence good practice and help  build appropriate culture and structure.

Prime suspects
The report highlights some interesting findings, revealing that 41 per cent of disruptions occur with the immediate supplier, compared to 50 per cent last year. Only 60 per cent of respondents, however, report that they analyse the source of disruption.

When it comes to pinpointing the cause of disruption, unplanned IT and telecommunications outage remain the top reason for disruption, with loss of talent or skills moving up to second place from sixth in 2015. Other top five causes were listed as outsourcer failure, transport network disruption and cyber-attacks or data breaches.
What are the consequences of all this disruption? The top five consequences were listed as loss of productivity, increased cost of working, customer complaints, an impaired service outcome and damage to reputation or brand.

Perhaps of most concern, however, is the fact that only a little over a quarter of respondents report high top management commitment to supply chain resilience. This is a worrying decrease from 33 per cent last year.

Business continuity
Author of the report, senior research associate at the BCI, Patrick Alcantara, commented: “Our study reinforces observations about the growing cost of supply chain disruptions and its negative impact on an organisation’s reputation. More than ever, it is important to focus on supply chains, identify areas of risk and deploy appropriate arrangements that increase resilience. Business continuity has an essential role to play in this. Our research abundantly shows how business continuity professionals, working with their supply chain counterparts, can build supply chain resilience and direct management efforts in this area.”

Currently, just under three quarters of those questioned report that they have business continuity arrangements in place to deal with supply chain disruptions.

Global supply chain product leader at Zurich Insurance Group, Nick Wildgoose, concluded: “Adequate supply chain resilience is a prerequisite for improving organisational performance. You need senior management support to achieve this, in terms of breaking down the organisational silos and providing appropriate resources. The businesses that invested in this area have recognised there is a compelling business case to do this and are seeing the benefits.”