Introduction
Supply chains are essential for businesses to conduct their operational activities and achieve stable profits. Interruptions in the supply chains cause many difficulties for companies, including the need to find new suppliers, replace materials, and even delay the production of goods or service delivery. These problems can hurt the financial performance of businesses, causing losses of profits and customers to competitors. In recent months, the subject of supply chain resiliency became particularly prominent due to the devastating impact that the COVID-19 pandemic had on businesses worldwide. Lockdowns and restrictions were imposed on companies by governments of various countries to prevent further spreading of the virus and avoid putting overwhelming pressure on healthcare systems. Consequently, many companies lost their reliable suppliers and were forced to suffer losses while being unable to provide their customers with products and services as usual.
The purpose of the present paper is to explore the effects that catastrophic risks have on supply chains and use this information to highlight the importance of supply chain resiliency. Furthermore, the essay will also provide strategies and recommendations that could be used by companies to develop more resilient supply chains by protecting them against catastrophic risks. As the information from research and discussion will show, supply chain resiliency is a critical issue that should be addressed by all types of businesses to minimize the negative consequences of catastrophes.
Background
The contemporary business environment presents numerous sources of risk for businesses and their supply chains. Catastrophic risks vary in terms of their origin but are similar in their impact. According to the explanation by Kunreuther and Useem (2018), catastrophic risks are related to rare but disastrous events that affect businesses but cannot be adequately predicted. These events can take the form of natural disasters, such as hurricanes or tsunamis, as well as man-made threats, including terror attacks or military strikes (Kunreuther and Useem 2018). The rarity and unpredictability of these risks often leave businesses unprepared since there are no specific procedures for risk management or minimization. Consequently, businesses suffer significant losses because they cannot operate under the new circumstances and are forced to use temporary decisions that leave a significant part of the impact unaddressed. Preparing for catastrophic risks can benefit businesses in many ways by ensuring that they can either operate with minimal disruptions in the face of an unprecedented situation or can limit the losses to a minimum (Kunreuther and Useem 2018). These ideas form the background of the issue of supply chain resiliency against catastrophic risks.
In the current global environment, the subject of catastrophic risks emerged in connection with various critical events, such as the 9/11 terror attacks and the 2008 financial crisis. These events had a critical impact on businesses throughout America and on the global level. This year, the coronavirus pandemic has brought the problem of supply chain resiliency to light once again. To limit the scope of the pandemic, countries introduced regulations aiming to preserve social distancing. While the specific aspects of these regulations vary considerably between countries, non-essential businesses were forced to close temporarily (Taylor 2020). People were also required to avoid leaving their homes except for urgent matters, such as going to the pharmacy or purchasing groceries (Taylor 2020). The changes brought by the pandemic had a crucial impact on supply networks worldwide, proving their susceptibility to unexpected catastrophic events.
Impact of Catastrophic Risks on Supply Chains
To understand the impact of catastrophic risks on supply chains, it would be useful to examine the influence that the coronavirus pandemic had on suppliers globally. Scholars confirm that over 75% of companies in the United States have claimed supply chain disruptions (Fernandes 2020). Consequently, three main issues arose in supply chain management due to the pandemic.
The first essential problem that was encountered by many companies was that they lost access to their regular suppliers. According to scholars, lockdowns and travel bans imposed by governments prevented many companies from accessing materials or parts that they needed to produce goods or deliver services (Fernandes 2020; Ivanov and Dolgui 2020; Ivanov 2020; Ivanov and Das 2020). For example, travel restrictions affected relationships with international suppliers, whereas business closures impacted domestic production and sourcing of parts and materials. Fernandes (2020) states that the manufacturing of a variety of products, from cars to Swiss watches, had to be limited or stopped temporarily due to interruptions in the supply chain. These limitations have significant consequences for companies since they result in substantial financial losses and can even cause businesses to go bankrupt if production remains on hold for a long time. For this reason, many companies attempted to mitigate the impacts of the crisis by finding new suppliers, which led to the second problem in supply chains.
As the availability of materials and parts decreased due to the low number of suppliers still operating, the demand for them rose significantly. This contributed to the bargaining power of suppliers in setting prices and selecting suitable contracts. These effects were particularly noticeable at the local level. As explained by Fernandes (2020), many companies in the United States and Europe lost access to their suppliers in China due to travel bans. Therefore, the demand for American and European suppliers rose significantly, enabling them to negotiate better prices (Fernandes 2020). This increased the cost of supplies for many companies all over the globe, forcing them to spend more than they normally would on parts and materials.
With a high demand for suppliers, a third issue that became evident was the reduced quality of supplies or worse contract conditions offered. Due to the substantial risk of losses stemming from putting manufacturing and service delivery on hold, organizations were forced to work with suppliers who offered materials that differed from their regular supplies in terms of quality or other characteristics, which could have impacted the features of final products or services provided to customers (Fernandes 2020). With suppliers being in high demand, they also had to agree with longer waiting times and experienced more delays (Fernandes 2020). These changes all influenced the quality of their supply chains and the overall performance of businesses.
While the aforementioned effects were true for businesses amid the COVID-19 pandemic, they were also evident in other catastrophic events. For instance, as noted by Hopp and Yin (n. d.), “beyond the direct destruction, the 9/11 terrorist attack had far-reaching indirect consequences for business systems as a result of disrupted air travel, communications, and information systems” (p. 1). Similarly, in the aftermath of the Kumamoto earthquake in Japan, car manufacturers relying on parts from Japanese suppliers had to suspend production temporarily (Savitsky 2018). Hence, it can be said that all types of catastrophic risks, while different in their scope and origin, have similar repercussions for supply chains. Specifically, they limit the access of businesses to their regular suppliers, raise the demand for new suppliers, and decrease the quality of parts and materials that can be sourced through newly signed contracts.
The Importance of Supply Chain Resiliency
The importance of building resilient supply chains in the modern business context is obvious. With the increased interconnectedness between firms, their suppliers, and other actors, a single event can have far-reaching consequences throughout a global supply network, leading to disruptions in production and service delivery (Tukamuhabwa et al. 2015). Supply chain resilience is defined as “the adaptive capability of a supply chain to prepare for and/or respond to disruptions, to make a timely and cost-effective recovery, and therefore progress to a postdisruption state of operations – ideally, a better state than before the disruption” (5597). Consequently, a resilient supply chain can help companies to avoid various negative effects of catastrophic risks.
First of all, a resilient supply chain can increase the possibility that a business retains access to its preferred suppliers, thus continuing to use high-quality materials and parts at the same prices as set in their contract. In other cases, a company might lose access to its preferred suppliers but turn to alternative suppliers that provide similar quality materials or parts at fair prices. This could help companies to minimize the financial risks associated with catastrophic events by allowing them to produce goods and deliver services with little to no interruptions.
Secondly, there are also indirect benefits associated with resilient supply chains. By continuing their operations with few interruptions, businesses can outperform their competitors who experience supply chain disruptions, thus earning a larger share of the market. This can have long-term positive effects on profitability and performance if customers decide to continue purchasing their products or services even after the competitors manage to restore operations.
Developing Resilient Supply Chains
As evident from the previous section, developing resilient supply chains should be a goal for most businesses operating in the current environment. Fortunately, research on the subject of supply chain resilience provides some strategies that could help companies to build more resilient supply chains. First of all, it is recommended that the process of building a resilient supply chain starts with measuring the resilience of current or prospective suppliers (Hosseini et al. 2019; Yilmaz-Börekçi, İşeri Say and Rofcanin 2015). Scholars argue that working with suppliers that have well-developed and regularly updated plans for emergency operations and can deliver service with minimal interruptions under different circumstances can help to prepare for catastrophic risks. Hence, businesses should integrate resilience assessment into their supplier selection process to evaluate whether or not a potential supplier can enhance the resilience of their supply chain.
Secondly, scholars also note that companies should engage in regular evaluations to understand the current state of their supply chains with respect to resilience. Hosseini, Ivanov, and Dolgui (2019) explain that evaluating supply chain resilience can help companies to identify the weak elements in their supplier networks and address them long before a risky event occurs. The evaluation process is also an integral part of the supply chain resilience development framework, as suggested by Pettit, Croxton, and Fiksel (2019). According to these authors, identifying resilience gaps allows modifying the impact of potential disruption scenarios. The results of these tests, in turn, can help companies to develop plans for strengthening their supplier networks, making them more resilient in the long term.
Finally, it is also suggested that businesses should engage in emergency planning to react appropriately to any disruptions in their supply chains. This is because catastrophic risks are unpredictable and can still damage supply chains despite all the precautions taken. Hence, ensuring that the company has a plan for restoring its supply chain quickly can help to avoid any negative consequences and restore operations promptly (Kunreuther and Useem 2018). For example, a plan for supply chain management in the aftermath of a catastrophic event can include a list of potential alternative suppliers, options for re-distributing supply needs among current suppliers, and other modifications that could be helpful in an unpredicted situation. While planning for a catastrophic event, it is critical to understand the variability of risks involved and plan for several alternative scenarios so that managers could take action quickly (Kunreuther and Useem 2018). Following these recommendations will help businesses to build more resilient supply chains and limit disruptions in case of any damage to them.
Conclusion
Overall, supply chain resilience is one of the most critical issues in contemporary supply chain management. The coronavirus pandemic has shown that the vast majority of businesses in the world are susceptible to disruptions in their supply chains and that the effects of unexpected events can be truly drastic. In this context, the paper explains the potential danger that catastrophic risks hold for supply chains and the importance of developing supply chain resiliency. Furthermore, it provides recommendations for businesses to develop more resilient supply chains and restore them more quickly in case of any unpredictable disruptions. This information can help managers to prepare for catastrophic risks and limit the financial and performance losses that can occur because of them.
References
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