Supply Chain or Distribution Failure

What Is Supply Chain or Distribution Failure?

Supply chain or distribution failure occurs when the sourcing of commodities, ingredients or components breaks down or unconventional spikes in demand cannot be fulfilled.

Why Is Supply Chain or Distribution Failure a Top Challenge for Organizations Today?

For over two decades, multinationals have sought to drive efficiency and margin through their sourcing strategies, and liquidity based on limited use of inventory and just-in-time fulfilment. These strategies are good for the bottom line, but can also accelerate risk. As companies have become aware of the size of the threat, they have become more willing to trade efficiency for resilience, but this is not a straightforward exercise.

Understanding what risks are in the supply chain and where can be challenging. Procurement leaders often focus risk management efforts on suppliers with whom they spend the most, whereas in reality the concentration of risk may sit with a much smaller supplier. In fact, a single product can account for a disproportionate level of risk. A recent telling example is when celebrities and influencers stoked a surge in demand for semaglutide (the main ingredient in brand-name diabetes drugs Ozempic, Wegovy, and Mounjaro), used off-label for weight loss. The ongoing supply disruption sharply reduced the availability of the drugs for treating patients with type 2 diabetes.

Indeed, the definition of supply chain risk is broadening and becoming more complex, extending well beyond keeping shipping vessels moving or suppliers’ manufacturing facilities intact. Today it involves the availability of talent, the ongoing solvency of critical suppliers, the ESG performance of a company’s supply chain, and the increased IP and cyber exposure triggered by shared supplier systems and processes.

Supply chain or distribution failure is a prominent concern across many industries, although the contributing factors differ. The 2023 survey results reflect this reality: for instance, respondents in the life sciences industry ranked supply chain or distribution failure as their number one risk in 2023. In the US, widespread drug shortages prompted an investigation by the US Senate Committee on Homeland Security and Government Affairs. The committee found a 30 percent increase in drug shortages between 2021 and 2022, due in part to geographic supply concentrations and opacity in the supply chain.

The fact that there are shared suppliers in most industries compounds these challenges, with a single event able to compromise hundreds or even thousands of companies. Consider the global semiconductor chip shortage’s impact on the availability of automotive products, consumer electronics, and smart phones. This accumulated, aggregated risk also led to more restricted capacity across many insured sectors.

The resulting complexity means building more resilient supply chains requires a sustained effort. That recent survey respondents reported their risk readiness remained unchanged from 2021 (at 63 percent) bears this out. For example, Original Equipment Manufacturers (OEMs) have rigorous quality checks built into their manufacturing processes; any new suppliers must meet the high bar set by OEMs as well as their customers. And in heavily regulated sectors such as food, it may be impossible to change ingredient suppliers if alternative suppliers do not meet regulatory requirements, such as those around labelling measures.

How Can Organizations Mitigate the Impact of Supply Chain and Distribution Failure?

Building visibility into the supply chain is the cornerstone of mitigating risk. Ideally, visibility should extend beyond the most important suppliers and their geographic location and include a keen understanding of suppliers’ capacity and utilization levels and their dependency on other third parties.

Profiling and quantifying the likely financial effects of losing a key supplier are critical to guide decisions around investments in resilience and adequacy of insurance cover. A better understanding of the risks facing suppliers enables a more effective assessment of suppliers’ risk management measures and can help to inform how contractual terms are set from a liability perspective.

Supply chain risk management should be truly enterprise-wide, connecting risk and insurance professionals with senior directors in supply chain, procurement, treasury, strategy, and operations, around a common set of data and decision making.

General Disclaimer
This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent, or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss caused by reliance on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.