Supply chain risks – are you prepared?
Many supply chains were severely disrupted during the pandemic. The war in the Ukraine has now exposed them to further stress. We explore the challenges businesses face and what you can do to protect yourself.
Covid-19 was a wake-up call, what next?
As the pandemic unfolded it became clear that many organisations were ill-prepared to respond to this Black Swan event and the war in Ukraine could expose businesses further. While the soaring price of gas and oil have been making the headlines there are many other commodities that are being affected. Some of the numbers for Ukraine and Russia are staggering – together they provide the world with 12% of its calories.
The two countries are among the top five global exporters for many important cereals. They produce nearly 30% of the world’s wheat , 60% of our sunflower and 30% of global barley exports. The world is also heavily dependent on Russia for fertiliser with some reports predicting this could lead to the worst food insecurity level since World War II.
It's not just food commodities. The region provides a number of precious metals and gases used in modern technology. Half of the world’s chip output has been halted as the Ukraine supplies 54% of the world's semiconductor-grade neon. The price of Palladium, critical to catalytic converters, has risen 80% to an all-time high since the conflict started.
The knock on effects are already evident - grocery prices have hit a 10-year high . Sunflower Oil has jumped 22% in price and with Russia providing 45% of whitefish supplies even the humble bag of fish and chips could see a price hike or even shortages.
What do businesses need to do?
Managing these increasing supply chain risks raises a number of challenges for organisations to consider.
- Business Impact - Switching supply chains has sourcing, sustainability and pricing implications. For example, the cost of shipping a container has increased seven-fold in the last 18 months. While it may not always be practical risks could be mitigated by moving to local alternatives through onshoring or friend shoring policies. The broader consideration is one of getting the right risk management advice coupled with robust business continuity planning (BCP).
- Enterprise Risk Management – The business needs to understand and act upon its Principal Risks and Uncertainties (PRUs) from the C-Suite down. In practice this should mean that they are mapped against a strategic risk management framework and integrated within the key objectives and plans.This could mean considering the supply and inflationary risks in the extended supplier network as well as feasible alternatives. It is also good business practice to keep your risk register up to date and aligned with your PRUs
- Insurance – This could be a good time to assess your insurance programme and risk profile. A thorough analysis will assess your risk appetite compared to your limits deductibles and overall cover – identifying overlaps and gaps. One key consideration could be a Trade Credit insurance policy. This protects you and others should there be a default. As an example, a business with a debt of £20,000 and working on a 10% margin would need to bridge an income gap of £200,000 worth of sales to restore the lost profit. It is likely that they may need to find a new customer to do this as well.
- Staff – In 2021, more people left their jobs than ever before. It was dubbed ‘The Great Resignation’ and is an important factor in the supply chain for all businesses. Firms need to have robust plans in place to attract and retain staff. A rounded, inclusive, and relevant staff benefits programme will match the demographics and culture of your business. You can read more about how to manage this risk here.
The team at Verlingue can help you with all aspects of, Enterprise Risk Management, insurance and employee benefits relating to Food & Drink. If you would like to find out more, please don’t hesitate to get in touch.