Trends to Watch: Organizations are Reducing Uncertainty by Building Supply Chain Resilience
Risk and disruption in global supply chains have become something of a constant for many companies dependent on the supply of components, ingredients or services from third parties. Whether it is the cost and availability of materials, shortages of labor, complex regulatory changes, an increase in natural catastrophe events, or the threat of supplier insolvency, the risk is significant and ever-present. Many of the major geopolitical and macroeconomic events that were considered an accelerant of supply chain risk – such as the pandemic, the conflict in Ukraine, or Brexit – are now months, even years old. Despite this passage of time, companies remain challenged by risk in their supply chains through the conditions spread by these events.
In fact, the issue remains very prominent on the agendas of executive management teams around the world. A recent Aon survey of 800 business leaders reported that supply chain disruptions ranked at number five on their prioritized risks looking forward.
While supply chain efficiencies have historically helped companies to optimize short-term financial performance, over time they have invited accelerated risk and reduced resilience. As a result, many companies are now willing to trade a proportion of their supply chain efficiency for greater certainty. We expect this trend to continue into 2023, with companies deploying strategies such as dual sourcing, contracts with improved supplier terms, supply chain financing or holding increased levels of inventory. To build confidence around the supply of goods and services, scrutiny will continue to be focused on strategic suppliers. Risk management will become an increasingly important lever in the armory of procurement and supply chain management.
In this environment, risk managers should look to play a more significant role in their companies’ undertakings on supply chain risk management. Companies with large balance sheet exposure to supply chain risk may pursue strategies around alternative capital, such as inventory financing, leveraging captive capital or parametric solutions. Insurers will try to remain relevant and to look to innovate but will be likely held back by the challenges presented by the potential for accumulation and aggregation of risk within their portfolios. These challenges were best evidenced recently with the global chip shortage and how it impacted industries as far-reaching as automotive, consumer electronics and smart phones.
Aon can help. To help clients determine their principal sources of supply chain risk as well as provide solutions and capital, Aon has established a global supply chain group.
The Impact of Supply Chain Issues on Claims Trends
Complexities and challenges in the supply chain create complexities and challenges in claim situations, with resolution periods extended and opportunities to mitigate loss costs potentially reduced. Further, the quantification of business interruption costs can be impacted by increased levels of subjectivity, requiring all involved parties – clients, adjusters, insurers, broker claims professionals and other relevant experts – to step back and consider how best to engage on valuation and on achievable recovery timelines.
It is Aon’s view that such complexities require open, transparent communication from the outset. We advise clients to ensure they have a full understanding of their supply chain and of how that supply chain is responding at any given point in time. We seek collaboration from adjusters and insurers in responding to claim situations with recognition of the supply chain complexities. Aon’s perspective is that supply chain challenges do, and will continue to, impact claims but should not be a reason for a more adversarial process.