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Resilience after disruption: Improving supply chain risk management after Covid-19

This year marks five years since many governments around the world began imposing lockdowns to manage the Covid-19 outbreak, which upended global supply chains and transformed supply chain risk management.

Before the pandemic, globalized trade and demand patterns were comparatively predictable: supply chain strategies focused on cost and efficiency, lean inventories, a “just-in-time” production approach, and were heavily concentrated towards a few major regional production hubs.

Five years on, the shape of the world’s supply chains has shifted. Organizations today are updating their risk management strategies, recognizing that a holistic view of risk of third-party networks is crucial to building resilience and agility in their supply chains.

    Disruptions, demand surges, and the need to diversify supply chains

    Global trade plunged in the aftermath of the pandemic. Countries closed their borders to trade and travel, with lockdowns resulting in shortages of raw materials, demand surges of consumer products, and export controls for healthcare supplies.

    The virus’s rapid spread also sparked a global race for governments to procure enough personal protective equipment (PPE) and medical supplies as scientists worked to develop a safe vaccine.

    With shortages in essential goods and increasing import/export restrictions around food and medical supplies, countries needed to find quick ways to ramp up local production and diversify supply chains. 

      A snapshot of supply chain disruptions around the world in the aftermath of the pandemic

      • United States 
        • Shortages in raw materials and semiconductor chips from Asia disrupted the United States’ automotive industry, with manufacturers like Ford and General Motors temporarily stopping production. 
      • Europe
        • Logistical disruptions in the transport sector, particularly for container vessels, caused significant supply chain bottlenecks, leading to delays, and increased shipping costs. 
        • Lacking availability of nearshoring partners and overdependence on single-source suppliers has limited options for businesses to seek alternative vendors. 
        • Beyond Covid-19-related disruption, the ongoing Russia-Ukraine conflict continues to disrupt supply chains, particularly for energy and raw materials. 
      • Asia-Pacific
        • Widespread factory closures in major manufacturing hubs, impacted the global supply of medical essentials, consumer products, and household goods.
        • COVID-19 restrictions led to port closures, congestion, and shipping delays, which resulted in a marked increase in shipment costs and supply backlogs. 
      • Middle East
        • Reduced demand for oil during lockdowns preventing travel led to a sharp fall in global oil prices: West Texas Intermediate crude oil briefly went negative for the first time at -$37 a barrel, negatively affecting revenue and operations of oil-producing countries in the Middle East.

      These disruptions called into question the transparency and resilience of existing supply chain management systems, as companies and nations sought new ways to assess, prioritize, and mitigate unprecedented risk in their supply chains. It prompted companies to adopt new analytical approaches and processes to improve the quantification and prioritization of key supply chain risk areas. 

        Strategic shifts and new processes

        Process and technology improvements

        A reliance on a single source or region for manufacturing used to be common practice, but the impact of global supply chain shocks has encouraged diversification of suppliers to insulate businesses from disruptions.

        Today, the supply chain mandate often calls for enhancing risk management – and as a result, resilience and improving visibility – while gradually increasing capacity closer to home through nearshoring, onshoring, or reshoring. This marks a shift from pre-pandemic patterns that prioritized cost optimization and offshoring operations. However, this can add new layers of complexity: relocating production lines is not only costly, but also brings increased operational risk, particularly during its early stages.

        Companies are increasingly adopting agile planning, scenario modeling, and risk management, choosing to increase inventory levels to buffer against unpredictable demand fluctuations and ensure continuity in production. This way of managing inventory, known as the “just-in-case approach”, can help mitigate supply chain risk as companies are better positioned to react to fluctuations more quickly. Increasing inventory during times of high interest rates requires, however, internal buy-in for additional funding.

          In parts of the world, more regulatory oversight of sustainability and supplier due diligence

          Regulations that have been announced or come into effect since Covid-19 increased the pressure on companies to assess risk in their supply chain: the German Supply Chain Due Diligence Act; the United Kingdom’s Modern Slavery Act;  Australia’s Modern Slavery Act; and Norway’s Transparency Act. Some of the regulations require businesses to disclose due diligence processes and report forced labor, human rights, and sustainability risks. Having transparency in the supply chain becomes non-negotiable for companies to remain compliant with evolving regulations.

            Refreshing third-party risk management programs to meet today’s demands

            Given the current global environment of tariffs, counter-tariffs, sanctions and other supply chain disruptions, as well as supplier due diligence reporting requirements, businesses are looking to develop robust risk management frameworks to assess, prioritize and mitigate risks in their supply chains.

            Value at Risk (VAR) is one way of providing a quantifiable approach to measuring how risk mitigation strategies can protect revenue. Organizations can use comprehensive, enterprise-level data to reliably calculate VaR, ascertain the cost-benefits of near-term risk mitigation strategies, and develop a long-term investment plan for supplier risk mitigation. An understanding of these dynamics can help inform business decisions when prioritizing efforts and efficient resource allocation.

              How Moody’s can help

              • Make risk-informed decisions: Businesses can navigate risk in their third-party networks using Moody’s Maxsight™ unified risk platform’s enhanced data quality and analytical capabilities. Data-driven decisions can be made with more confidence, as the tool integrates comprehensive risk assessments tailored to the unique risk profile and resource levels of individual companies. By harnessing advanced analytics, organizations can predict, prioritize, and mitigate potential risk more effectively. 

              • Understand your supplier’s near-term operational risk: Moody’s Supplier Performance Risk indicator uses Moody’s database of over 500 million companies and risk models to assess a supplier’s financial health and predict around-the-corner operational performance. It can provide early warning signals alerting organizations to at-risk suppliers, as well as offer specific, resource-conscious risk mitigation options based on the risk indicator score. Beyond anticipating disruption, organizations can use Moody’s Supplier Performance Risk Indicator to prioritize risks and selecting appropriate risk management actions from a risk-driven mitigation menu, according to their own risk tolerance, and available resources.

                Lessons learned and what’s next

                Given the scale and interconnected nature of risk – financial, operational, compliance, reputational, cybersecurity, geopolitical, and natural-disaster risks – striking a careful balance between comprehensive risk mitigation and practical resource allocation is particularly challenging.

                A unified risk platform gives different departments across an organization – compliance, supply chain, senior management, finance, and more – the ability to leverage critical, data-led risk insights. A single platform helps streamline risk management, leverage data more holistically, and provides a common understanding of key risks. Organizations can start with a single risk management use case, such as sanctions compliance, digital onboarding, or supply chain risk management, and adapt their workflows and processes as their business needs evolve.

                The supply chain landscape will continue to be shaped by geopolitical tensions, trade restrictions, developments in artificial intelligence and unforeseen events. Ultimately, the lessons learned from pandemic-induced disruptions have created more opportunities to drive digital transformation, innovation, and growth, while equipping companies to better navigate unforeseen supply chain shocks.

                Get in touch

                Moody’s data, AI-led tools, and analytics can be leveraged to help your team make more informed decisions when it comes to supply chain-related risk.

                Get in touch today to learn more about enhancing your supply chain risk management program – we would be happy to discuss our solutions.