RESEARCH ALERT - Bad Moon Rising: Global Supply Chain Risk ... · ~ Creedence Clearwater Revival...

Research Alert

Bad Moon Rising:

Global Supply Chain Risk

Reaches 20-Year High

http://www.ardentpartners.com

© Ardent Partners 2020 Page | 1

Bad Moon Rising: Global Supply Chain Risk

Reaches 20-Year High

Executive Summary

Ardent Partners, the established leader in supply management market

research, has identified unprecedented levels of risk across the vastly

complex and highly interconnected supply chains that drive and support

the global economy. Compounding the risk is the fact that these supply

chains are universally untested, leaving a majority companies ill-prepared

to deal with any near-term global shock or risk event.

Today’s global supply chains are a largely 21st-Century phenomena, driven

by the demand for lower-cost sources of supply and production and

bolstered by the rapid advances in technology and communication. These

global supply chains delivered extraordinary value to the Western-based

corporations that initially moved supply off-shore in the pursuit of lower

costs. Over the ensuing two decades, manufacturing capabilities expanded

rapidly across the traditional low-cost regions (including Asia, Eastern

Europe, as well as regions within Africa and across Central and South

America) spawning the current age of globalization and innovation.

In the face of heightened geopolitical and economic uncertainty and an

increase in “event-specific” risks, like the current coronavirus outbreak,

political upheaval within specific countries, new and erratic trade

policies/agreements, and environmental events, it has gone largely

unnoticed that global supply chains, by and large, are ill-prepared for any

major global shock or event and remain almost universally untested.

In fact, Ardent Partners’ latest supply management research covering more

than 700 global enterprises has shown that

• 79% of all businesses lack a comprehensive risk management

program in place for their strategic suppliers.

• 66% of all businesses lack an active supply risk management

program.

• Only 9% of all businesses have prioritized improving supply

risk management over the next 12 months.

Ardent Partners

February 27, 2020

Analysts:

Andrew Bartolini

Matthew York

Contents:

1 Executive Summary

2 Globalization is a Recent

Phenomenon

3 Today’s Supply Chains

Remain Untested

4 Bad Moon (and Supply

Risk) Rising

4 COVID-19

(“Coronavirus”)

5 Economic Uncertainty

6 Geopolitical Uncertainty

6 U.S. International

Relations and Trade Policy

7 Environmental

Challenges

8 Recommendations

9 Conclusion

10 Appendix

Research Alert: Global Supply Chain Risk Reaches 20-Year High Ardent Partners


And, while it is true that various country-based and industry-focused supply

chains have faced serious disruptions (with varying degrees of success)

over the last decade, none have had to confront a large and global-

reaching risk event or series of events.

Under normal circumstances, insufficient risk management is cause for

concern. With supply risk levels at a 20-year high, the pervasive

inadequacies of corporate supply risk management capabilities are cause

for outright alarm.

This special research alert highlights the most immediate and urgent risks

facing today’s global supply chains and outlines the steps that corporate

leaders (including those in supply chain, procurement, finance, and

manufacturing) should be taking to prepare for and mitigate against supply

chain risk in 2020.

BAD MOON RISING…

“I see a bad moon a-rising

I see trouble on the way”

~ Creedence Clearwater Revival

Globalization is a Recent Phenomenon

While global trade has existed for centuries, globalization is a relatively

recent phenomenon that began with the fall of the Berlin Wall as companies

saw opportunities to expand into new and developing markets. Newer still

is the global supply chain that arose in the late 1990s and early 2000s with

an aggressive push by Western-based companies to enter new markets

reduce costs via sourcing from low-cost countries (primarily China in the

early years). Over time, the capabilities of many other regions to

manufacture and/or support the development and delivery of products and

services matured to the point where a company’s supply chain in 2020 can

be truly global with a reach across Asia, and into Eastern Europe, Africa,

and the Americas.

In the early years of globalization, the risks associated with moving supply

offshore like increased lead-times and holding costs, reduction in quality

control, and poor supplier communication and visibility were mitigated by

the dramatic cost savings that could be achieved by simply “lifting and

shifting” manufacturing capabilities to low-cost locations.

Over the ensuing twenty years, the development of new supply

management technology, advances in communication capabilities, and the

proliferation of free trade agreements combined to flatten the earth and



drive global supply into new regions. And, as the global supply chains

expanded and evolved over the past two decades, they became the critical

sources of supply and innovation that have supported and driven the

longest global expansion in modern times.

Today the average company’s reliance upon its supply chain is greater than

at any point in history, with supplier performance having a more direct and

immediate impact on a company’s own products and services, its customer

satisfaction rates, and its overall sales and profitability.

Today’s Global Supply Chains Remain Largely Untested

As the reliance on global supply chains dramatically increased, so too did

the size, scope, and complexity of these supply chains. Yet, despite this,

most companies remain ill-prepared and ii-equipped to respond to a large

global risk event, much less a series of risk events. To be sure, gaining

visibility into and control over supplier and third-party risk can be

challenging even for sophisticated enterprises with dedicated risk-

management teams. The task requires constant monitoring of multiple

sources of information, different perspectives on risk, and a willingness to

reach across the enterprise for help in managing risk and achieving and

maintaining compliance.

Nonetheless, Ardent Partners’ latest supply management research

covering more than 700 global enterprises identified supply risk as a

massive blind spot for the vast majority of companies today. Ardent’s

research shows that

• 79% of all businesses lack a comprehensive risk management

program in place for their strategic suppliers.

• 66% of all businesses lack an active supply risk management

program.

• Only 9% of all businesses have prioritized improving supply

risk management over the next 12 months.

While most companies are not ready to manage a supply risk occurrence,

the reality is that even fewer companies have ever faced a supply risk event

that had a significant impact on their global supply chain and global

operations. There have been pockets of industries in certain sub-sectors

that have been tested over the years (e.g., the print-board circuitry and

memory industries that were hit after the Thailand floods), but, there has

not been a widescale test of the global supply chain.

But, the consequences of supply risk usually go far beyond impacting

supply chain operations. In fact, Ardent Partners research has shown that



supply glitches traditionally pose great risk to customer relations, earnings,

time-to-market cycles, sales, and overall brand perception.

Under normal circumstances, insufficient risk management is cause for

concern. In today’s competitive and unpredictable global market, the

pervasive inadequacies of corporate supply risk management capabilities

are cause for outright alarm.

Bad Moon (and Supply Risk) Rising

A host of recent trends and events have placed a spotlight on the

uncertainty of global supply markets and the fragility of supply chains. The

list of potential supply chain risks continues to grow in number and intensity

while the likelihood of one or more making a major impact on global supply

chains in the near-term is extremely high. Additionally, the so-called

“Butterfly Effect” — the idea that a small and seemingly insignificant event

that occurs halfway around the world could have a large and significant

impact on people or businesses globally — is a very real concern in today’s

global and interconnected world. What were once merely company or

country specific events and risks can now explode across an entire industry

or region (and even the entire world) impacting the short-term continuity of

operations and the long-term sustainability of supply for companies

everywhere. A discussion of today’s major risks follows below.

COVID-19 (“Coronavirus”)

It was not butterfly wings, but rather bat wings, that have created the first

truly global supply risk event in the 2000s. On January 30, 2020, The World

Health Organization has issued a “public health emergency of international

concern over the global outbreak of novel coronavirus.” Since then, the

coronavirus (or officially “COVID-19”) has dominated the news with more

than 82,000 reported cases and more than 2,700 deaths. Its impact has

only just begun to pervade business.

The COVID-19 pandemic is unprecedented in modern times. When the

SAR outbreak hit China in 2003, the country accounted for approximately

3% of global GDP; today that number is close to 20%.

In the three weeks since we first started writing this research alert, a wide

range of Fortune 500 (and Global 2000) companies have rapidly (but, also

unexpectedly) announced that the COVID-19 is going to have an

immediately negative impact on operations and financial results. Here are

but a few of the companies that are joining a long-list of companies

impacted by COVID-19:



• Microsoft announced that it does not expect to meet earlier revenue

guidance because “the supply chain is returning to normal

operations at a slower pace than anticipated” due to COVID-19.

• An Italian Tier One automotive supplier announced that its

slowdown, caused by the virus, would have the likely force the

closing factories for four major European carmakers – Fiat, BMW,

Peugeot, and Renault.

• P&G, Apple, Adidas, and Starbucks all report a high number of

potential products that could be impacted by the virus

Dun and Bradstreet estimates that there are approximately 22 million

businesses within the regions impacted by COVID-19. This is about 90%

of all businesses in China which means that the majority of companies with

Chinese suppliers face a risk that is currently unknown in scope and

immeasurable in impact.

Economic Uncertainty

The global economy in general and the US economy, in particular, are in

one of the longest recoveries and expansions in history – beginning in the

middle of 2009 as the Great Recession ended. In fact, there has been

perennial hand wringing over the likelihood that the economy will slip into

recession in the near term, with more and more economists increasing the

odds of a recession in the next 18 months. It was evident in August 2019

when the ten-year and two-year bond market yield curves inverted and

flashed warning signs of a recession in the following 18 months. The stock

markets also suffered routs that month, following news of the inversion and

that the US-China trade war would continue.

Although consumer confidence rebounded at the end of 2019, and the

economy ended 2019 on a high note, economic uncertainty remains. Gross

Domestic Product (GDP) in the US grew by just 2.3% last year, falling short

of an estimated 3.0% for 2019, and down from 2.8% from 2018. Moreover,

the agricultural industry is still reeling from the nearly two-year trade war

with China, seeing record high farm foreclosures in 2019, despite receiving

more than $22 billion in federal subsidies to partially offset losses.

The major point to be made here is that US and global economic growth

are not perpetually sustainable. At some point, sooner, rather than later,

the economy will start to go the other way; faster if the downturn is in

concert with other global risks.



Geopolitical Uncertainty

In earlier generations, supply chains were largely localized and, therefore,

largely insulated from the majority of world events. That time has passed.

Now, political decisions or agreements that are made by one country or

between two can shift the cost, risk, and attractiveness of working with a

supplier. This means that procurement and supply chain leaders must track

and gauge the activity happening the in the home countries of their tier one

suppliers, but they must also attempt to understand the location and

associated risks of their tier two and three suppliers.

Today’s global business environment is peppered with geopolitical and/or

political risk and uncertainty. This is evidenced by the significant number of

in-country challenges across the globe and rising tensions between

countries as well.

The US Congress recently impeached (and the US Senate promptly

acquitted) President Trump. The impeachment was a highly-charged event

that will ensure the 2020 presidential election is an extremely divisive one.

Elsewhere, there are high-profile anti-government protests in Chile and

Hong Kong and political unrest in Brazil and Venezuela. Civil wars are

raging across Africa, the Middle East, and Southwest Asia. The war in

Donbass between Ukraine and Russia-backed separatists is now in its

sixth year. Meanwhile, the US and Iran are engaged in a months-long proxy

war that recently saw each side’s military forces directly target each other,

risking a major conflict. As a result, traveling anywhere in North Africa, the

Middle East, and the Caucuses carries heightened risk and danger due to

ongoing conflicts in these regions. For its part, the UK is officially no longer

part of the EU and the future economic relationship between the two is

murky.

Meanwhile, Russia continues a push for global destabilization while

attempting to expand its sphere of influence by meddling in other country’s

elections, according to recent U.S. intelligence reports, but notably, not

according to the U.S. president.

Child labor, human trafficking, debt bondage, forced labor, and unsafe

working conditions (i.e., “modern slavery”) are global problems requiring

global solutions. According to some estimates, there are more than 40

million people entrapped in modern slavery today.

U.S. International Relations and Trade Policy

The long arc of free trade policy has been bent backwards by the current

U.S. administration which has promoted a U.S. first agenda while

negotiating unilateral trade agreements that offer no standard approach in



overall U.S. trade policy. In mid-2018, the US began placing tariffs on

imported goods from China in an attempt to offset trade imbalances

between the two countries, and to punish and deter Chinese businesses

and the government from engaging in intellectual property theft. The US

withdrew from the North America Free Trade Agreement and renegotiated

and replaced it with the US-Mexico-Canada Agreement, which was signed

into law on January 29, 2020.

More broadly, the unpredictable nature of President Trump, and the gap

between what he communicates to the public and what his administration

establishes as policy, make it difficult for executives to understand, predict,

and prepare for shifts, because many of the administration’s initiatives have

been introduced and executed with little lead-time. One example of this

include: banning travelers from seven Muslim-majority nations, which has

prevented sourcing and procurement practitioners, as well as technology

specialists, from entering the US. Another is the US-China trade war. After

the US Treasury began placing billions of dollars in tariffs on imported

Chinese goods, the Chinese government retaliated in kind, causing many

Chinese businesses to move their sourcing and supply chains to other

global markets. Costs include tens of billions of dollars in lost revenue for

farmers and manufacturers, many bankruptcies, and for those businesses

that have survived the trade war, lost market share to rival suppliers in other

markets.

President Trump is one point, a large point, on a continuum that views

many traditional organizations, structures, protocols, and relationships with

contempt. Fairly or unfairly, this administration’s approach has contributed

to overall instability as well as U.S.-specific uncertainty. There are, of

course, other factors contributing to the heightened uncertainty in the global

business world today.

Environmental Challenges

For many, climate change is the biggest crisis in the world today, with the

potential to disrupt foreign trade and economies, fuel domestic and

international tensions, and adversely affect human life. Whether readers

choose to believe the conclusions made by 98%+ of all scientists or not,

the effects of climate change are real and increasing. In certain regions,

food, water, habitat, and energy resources are strained. For example,

recent and ongoing wildfires are decimating ecosystems, rendering them

uninhabitable to humans and animals, alike. And, as the impact of climate

change continues to accelerate, it is highly likely that weather events will

create more and larger disruptions to global supply chains.



Recommendations

This period of expansive uncertainty – globally, but more specifically in the

US – is unlike anything that business leaders have witnessed in half a

century. Accordingly, Ardent Partners recommends that business

executives and leaders in procurement, supply chain, and/or finance take

the following actions to start building out their supply chain risk

management capabilities:

• Segment strategic categories (followed by suppliers) on a two

by two matrix measuring “business criticality” and current risk

level. Then, prioritize the development of contingency plans based

upon the location of each category on the matrix. Make sure the

team understands the options to requalify/move supply if needed,

either to supplier owned locations or to another 3rd party. Next,

segment suppliers according to their overall impact upon business

continuity.

• Enhance current contingency plans. There should be tiered

response plans designed to mitigate risk events ranging from best-

case to worst-case scenarios. Begin developing risk management

plans that provide early indications and warning,

communication/notification trees, operational redundancy and

resiliency.

• Establish cross-functional rapid response teams to support

supply risk programs. A broad-based team with a vested interest

and awareness in supply risk, will better anticipate the unexpected

and bring the right resources to bear if the need arises. Have the

teams organize supplier outreach and conduct a weekly refresh

based on segmentation and/or critical inventories.

• Run simulations and conduct drills. The best prepared

organizations are the ones that simulate, practice, and drill regularly

and are most familiar with the various contingencies. Call up those

worst-case scenarios – the ones that keep you up at night – and put

your team through their paces. Practice. Observe. Review and

analyze. Learn from mistakes, understand weaknesses, and

practice some more.

• Take a 360-degree view in defining enterprise-level supply risk.

Risk is subjective; so, before making investments in a robust risk

management program, a comprehensive evaluation should be

performed to identify and properly assess the wide-range of supply



risks that exist across the enterprise, including all relevant types of

risk such as financial, operational, and others.

• Collaborate with your top suppliers. Suppliers frequently have

better market and risk insights than the sourcing team. Leveraging

a supplier’s unique market knowledge and experience can provide

a competitive advantage.

• Continually revamp supply risk management programs to

mirror the shifts in the supply base and marketplace. The speed

of business continues to accelerate, which makes supply risk

management a moving target. Static supply risk management

strategies and programs could eventually expose businesses to

new and/or unanticipated risks.

• Develop ongoing supply risk management training programs.

It is incumbent on Chief Procurement Officers to build training

regimens that support the constant usage of data, intelligence, and

real-time insights as applied to the measurement of current and

future supply risk threats.

• Expect the best, prepare for the worst. Procurement and supply

chain teams should develop and test business continuity and crisis

management processes. From time to time, teams should run

different supply risk scenarios to test their programs including all

preparation, response, and recovery activities.

• Understand that supply risk management does not mean the

elimination of supply risk. The competition for market share and

the drive for innovation is fierce. Risk is not the enemy of a supply

risk management program, unknown, unidentified, and/or

unanticipated risks are.

Conclusion

Globalization surely has its advantages, but the global expansion of a

supply chain exposes it to generally more supply risk and certainly different

types of supply risk. In 2020, many of the business world’s relatively

nascent global supply chains have yet to be challenged by a significant,

persistent, and comprehensive global risk event.

As a result, Ardent Partners is raising concerns that many companies are

ill-prepared to deal with the myriad risk events outlined and detailed in this

report. Thus, while we assess supply chain risk and uncertainty to be at a

20-year high, we also, and perhaps more importantly, advise business

leaders to make quick assessments and take swift action.



Appendix

About the Authors

Andrew Bartolini is the Founder & Chief Research

Officer at Ardent Partners. With 20+ years in the

industry and 10+ years leading the charge at Ardent,

Andrew Bartolini is a globally-recognized expert in

sourcing, procurement, supply management, risk, and

accounts payable. Andrew focuses his research and

efforts on helping enterprises develop and execute

strategies to achieve operational excellence within their

finance and procurement departments. Andrew is also

the publisher of CPO Rising, the news and research site for Chief Procurement

Officers and other procurement leaders (www.cporising.com).

Advisor to corporate executives and leading solution providers alike, Andrew is a

sought-after presenter, having lectured and presented more than 400 times in ten

different countries. Over the past decade, Andrew has benchmarked thousands of

enterprises across all facets of their sourcing, procurement, supply management,

and accounts payable operations and his research is currently part of the Supply

Chain/Management curriculum at several US universities. He actively covers the

technology marketplace as well as trends in sourcing, procurement, supply

management, and accounts payable and has been published or quoted in leading

business publications including The Wall Street Journal, Business Week,

Investor’s Business Daily, Forbes, and Fortune, as well as the major trade

publications focused on accounts payable and supply management.

Prior to becoming an industry analyst, Andrew developed, packaged, deployed,

and used supply management solutions on behalf of enterprises in the Global 2000

while working for Ariba and Commerce One. Additionally, his experience in

strategic sourcing (where he managed sourcing projects totaling more than $500

million in aggregate client spend), business process transformation, and software

implementation provides a “real-world” context for his research and writing.

Andrew has been named a “Pro to Know” by Supply and Demand Chain Executive

multiple times and holds a B.A. in Economics from The College of the Holy Cross

and an M.B.A in Finance from Indiana University. He welcomes your comments at

abartolini@ ardentpartners.com or 617.752.1620.

http://www.cporising.com/

mailto:[email protected]




Matthew York is a Senior Research Analyst at

Ardent Partners who for more than a decade has been

fascinated by emerging technologies like artificial

intelligence, connected devices, and distributed digital

ledgers and how they can enrich business operations.

At Ardent Partners, Matt researches, analyzes, and

writes about the intersection of people, processes,

strategies, and technologies in supply management and

how they are changing the business landscape of

tomorrow. He has been lead author on data-driven, thought leadership reports

ranging from advanced analytics to contract management to strategic sourcing to

supply chain risk management. Matt has twice been named a “Pro to Know” by

Supply and Demand Chain Executive magazine and is a sought-after speaker.

Previously, Matt served as an analyst with the U.S. Department of Justice and the

U.S. Intelligence Community. He earned a B.A. in Political Science / International

Relations from Stonehill College and an M.A. in Political Science / International

Politics from the University of New Hampshire. Matt can be reached at

[email protected].




Ardent Partners: Research with Results

Ardent Partners is a research and advisory firm focused on defining, and advancing the

supply management strategies, processes, and technologies that drive business value and

accelerate organizational transformation within the enterprise. Ardent Partners was

founded in 2010 by Andrew Bartolini. Ardent Partners actively covers the supply

management marketplace and produces research to help business decision makers

understand (1) industry best practices and how to improve performance & (2) the

technology landscape and how to identify the best-fit solution(s) for their specific budget

and requirements.

Contact [email protected] if you have any questions about this report or our

research in general.

To receive access to similar research, register for Ardent Partners’ newsletter here.

Industry Standard “Fine Print:” The information contained herein has been obtained from sources

believed to be reliable. Ardent Partners, Ltd. disclaims all warranties as to the accuracy,

completeness, or adequacy of such information. Ardent Partners, Ltd. shall have no liability for errors,

omissions, or inadequacies in the information contained herein or for interpretations thereof. The

contents expressed herein represent Ardent Partners’ best analysis at the time and are subject to

change without notice.

© 2020 Ardent Partners, Ltd. All rights reserved. Reproduction and distribution of this publication in

any form without prior written permission is forbidden. Solution providers and consultancies should

take special note that Ardent Partners reserves the right to seek legal remedies including injunctions,

impoundment, destruction, damages, and fees for any copyright infringement (which includes but is

not limited to usage of any Ardent Partners content in company collateral, presentations, and

websites) in accordance with the laws of the Commonwealth of Massachusetts and the United States.

mailto:[email protected]?subject=Research%20Inquiry

http://ardentpartners.com/newsletter-registration/

RESEARCH ALERT - Bad Moon Rising: Global Supply Chain Risk ... · ~ Creedence Clearwater Revival...

Documents

Transcript of RESEARCH ALERT - Bad Moon Rising: Global Supply Chain Risk ... · ~ Creedence Clearwater Revival...