Top 10 Risks

8. Supply Chain or Distribution Failure

Rankings in Previous Surveys

Rankings by Region

In the early morning of March 23, 2021, the Ever Given, one of the world’s largest container vessels with a capacity of 20,000 containers, was caught in a strong sandstorm as it was traveling to the Port of Rotterdam in the Netherlands through the Suez Canal. Having lost its ability to steer in the strong wind, the ship ran aground and became lodged sideways across the waterway, causing 370 ships to be stuck on both sides of the canal, including five other container ships of similar size. Experts told the BBC that about 12 percent of global trade — around one million barrels of oil and roughly 8 percent of liquefied natural gas — passes through the Suez Canal each day, so the value of the goods delayed each hour was estimated at $400 million.

The Suez Canal blockage didn’t just affect the global shipping industry. Countless businesses, from domestic transport providers to retailers, supermarkets and manufacturers, were also adversely impacted. The blockage further compounded the woes caused by the pandemic; threatened the fragile flow of raw materials, parts and consumer goods; and thwarted budding economic recovery.

Meanwhile, fresh outbreaks of the COVID-19 Delta variant in Southeast Asia have crippled the region’s factory sector, disrupting global supply chains for goods such as rubber gloves, semiconductors and sport utility vehicles (SUVs). Japan’s Daihatsu Motor halted operations at four factories in Japan for up to 17 days because surging coronavirus cases in Malaysia and Vietnam created a serious parts crunch. In Vietnam and Thailand, factories that supplied parts and products for multinational companies such as Samsung, Foxconn and Nike were also forced to close.

In addition to the pandemic, climate change has also wreaked havoc. At time of writing, wildfires in Australia and the American West, floods in China and Europe, and droughts in South America are already disrupting the supply of everything from lumber to chocolate. More importantly, increased cyber attacks have caused broader disruptions in the supply chain. For example, ransomware attacks are threatening the shipping industry, which relies heavily on the interaction between a number of different digital systems, from ports and cities to individual ships and the companies that own them.

The upheaval from these disruptions has aggravated businesses’ concerns. In Aon’s 2021 Global Risk Management Survey, supply chain or distribution failure, which ranked at number 19 in the 2017 survey, is surging back into the top 10 risk list for the first time since 2009. Participants ranked it at number eight in the 2021 survey.

Loss of income from this risk in the past 12 months has risen from 21 percent to 35 percent, whereas risk readiness has declined from 70 percent to 63 percent. The results are consistent with those in Aon's COVID-19 Risk Management and Insurance Survey, in which 36 percent of surveyed companies cited disruption to their supply chains and nearly 20 percent had trouble sourcing materials.

Not surprisingly, the retail and consumer goods sectors see supply chain and distribution failure as a number one risk. According to two surveys conducted by the National Association of Convenience Stores, two in five convenience retailers say there were “significant” levels of disruption across the supply chain during the second quarter of 2021, and 86 percent reported that at least 10 percent of their orders were disrupted. Also, two in five industry suppliers said they faced “significant” levels of disruption for materials necessary to create their products.

Regionally, participants in Europe and North America, where companies of all sizes are deeply reliant on international supply chains to produce medical equipment, pharmaceutical products, automobiles, technology, toys and apparel, to name a few, rank this risk at number five and six, respectively. Rising demands combined with unforeseen events struck a crippling blow to companies in these regions. In the short term, global supply chain problems could constrain output in many manufacturing and service sector companies while simultaneously pushing prices higher as demand exceeds supply.

The perils that may cause supply chain interruptions can be very broad, from pandemics and cyber attacks to climate change, political turbulence, credit failure and recall events. As consumers and governments demand change, the way companies are doing business is coming under scrutiny. Looking ahead, ESG risk could develop into the biggest threat to the global supply chain.

Aon classifies complex supply chain risk as one of the big six risks facing businesses today, along with loss of intellectual property, cyber attacks, damage to reputation, climate change and the COVID-19 pandemic, all of which are interconnected and evolving fast. They have long-tail exposures but limited risk transfer solutions.

Lori Goltermann, Chief Executive Officer of Enterprise Clients at Aon, says the pandemic served as a wake-up call, forcing companies to carefully consider how “grey swan” events — major events that are unlikely to occur but are becoming increasingly common — could impact their supply chains and their overall operations. Besides a pandemic, other grey swan events could manifest in the form of major cyber-security attacks, significant climate incidents and global wars.

Lambros Lambrou, Aon's CEO of Commercial Risk Solutions, advises businesses to start planning ahead and focus on shaping end-to-end processes rather than on one part of the chain. They should get better at understanding who touches what along the chain and use data and sensor technology accurately to see their pain points so they can protect themselves against risks that wouldn't have been covered before. “We can now use different sets of data to enable us to not just understand how risks can evolve but also where we can link [them] to a risk transfer product that provides a holistic solution,” says Lambrou.

While supply chain risk is becoming more concentrated, frequent and broadly defined, challenges in the insurance market are poised to contribute to the size of the problem. Contingent business interruption coverage in particular is increasingly under review. There have been more restrictions because of the ever-growing complexities of internationalization and globalization of trade, as well as the growth of technology and logistics solutions.

Coverage issues center around the following:

In the face of the pandemic and a changing risk landscape, global supply chains are being tested to the limit. The just-in-time supply chain that is all about cost and efficiency must now respond to those emerging risks. Failure to do so is not an option. A strong, resilient and adaptable supply chain is an imperative for business survival and growth. To meet that imperative, leaders should take a number of actions, which include agreeing on which contracts, customers and products need protection first, understanding your suppliers and their suppliers, quantifying risks, and breaking down silos everywhere.

Often, a crisis can bring opportunities to reshape existing operating models that drive innovation. By preparing for shocks now, companies will be able to make better decisions tomorrow and be poised to thrive in a volatile and changing business environment.