CSCMP's Supply Chain Quarterly
Third-Party Logistics
September 16, 2019
Third-Party Logistics

A growing focus on risk

Comment
The "2019 23rd Annual Third-Party Logistics Study" reveals that supply chain shakeups are among the top concerns of shippers and 3PLs, but comparably few have effective risk mitigation strategies in place.

In today's global marketplace, supply chain disruptions pose a significant threat to organizations of any size. At the same time, supply chains are becoming more complex and distributed, making them more vulnerable than ever before.

Any disruption or delay, regardless of cause, can have a large ripple effect on the supply chain, causing missed deliveries and downed production lines, which can cost companies hundreds of millions of dollars and damage their reputation. For example, the catastrophic Tohoku earthquake and tsunami that hit Japan in 2011 cost the country an estimated $210 billion. Car manufacturers like Toyota, Nissan, and General Motors were forced to temporarily stop most of their auto production because they could not ship or receive required materials, shaking up supply chains all over the world.

Article Figures
[Figure 1] The impact of various risk mitigation strategies
[Figure 1] The impact of various risk mitigation strategies Enlarge this image

The threat of supply chain disruptions has not gone unnoticed by companies themselves. "The 2019 Annual Third-Party Logistics Study"—conducted by Infosys Consulting, Penske Logistics, Penn State University, and Korn Ferry—shows that the level of importance that shippers and third-party logistics providers (3PLs) place on mitigating supply chain disruption is much greater than it was five years ago.

Common concerns

Risk within the supply chain can come in several different forms, ranging from disruptions and delays to forecast and procurement issues. According to the study, the most common issues that shippers and 3PLs have faced include increased transportation and logistics costs, network disruptions, and an increase in supplier costs. Other top issues include damage, loss or detention of inventory, loss or impairment of production capability, product recall or failure to sell, unforeseen return, and loss of a key supplier.

The majority of shippers (58%) and 3PLs (64%) reported that natural disasters, extreme weather, or pandemics were the leading cause of supply chain disruptions, but they are far from the only source.

Among the respondents, 51% of shippers and 49% of 3PLs cited infrastructure issues (such as border delays, loss of roads, or a rail strike); 51% of shippers and 46% of 3PLs cited extreme volatility in labor or energy prices; and 41% of both shippers and 3PLs mentioned information and communication disruptions. In the past years, new threats, including social and public pressure as well as cyberattacks, have been added to the mix.

These statistics suggest that forming an effective supply chain risk management strategy needs to be a top issue for 3PLs and their customers. However, there is a discrepancy in how far along companies are on being aware of the impact and severity of risks. While 63% of shipper respondents said they have key metrics in place to quantify the impact of a disruption, the majority of 3PL respondents—57%—said they do not have such metrics in place.

Top mitigation strategies

There is no silver-bullet strategy for protecting the supply chains against such threats. Instead many shippers and 3PLs are taking a multipronged approach to limit the ripple effect of a disruption, utilizing several mitigation strategies. (Figure 1 lists some common supply chain risk mitigation strategies and indicates their level of impact.)

The top two tools that shippers and 3PLs use to mitigate and manage supply chain disruptions are supply chain visibility tools and partnerships, such as those with strategic partners and even competitors. Another tool that many are using is predictive analytics. However, fewer shippers and 3PLs are turning to financial products, like insurance, to mitigate and manage supply chain disruptions compared to the last time we asked about risk in 2013.

Even though companies are aware that they need to protect their supply chains from serious and costly disruptions, many are currently not implementing effective risk mitigation strategies, such as those shown in Figure 1. Only 47% of 3PLs and 34% of shippers said they are planning on investing in supply chain disruption mitigation and response capability within the next two years.

Shippers said the most common reasons for not investing in supply chain disruption mitigation and response capabilities are a lack of executive support (52%), a lack of understanding about the tools available for supply chain disruption response (48%), and a lack of available capital (44%).

Among 3PL respondents, the majority—50%—cited a lack of available capital as their top reason for not investing in mitigation and response capabilities. Other top reasons included the inability to build a business case for investments (48%) and a lack of understanding about the tools available (43%).

Additionally, just over one-third of both shippers (37%) and 3PLs (39%) said supply chain disruption mitigation and response capability has not been a problem for them in the past and is therefore not a priority.

The emerging need for supply chain finance

As supply chain disruptions continue to grow at an alarming rate, so too do the financial impacts. Finance also plays a key role in weighing the tradeoffs between various mitigation strategies, such as using expedited shipments or building up inventory.

Choosing the best and most cost-effective mitigation solution is already difficult, as managing the traditional cost components of international logistics are still a challenge for many companies. These decisions, however, have grown even more complicated recently due to changing trade agreements and regulations, which can drive wild swings in costs.

All of this points to the increasing need for a robust supply chain finance capability. In the upcoming "2020 Annual Third-Party Logistics Study," we explore this need across both shippers and 3PLs and where they stand in developing the capability.

 

Shanton J. Wilcox is partner and head of the North America manufacturing/high tech segment of InfoSys Consulting.

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