How to protect your supply chain for the next ‘grey swan’ event

• The COVID-19 pandemic brought to light the volatility of the global supply chain.
• It also highlighted that companies are not prepared for “grey swan” events, those which are unlikely to occur but can wreak havoc when they do.
• Aon helps businesses minimize the risk of supply chain disruptions through its overall business and professional services.

One day, when the pandemic is long over, people will be free to reminisce about March 2020 and its empty toilet paper shelves, impossible-to-find flour, and out-of-control lumber prices. It was in that month that people started understanding just how global and intertwined supply chains had become and that when links break — in this case because of a worldwide lockdown that made it difficult to create and ship goods — the entire system falls apart.

“This past year has shown how volatile our supply chain can be and that it may not be as resilient as we once thought,” says Lori Goltermann, CEO of US commercial risk and health solutions at Aon.

Clearly, the pandemic caught everyone off guard, including the many companies that say they think carefully about supply chain risks. According to Aon’s COVID-19 Risk Management & Insurance Survey, 82% of companies failed to identify a global health crisis as a principal risk to their business, while the general risk readiness of major corporations was at its lowest level in 12 years. In addition, 48% said COVID-19 impacted their business in some way, with 17% still unsure how the pandemic will impact their operations long term.

As difficult as the pandemic has been on businesses, it’s also been a wakeup call to the many operations that haven’t carefully considered how “grey swan” events — a term used to describe major events that are unlikely to occur, but are increasingly becoming more common — could impact their supply chains and their overall operations. In fact, Aon’s recent grey swan report found the average impact reflects a total of USD $1.2 trillion in destroyed value, and that in over 10% of crises, more than 50% of shareholder value is destroyed. Besides a pandemic, other grey swan events could include such things as a major cybersecurity attack, a significant climate incident, and a global war.

With companies now knowing that anything can happen, preparing supply chains for the next grey swan event is critical. “We’ve all lived through something that we didn’t think was possible,” Goltermann says. “For those that did prepare, risk management has absolutely been a competitive advantage and it will continue to be for those businesses that do it really well.”

Know your supply chain

As the pandemic has shown, grey swan events can impact supply chains in a variety of ways. According to Aon’s COVID-19 report, 36% of companies said that a drop in consumer demand caused the biggest disruption to their supply chains, while nearly 20% said they had trouble sourcing materials.

Ultimately, though, if one part of the chain is disrupted everything gets disturbed, which is why businesses should focus on the end-to-end rather than on one part of the chain, says Lambros Lambrou, Aon’s CEO of commercial risk solutions.

Companies must get better at understanding who touches what along the chain, he adds. In many cases, businesses have no idea where parts are coming from — they just trust their suppliers to get the job done, which is not good enough anymore.

“Whether it’s relationships with customers, with suppliers, with suppliers of suppliers, it’s truly understanding the risks associated with organizations that are further down the supply chain that can then impact your business in ways you perhaps didn’t focus on before,” he says.

While that may be easier said than done for a lot of businesses, as global supply chains can be long and complex, they at least have to try and connect the dots, Lambrou says. He suggests having conversations with suppliers about where they get their goods from and continuing to ask questions to businesses along the chain until a more robust supply chain picture appears.

Employ more creative risk management solutions

At the same time, businesses must start investing more in risk preparedness and loss prevention mitigation, he says. Even if a company has a full view into its supply chain, things can go wrong when a grey swan event occurs. As companies collect more data about their supply chains, this information can then be used to negotiate better “fit for purpose” risk transfer solutions for them.

For example, Aon is working with companies in vaccine distribution to mitigate supply chain risks. Given how sensitive vaccines are to temperature, if they’re not handled correctly throughout the delivery process, they must be thrown out. Aon has worked with insurance markets to develop a product that can protect a vaccine distributor from any losses related to storage temperatures. The solution leverages innovative Artificial Intelligence (AI) capability to put sensors inside cargo units that provide real-time reporting of any temperature deviations. The AI can flag any problems as they’re happening and pinpoint more accurately how many doses may be lost and therefore covered by insurance.

Using data and sensor technology will allow businesses to more accurately see their pain points and protect themselves against all kinds of risks that wouldn’t have been covered before, Lambrou says. “We can now use different sets of data to enable us to not just understand how risks can evolve,” he adds, “but also where we can link it to a risk transfer product that provides a holistic solution to the people that are involved in the distribution of a product.”

Now that everyone knows that even the seemingly most far-fetched grey swan event can occur, businesses must start planning ahead. One option is to work with a company like Aon that can help corporations better understand their risk profiles and develop risk mitigation strategies, which include building insurance programs designed to protect an operation’s balance sheet and to ensure that no matter what happens, the business can remain resilient and continue to succeed, Goltermann says.

Going forward, risk management will become a much more important part of a business, she adds. The risk management position should be supported and invested in so companies can fully understand where things could go wrong. “Businesses need to continue to evolve in order to manage both traditional and emerging risks,” she says. “Risk managers are essential in informing a company’s overall strategy.”

Find out how Aon can help your company mitigate supply chain risk.

This post was created by Insider Studios and Aon.