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3 major supply chain risks retail, food and beverage companies must navigate

Supply chains are prone to numerous challenges. Three overarching challenges are top of mind for the industry as organizations seek to build resilience.

12/06/2023

Today’s interconnected supply chains have become increasingly complex and fragile, prone to complications from weather events, geopolitical concerns, skilled labor shortages, and increased theft that are contributing to increased costs and risk exposure.

Although supply chains have started to unclog, the fragility seen in the early 2020s remains, and the next disruptors will most likely impact the global movement of goods. Technology has allowed increased visibility into supply chains, but has also brought new challenges, including increased exposure to cybersecurity threats, from data breaches to ransomware, that can compromise sensitive customer information, disrupt operations, and damage reputations.

With higher costs and continued threats to both physical and digital supply chains, retailers, restaurants, and food and beverage companies like yours require an agile mindset to identify and quickly address ever-evolving challenges. This should enable you to pivot in order to build a resilient supply chain that is in line with shifting customer requirements and expectations.

A plethora of risks

From shortages of key ingredients to transportation bottlenecks to delays in delivery, supply chains are prone to numerous challenges, which at times can lead to empty shelves, food spoilage, and an inability to fulfill contractual obligations. Three overarching challenges are top of mind for the industry as organizations seek to build resilience.

Increased costs

The massive supply chain challenges experienced in the early 2020s have contributed to a rethink of the just-in-time concept. Instead, businesses are stocking up on critical supplies and storing them closer to their end customers. But the just-in-case approach brings increased carrying costs and accumulation risks, which typically contribute to higher insurance costs.

And at a time when social media channels are prevalent, influencers can play a critical role in a product’s popularity. However, their immediate marketing influence can create challenges in ordering and stocking sufficient amounts of popular products.

Further, a rise  in cargo theft, which spiked by 57% in the second quarter, has increased operational costs and in some cases impacted insurance pricing. At the same time, the industry is still experiencing significant price increases due to inflation and higher labor costs.

Climate change, natural catastrophes

Climate impacts on key infrastructure are increasingly complicating transportation. For example, the Mississippi River — through which 60% of US grain exports and many other critical supplies pass — continues to run at historically low levels, sometimes requiring barges to lighten their loads. 

Natural catastrophes, including hurricanes, floods, earthquakes, and fires, can destroy products, delay deliveries, or even block access to warehouses and distribution centers.

Case in point: Retail example: A warehouse fire at a large retailer caused around US$200 million worth of product loss, with additional cleanup and rebuild costs. Resolving the claim required a joint effort by Marsh specialists, including forensic accountants, and insurers to accurately value the loss and obtain needed coverage for following years.

Cyber threats

A cyber incident can disrupt operations, expose sensitive data, and cause significant financial losses.  According to one study, more than 60% of organizations in the US were affected by software supply chain attacks in 2022, with even more indicating that they were not satisfied with their visibility into risks across their supplier base.

The digital nature of today’s supply chains, coupled with increased dependency, have introduced new vulnerabilities, including the risk of attackers gaining access to your data or systems through a third party. A software vulnerability, for example, can lead to attackers infiltrating systems, potentially installing malicious code on your network. Aside from the potential exposure of sensitive information — either about the company or clients — these breaches can lead to significant disruptions. For example, a network disruption can impact a business’ ability to order or receive products.

And as disruptive technologies, such as artificial intelligence, come online or their use grows, risks will continue to evolve. New threats will require novel approaches to identify, manage, and mitigate risks. 

How to improve your supply chain’s resiliency

Interconnected supply chains remain vulnerable to events — whether a natural disaster, geopolitical pressures, or other risks — anywhere in the world. It is therefore important for senior leaders to take both short- and long-term approaches and take action now to identify potential disruptors and build a supply chain that can withstand new pressures. As you take steps to make the supply chain more resilient, consider the following actions.

Increase visibility throughout supply chain

Each entity needs to understand its individual supply chain, who contributes to it, and where the weaknesses are. Having a clear line of sight into a product’s entire journey can help you identify potential points of failure, for example, an overreliance on a particular supplier or an accumulation of suppliers in a region prone to natural disasters. Go beyond the first tier to understand risks that suppliers and their suppliers may face that could impact the timely and cost-effective delivery of your products.

Take action to improve visibility into your distribution methods, especially considering today’s omnichannel customer journey. A clear view into the products in your stores, restaurants, warehouses, or distribution centers helps to identify shortages or excesses and can also inform your insurance purchasing.

Extend your network security and privacy visibility efforts to digital services, especially critical ones, such as payment systems. For example, if a restaurant’s payment service provider systems are down for a prolonged period, they may not be able to accept credit card payments. Also, an outage at your network services provider may cause website downtime and disrupt order taking or fulfillment.

Consider broader reputational and privacy-related implications to better inform risk management practices. These may include contractual and incident response considerations, as well as the development of critical vendor redundancies. As part of your negotiations, consider requesting visibility into your suppliers’ downstream vendors to assess common dependencies that could impact operations. Once you’ve identified the potential losses, work with your broker or insurance advisor to build an effective insurance program.

Focus on accurate forecasting and improve transparency

With tight budgets and short windows to deliver products, accurate forecasting has become a lifeline for retailers, restaurants, and food and beverage companies, allowing them to efficiently order sufficient amounts of products to accommodate customers’ shifting requirements.

Visibility into your supply chain and a rapport built on transparency can help improve forecasting and reduce unnecessary accumulation risks. For example, knowing how long it will take suppliers to deliver hot holiday gifts can help a retailer decide when to order, striking a balance between holding product before peak sales and reducing time and carrying costs for warehouse inventory. And knowing ahead of time when a shipment is expected allows you to beef up safety and security to reduce theft risks — critical when supply chains are stretched and available stock is essential for success.

Review your insurance program

Whether they are in transit or at your warehouse, your supplies need to be adequately insured. And because prices have fluctuated in recent years, you should work with your broker to review and update valuations to make sure you are purchasing sufficient coverage. As you build an insurance program, keep in mind the fluctuations in stock and consider whether you have sufficient coverage for peak seasons.

Work with your broker or insurance advisor to determine whether your existing policies would respond in the event of a supply chain disruption and identify any gaps in coverage. Consider whether a stock throughput policy — which allows you to insure inventory throughout its lifecycle — might be a suitable option.

Carry out iterative security assessments

The rapid evolution of risk exposures and the pervasiveness of threat actors underscores the need for constant assessments of your security posture. Establish a baseline of cyber hygiene, in particular the controls related to how a third party may access your corporate or operational networks.

Make sure that third-party providers — whether of digital services or physical supplies —also carry out regular reviews and make necessary improvements. This is especially important for third parties with access to critical or private information about your company or clients. For example, retailers capture consumer information to help build more effective relationships, but could suffer reputational damage if that personal data is stolen and misused.

Work with your vendors and providers to determine whether they are compliant with applicable laws that govern data storage and transfer. As part of your contractual agreements, identify who is responsible for the financial repercussions of a break in the supply chain. Agree on the responsibility of each stakeholder — for example, is your vendor required to notify you and when?

A robust and effective supply chain is essential in allowing your company to execute on its vision and achieve financial targets. As disruptors continue to evolve, retailers, restaurants, and food and beverage companies should take action to identify their most pressing supply chain challenges — especially increased costs, natural catastrophes, and cyber threats — and be able to quickly pivot to address emerging risks before they lead to financial or reputational losses.

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