The Middle East and North Africa (MENA) region has been a hub for trade and industry driving global economic growth for centuries. But from delays for crucial oil refinery parts, to lead times of years for an aircraft, to the impossibility of procuring chips used in car manufacturing — there are indications that supply chain resilience in the region has reached a low point.
In May, readings for all regions tracked by the Global Supply Chain Pressure Index (GSCPI) were below their historic averages. Meanwhile, the World Bank forecasts that the MENA’s GDP will slow to 3% in 2023, from 5.8% in 2022, with the need for stronger supply chains cited as a factor to improve growth.
There are actions companies can take to mitigate the risks embedded within the region’s supply chains, facilitating the continuous manufacturing of goods and provision of services. However, it is necessary to first understand the risk.
Main supply chain risks in MENA
Numerous, complex, and constantly evolving — the region’s supply chains are vulnerable to many risks, including:
- Shortages of key parts
Many industries have been impacted by global shortages of raw materials and components, such as semiconductors. This has been exacerbated by the Russia-Ukraine conflict and the stop-start COVID-19 lockdown policies in China, which have hampered production in the country.
Shipments of crucial materials have been delayed as a result of port congestion, protracted inspections by customs officials, and simply inefficient customs processes. Additionally, insurance complications can arise when penalties or fines are imposed.
The Middle East Institute predicted a turbulent 2023 for MENA, with political instability, high food and energy prices, and economic strains impacting many countries and their supply chains. Egypt, for example, is experiencing economic challenges that are inflicting hardship on households and could eventually lead to rising tensions among the general population. In Tunisia, high unemployment and rising inflation already led to protests earlier in 2023.
Protestors can delay the transport of goods by blocking the main traffic corridors while strikes can reduce manufacturing production.
- Natural catastrophe risk
Insured losses estimated at US$161 million as a result of Cyclone Shaheen in 2021 are a stark reminder that the region’s supply chains are not immune to natural catastrophe risk. As well as cyclones — droughts, earthquakes, water scarcity, and heat waves can impact the region’s transport and trade corridors.
How to reduce supply chain risk
An end user unable to receive a product will usually go to the competition. This could result in reputational risk for the company formerly supplying that customer (as well as loss in revenue). Delays in receiving key parts can lead to business interruption, contract risk — even environmental damage. For example, if parts needed to maintain an oil refinery are unavailable, emissions could increase.
There are a number of steps companies can take, however, to improve their resilience amid supply chain challenges.
- Diversify suppliers and transport networks: Companies should not depend on a single supplier or transport route; consider using suppliers closer to home, and ensuring the security of transported goods.
- Entrench deeper communication lines: Companies should be aware of every aspect of their supply chain to ensure they understand the existing conditions at any given moment in time. If delays are likely, a business needs to inform the end user, and manage their expectations.
- Engage industry bodies: Companies have an important role to play in terms of working with governmental and other relevant organisations to push the agenda on improving infrastructure and other components of the supply chain.
- Manage their inventories: Balancing “just-in-time” with “just-in-case” logistics can help businesses build supply chain resiliency. For example, keeping critical spare inputs onsite or knowing how to source them rapidly elsewhere can keep production flowing. Companies can consider investing in technology that provides visibility of their supply chain.
- Insurance: Companies can mitigate their key risks with insurance. However, they should be fully aware of how those policies will respond in the instance of an event.
Navigating a challenging landscape
Risks associated with a company’s supply chain should be identified, classified, and ordered in terms of priority. Companies can carry out mock drills for multiple supply chain scenarios to increase their preparedness. They should also anticipate future supply chain risk and embed strategies within their business to mitigate those hazards.
It is important that an entire organisation is involved in mitigating supply chain risk — from procurement, to operations, to the legal and environmental, social, and corporate governance (ESG) teams. Managing supply chain risk should never be the responsibility of one department or business.
Brokers can help a company manage supply chain risk, not only by placing insurance cover and ensuring a full understanding of the technical aspects of a policy, but also by identifying its potential vulnerabilities. If there is a dispute over an insurance payout, a company can go to court to try to resolve the disagreement — a process that can take many years. Alternatively, they can contact their broker, who may be able to negotiate payment of a large part of the claim on the business’s behalf.
For more information on managing your supply chain risk, please contact your Marsh adviser.