January 05, 2018

As we head into 2018, what potential disruptions do supply chains face and how can companies manage these risks over the coming year?

It’s impossible to know for sure how supply chains will be disrupted in 2018, but we can prepare for the worst by learning from the past. Disruptive events that occurred over the last several years fall into three broad categories of supply chain risk: Natural Catastrophes, Man-Made, and Economic. Let’s look at each type of risk and their impacts on supply chains.

1. Natural Catastrophes

Supply chains are vulnerable to natural disasters such as storms, floods, and wildfires. Although catastrophes such as hurricanes and earthquakes are infrequent, they have the potential to cause extensive damage. For example, in 2016, we saw significant disruptions following the Kumamoto earthquake in Japan that forced the automotive industry to suspend production, floods in Louisiana that shut down the fourth-largest U.S. oil refinery, Hurricane Matthew that disabled ports up and down the U.S. East Coast, and wildfires in California that cut off key rail and trucking routes.

There was no letup in 2017 and the losses incurred from catastrophes such as hurricanes, wildfires, and earthquakes could make it one of the costliest years in history for the property insurance industry. These events also caused supply chain disruptions — although not all the effects may have been fully realized yet. For example, an analysis carried out by AIR on the potential impact of Hurricane Harvey on regional manufacturing found that, based on percentage of the total potential revenue loss, the top three subsectors are petroleum and coal products manufacturing (37%), chemical manufacturing (13%), and oil and gas extraction (12%). Time will tell how disruptions at these raw materials subsectors will ripple through global supply chains to disrupt other industries.

Hurricane Maria, which slammed into Puerto Rico on September 20, 2017, is a prime example of a catastrophe that reverberates through supply chains. It’s been reported, for example, that the destruction of medical device manufacturing capacity in Puerto Rico wrought by the hurricane has led to a national shortage of medical IVs, which has forced some hospitals to use alternative products and find new suppliers.

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