Supply chain interrupted

With trade already heavily challenged by the Covid-19 pandemic, the violent and destructive protest action of last week has thrown supply chain risk into stark contrast yet again, with businesses scrambling to secure the weak links, safeguard lives and property and reduce the risks to business continuity as far as possible.

“As a result of the pandemic, there has been a major consumer shift to online shopping with people clicking a button on their computer and getting goods delivered to their home. With so much of the supply chain happening behind the scenes and out of sight, consumers generally do not understand the complex and interlinked processes involved in getting that parcel or service delivered to their doorstep,” explains Tony Webster, of insurance brokerage and risk advisors, Aon South Africa. “It’s only when something goes wrong as it did last week, that there is a realisation of just how critical, yet fragile supply chains are, and how the domino effects of an incident reverberate throughout the entire value chain,” Webster adds.

Why it matters

With major highways and byways in and out of KZN blocked, it means that tens and thousands of fleet vehicles are unable to deliver goods across the country from South Africa’s busiest port, not to mention delays caused in Gauteng, the country’s economic hub. Goods will be late in reaching destinations, if at all, as transport operators run the risk of having trucks and cargo damaged, burnt or looted by rioting crowds.  

It is not uncommon for multiple events that disrupt supply chains to occur simultaneously.

“It’s quite possible that certain providers of products are going to be caught up in more than one event concurrently, as these events rarely wait for each other to finish and do not operate in a linear way,” says Webster.

In addition to the disruption of business operations, the impact of breakdowns in logistics systems raises another peril: reputational risk.

“Because consumers rarely separate the logistics from the provider of the product, the business involved could be hit twice: an immediate impact on revenue and profit, along with a loss of attraction in the future triggered by reputational damage. We’ve all been lulled into believing that everything is a click away and that’s fine if it works, but it only works when that specific supply chain is absolutely fluid and nothing goes wrong,” Webster explains.

It falls on the businesses whose products, essential components or raw materials are in the supply chain to evaluate and address these risks and put measures in place to mitigate them.

“Whatever businesses are producing or manufacturing, they will have a portfolio of products, and some of those products will be more valuable than others, either because they generate more income or because they service a market that’s growing for them or they are crucial for a key customer,” says Webster. “If they understand what’s driving the value of that business, they can then start to find the potential supply chain pressure points and risks around the end-to-end fulfilment of that product.”

Businesses should identify their most crucial supply chain ecosystem and the suppliers that are critical to that ecosystem. How a company addresses the risk becomes clearer once the points where a blockage or incident could negatively affect its ability to deliver products or services have been identified. Then they can ascertain their course of action, whether it is to hold more inventory, bring suppliers closer to home, diversify distribution points geographically, explore new logistics options or other alternatives.

“We’re seeing companies start to think more strategically around the business continuity element,” says Webster. “It’s all about how an organisation fulfils its most important client needs if a portion of stock is lost, which may mean relying on redundant supply, using a different route or other alternatives.”

Reshaping organisational response strategy

In addressing risks identified during the ongoing pandemic, many organisations made changes to their operating models, workforce strategies, products, portfolios, supply chains and more. The pandemic has created massive uncertainty, but also an unprecedented opportunity to learn and reshape parts of an organisation, building resilience for future shocks.

Concerns over geopolitical tension have been simmering in the background for a while and with domestic political unrest front and centre on South African soil at present, organisations are bound to find out just how resilient these changes are in the face of major disruption to their supply chains.

“It is at times like these where the insights and advice from experts in the field prove to be invaluable. Defining the fine line between what organisational risks can be handled internally and what aspects of that risk need to be covered externally, will provide a roadmap amid massive uncertainty,” concludes Webster.

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Climate-influenced weather is key driver of $268B global damage from 2020 natural disasters

“When Natural Disasters and a Pandemic Collide” global annual report explores “connected extremes”

Aon plc (NYSE: AON), a leading global professional services firm providing a broad range of risk, retirement and health solutions, today launches its global Weather, Climate & Catastrophe Insight: 2020 Annual Report. The report evaluates the impact of global natural disaster events to identify trends, manage volatility and enhance resilience. 

The report reveals that the 416 natural catastrophe events of 2020 resulted in economic losses of USD268 billion – 8% above the average annual losses for this century – as costs continue to rise due to a changing climate, more people moving into hazard-prone areas, and an increase in global wealth. Of this total, private sector and government-sponsored insurance programs covered USD97 billion, creating a protection gap of 64%, which is the portion of economic losses not covered by insurance. This highlights the importance of addressing the underserved by ensuring that there is increased access to affordable insurance products in the future.

“The global response to the socioeconomic volatility caused by the Covid-19 pandemic has increased focus on other systemic risks – particularly climate change – and is causing a fundamental reordering of business priorities.”

Greg Case, CEO of Aon

“This report highlights the increasing likelihood of ‘connected extremes’ and reinforces that leading organisations of the future will be defined by their ability to manage the global implications of concurrent catastrophic events,” said Case. “In a highly volatile world, risk remains ever present, is more connected and, as a result, is also more severe – and 2020 has underscored this reality. It has also emphasized the need for enhanced collaboration between the public and private sectors, which will be essential to close the rising protection gap and build resilience against natural catastrophes.”

During the year, more than 8 000 people lost their lives due to natural catastrophes. Tropical cyclone was the costliest peril, causing more than USD78 billion in direct economic damage. It was closely followed by flooding (USD76 billion) and severe convective storm (USD63 billion). From a climate perspective, NOAA cited 2020 as the world’s second-warmest since 1880 for land and ocean temperatures at +0.98°C (+1.76°F) above the 20th-century average.

“The world continues to evolve as it is faced with new challenges around natural perils. While many private and public sector entities primarily focus on physical and human hazard risks, an increasing number of global regulative bodies are further pivoting towards how to handle emerging transitional and subsequent reputational risks.”

Steve Bowen, Director and Meteorologist for Aon’s Impact Forecasting team

This is especially true as the financial and humanitarian risks surrounding climate-enhanced events become more evident on a daily basis. Focus at the corporate and federal levels will be critical around investments in risk mitigation, resilience, and sustainability as the landscape around climate change solutions continues to accelerate with renewed urgency. Significant regional events during 2020 included:

  • Costliest year on record for global severe convective storms led by historic U.S. derecho
  • U.S. mainland endured a record-breaking 12 named storm landfalls, including six hurricanes
  • Super Typhoon Goni struck the Philippines as the strongest landfalling storm ever recorded globally at 195 mph
  • Ciara became Europe’s costliest windstorm since Xynthia in 2010
  • Drought conditions reduced agricultural crop yields in Brazil and Argentina, burning 30% of the Pantanal Region
  • The most widespread Yangtze River Basin floods since 1998 caused USD35 billion of economic damage in China’s monsoon season

Exhibit 1: Top 10 Global Economic Loss Events1,2

Date(s)EventLocationDeathsEconomic Loss (USD billion)Insured Loss (USD billion)
June – SeptemberSeasonal FloodsChina28035.02.0
August 21 – 29Hurricane LauraU.S., Caribbean6818.210.0
May 15 – 21Cyclone AmphanSouth Asia13315.00.5
August 8 – 12SCS (incl. Midwest Derecho)United States412.68.3
July 3 – 15Kyushu FloodsJapan828.52.0
November 2 – 13Hurricane EtaCaribbean, U.S.3098.40.7
June – SeptemberSeasonal FloodsIndia1,9227.60.8
September 14 – 18Hurricane SallyUnited States07.03.5
March 22Zagreb EarthquakeCroatia26.10.1
July 30 – August 5Hurricane IsaiasU.S., Caribbean, Canada185.02.7
All other events146 billion67 billion
TOTAL268 billion97 billion

1 Subject to change as loss estimates are further developed

2 Includes losses sustained by private insurers and government-sponsored programs

The full report is available on Aon’s interactive microsite at https://aon.io/2XplYk4. To access current and historical natural catastrophe data, as well as event analysis, please visit catastropheinsight.aon.com.

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