How reshoring can help risk managers better build supply chain resilience

How reshoring can help risk managers better build supply chain resilience | Insurance Business America

Risk Management News

How reshoring can help risk managers better build supply chain resilience

“Mounting pressure” will necessitate some creative solutions

Risk Management News

By
Kenneth Araullo

Geopolitical tensions and market disruptions are driving a shift in global supply chain management. Reshoring, where companies relocate production and supply chain operations closer to home, is gaining traction as organizations seek to mitigate risks and capitalize on emerging opportunities.

Chris Bhatt (pictured above), chief commercial officer, global marine at Aon, highlighted the increasing trend of production relocation from China to markets like Mexico and Canada.

Automotive manufacturers, particularly in sectors such as electric vehicles and battery technology, are leading this shift. In 2022, 364,000 jobs were reshored to the US, a 53% increase from 2021.

“With rising geopolitical and market risks, I’m seeing more firms realign their resourcing and production,” Bhatt said. “It’s all about enhancing supply chain resilience.”

Scheduled elections in nearly half the world in 2024 and a trend towards protectionism are adding pressure on existing supply chains. Conflicts in the Red Sea and the Middle East add further unpredictability.

While manufacturing in China has traditionally had economic advantages, increasing production costs and geopolitical risks are prompting companies to reassess their options. Asia’s susceptibility to weather and climate risks adds another layer of complexity to supply chain decision-making.

Supplier insolvencies, particularly among smaller suppliers, and less robust legal frameworks in certain regions may expose companies to risks such as intellectual property infringement. Additionally, companies are under increasing scrutiny to demonstrate their environmental, social, and governance (ESG) commitments, leading to green supply chain initiatives.

Bhatt noted that as countries become more protectionist, risk managers need to strategize for their businesses.

“There is mounting pressure on existing supply chains, highlighting the necessity for fortified and strategic approaches,” he said.

Managing risks, building resilience in supply chains

The focus on reliability and quality over cost is making reshoring more attractive. Reshoring brings greater resilience and certainty to supply chains, ensuring the quality, reliability, and cost-effectiveness of products. It also reduces transit times and fosters better collaboration among stakeholders.

Tom O’Donnell, Aon’s practice leader for global logistics, also emphasized that reshoring does not guarantee a risk-free environment.

“These changes require careful planning and implementation over time,” he said.

Building in-house production facilities poses significant risks, including project delays, system malfunctions, compliance and integrity risks, startup delays, change management challenges, local planning issues, and construction-related risks.

“Supply chain risk management should be truly enterprise-wide, connecting risk and insurance professionals with senior directors in supply chain, procurement, treasury, strategy, and operations around a common set of data and decision-making,” O’Donnell said.

Challenges of reshoring

When relocating facilities from Asia to the US, further concerns emerge, including technology, talent and skills availability, and labour costs.

“Access to required skills and technology is particularly relevant as it is not always easy to simply hire experienced talent in the location that you want to build,” Bhatt said. “Therefore, having a talent assessment strategy becomes more important.”

Despite proactive measures, supply chain or distribution failures continue to impact businesses. According to Aon’s Global Risk Management Survey, 43% of respondents experienced losses due to such failures, despite 63% having response plans in place. This underscores the importance of ongoing preparedness and vigilance in mitigating risks associated with reshoring initiatives.

The transportation and logistics industry must adopt a proactive and dynamic risk management approach.

“Risk managers must identify, quantify and manage their exposure across their global supply chain,” Bhatt said. “Using data analytics and investing in new technologies and ways of working will help companies manage volatility and build resilient operations and workforces.”

Data-driven insights build visibility into the supply chain, helping to mitigate risk. Supply chain should be treated as an enterprise risk, considering sources beyond physical damage to include ESG events, cyber threats, and supplier insolvency.

Forecasting the future landscape of supply chains is crucial. Assessing supplier risks helps understand how changes in key suppliers can impact the overall risk landscape.

Conducting a risk tolerance assessment establishes the parameters in which the organization is comfortable taking supply chain risks. This includes mapping and quantifying risks associated with new supply chain configurations and understanding potential financial impacts such as loss of revenue, loss of attraction, and increased operational costs.

Optimizing inventory levels can mitigate supply chain risks. Seeking guidance on investment decisions to manage supply chain risks, including purchasing insurance, can effectively mitigate identified risks.

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