Negotiating Tip #48:
How Much Attention to Pay to Disruptions?
Between Covid-19 and global political tensions over trade, companies have been facing a lot of disruptions in 2020. McKinsey Global Institute’s August 2020 report (Risk, resilience, and rebalancing in global value chains) shows how many different types of disruptions can affect supply chains, from natural disasters to cyberattacks to political instability. It analyzes the vulnerability of more than 20 industries to dozens of different types of disruptions. The conclusion is, “Averaging across industries, companies can now expect supply chain disruptions lasting a month or longer to occur every 3.7 years, and the most severe events take a major financial toll.”
Sometimes the vulnerabilities are obvious, as when one supplier is the only source for a key part. MGI found 180 products across value chains for which one country accounts for 70 percent or more of exports. However, sometimes the vulnerabilities are buried deep in a complex supply chain. MGI warns, “one form of structural vulnerability is a subtier supplier that accounts for relatively little in spending but is collectively important to all participants.”
MGI estimates that a single 100-day shock to production would wipe out between 30 and 50 percent of one year’s earnings for companies in most industries. That said, the news is not all bad. As the MGI report concludes, “An organization’s supply chain operations can be a source of vulnerability or resilience, depending on its effectiveness in monitoring risk, implementing mitigation strategies, and establishing business continuity plans.”
Our job as negotiators is to explore with our suppliers to understand better how vulnerable is our supply chain to disruptions, no matter what their source. What kinds of plans do our suppliers have to deal with disruptions? How quickly can they relocate production? Who do they rely on for inputs, and how vulnerable are those second-tier suppliers to disruptions? Only when we have good information can we make a judgment about how to make our company more resilient.