Understanding Supply Chain Evolution

At the turn of the century, many businesses were still operating with linear supply chains. Fast-forward two decades, and over one in five (22%) manufacturers say they have between 51 and 100 suppliers in their supply chain, while a further 15% have between 101 and 200, and 14% cite over 200 suppliers, according to a 2022 survey from Make UK.¹

These findings not only underline the dramatic shift in supply chains but also present a promising outlook. The evolution of supply chains – from linear to complex ecosystems – has opened up a world of opportunities for businesses, enabling them to tap into a diverse network of suppliers and customers.

What is driving the current evolution of supply chains? The answer is twofold: global interconnectivity and sustainability, which are both dependent on technological advancement. Digitalisation has opened up numerous opportunities for supply chain optimisation, but it also brings new risks.

The term environmental, social, and governance (ESG) was first introduced by the United Nations in 2004.² Over the past two decades, its considerations have gradually become an essential component of business strategy. This year, new regulatory reporting requirements related to ESG have been introduced, adding further complexity and risk for businesses.

Investing in a digital world

Emerging technology developments are enabling a new standard in supply chain management. This paradigm shift allows organisations to respond more quickly to day-to-day requests, proactively solve problems, and reduce errors and inefficiencies. It also provides greater visibility, transparency, and traceability. Most importantly, this new approach will make organisations more resilient to future supply chain shocks.

The COVID-19 pandemic placed supply chain resilience under the spotlight in a way few had experienced within their lifetime. Research published by McKinsey Global Institute in September 2020 found that 54% did not have clear visibility of their supply chains beyond tier one.³ It rapidly became clear that this was largely due to inferior technology.

Businesses have come to realise, if they hadn't already, that supply chain visibility is crucial to preventing and responding to disruptions. Modern digital technologies play a critical role in enabling this line of sight, including advanced software for effective communication with suppliers, cloud computing for efficient data storage, AI-powered tools to make informed decisions, and robotics for automating processes.

Digitalisation has undoubtedly improved supply chain management, but it has also presented new challenges. For instance, it has made it harder to perform due diligence on a third party as their digital presence may be vastly different to their physical one. The rise of internet e-sales has also changed the supply chain profile, with direct imports from outside the EU/UK to businesses or consumers in the UK. These complexities highlight the need for technology investment to navigate the evolving supply chains.

According to a recent study by Catena Solutions, organisations almost doubled their average spend on supply chain innovation last year, and over two-thirds (67%) of CEOs intend to increase investment in disruption detection and innovation processes.⁴

Predictive AI

Advances in artificial intelligence are revolutionising the way we live and work, and supply chain management is no exception. AI's pattern recognition on complex data identifies optimal scenarios for routing, sourcing, inventory levels, and delivery frequency.

Supply chains are becoming more predictive as AI analyses live data such as weather, traffic, and customer trends to forecast disruptions and anticipate future demand fluctuations. AI also helps to dynamically manage trade-offs between cost, service levels, and sustainability.

Automation will become the norm

Warehouse automation and robotics are being integrated into supply chain management. As the demand for skilled workers in the supply chain increases and employees expect higher salaries to keep up with the cost of living, warehouse technologies are proving to be a cost-effective solution to address these challenges. In fact, according to Gartner, more than 75% of companies will adopt some form of cyber-physical automation in warehouse operations by 2027.⁵

Increased cyber risk

Cyber is now a universal liability—all businesses have a cyber supply chain they must protect. As supply chains evolve and become more reliant on technology and cloud-based services, the risk of cyber-attacks through third-party technology service providers is on the rise. Analysis of 2023 claims figures showed a significant increase in claims related to third-party/supply chain issues, with breaches from processors or third-party software providers being the most common cause, followed by phishing emails and vulnerability issues.⁶

Supply chain cyber breaches have a long history, from the 2013 Target breach to the 2017 NotPetya attack and, more recently, the Log4J incident in December 2021. Despite these precedents, the cyber insurance market saw a surge in both the frequency and severity of supply chain breaches in 2023, driven by our increasing reliance on technology. An example of this was the cyber incident at Capita in March 2023, which caused widespread disruption and led to an increase in claims across companies serviced by Capita, highlighting how a single breach can impact a wider supply chain.⁷

The most significant breach in 2023 occurred in May when the Clop Ransomware Group exploited multiple ‘zero-day vulnerabilities’ in the MOVEit application, impacting over 2,770 organisations and 95.7 million individuals. The financial repercussions of such breaches are challenging to calculate, with reported claims from individual businesses exceeding £2.5m.⁸

Managing cyber supply chain risk is crucial but complex, as visibility into third-party risk mitigation is often limited. Conducting thorough due diligence on technology supply chain partners, asking relevant questions, and ensuring they prioritise cyber risk protection are essential steps. Additionally, having a backup plan and reviewing contractual liabilities can help mitigate risks. Some insurers now offer cover under a cyber liability policy, making it logical for companies to invest in such protections to safeguard against supply chain cyber threats.

ESG and the energy transition

As ESG considerations continue to reshape the business landscape, companies must adapt their supply chains accordingly. By embracing sustainable practices, leveraging data-driven insights, and prioritising diversity and resilience, organisations can navigate the evolving landscape and contribute to a more sustainable and responsible global supply chain ecosystem.

The circular economy

One notable development is the growing adoption of circular economy principles across various industries. This involves minimising waste and maximising the reuse and recycling of materials. For example, the construction industry is increasingly incorporating the practice of recycling and repurposing used building materials, reducing both waste and carbon emissions. This shift towards a circular economy is not only driven by environmental considerations but also by the desire to create more sustainable and resilient supply chains.

Managing labour risks

In addition to sustainability, labour-related factors are also influencing supply chain evolution. Climate change, demographic shifts, public health concerns, and regulatory requirements are driving companies to assess and manage labour risks within their supply chains. Increasingly, organisations are expected to ensure worker rights are protected throughout their value chains, necessitating robust labour monitoring and management practices.

Well-governed data

Data plays a vital role in supporting ESG reporting and optimising supply chain operations. As businesses embrace technologies like automation and artificial intelligence, the availability of high-quality, well-governed data becomes crucial. This data enables organisations to make informed decisions, improve efficiency, and meet evolving ESG commitments. It also helps them identify areas for improvement and drive innovation within their supply chains.

Diversification

Furthermore, the emphasis on supply chain diversity is gaining momentum. While diversification is important to mitigate risks and enhance resilience, there is a growing recognition of the environmental impact associated with global supply chains. Companies are exploring strategies to balance diversity with sustainability by sourcing from local suppliers, reducing transportation miles, and minimising their carbon footprint. This approach not only aligns with ESG objectives but also contributes to cost-effectiveness, innovation, and better overall supply chain performance.

How Gallagher can help

An experienced broker like Gallagher can play a crucial role in supporting clients as they navigate the risks and opportunities inherent in the evolving supply chain landscape. By partnering with us, businesses can gain valuable insights into potential supply chain vulnerabilities and develop tailored risk management strategies.

Additionally, we can help businesses understand when cyber insurance can step in as a backstop and provide guidance on selecting the right coverage to protect against supply chain cyber breaches.

Businesses can consider undertaking an independent ESG assessment to help avoid the negative risks associated with poor ESG risk management. These assessments provide data-driven insights into a company's perception of material ESG matters and how this may give rise to legal or regulatory exposures affecting the company and its directors and officers.

Through proactive collaboration with an insurance broker, businesses can enhance their resilience and preparedness for supply chain disruptions, ultimately fostering a more secure and sustainable supply chain ecosystem.