My children are eagerly anticipating Christmas and part of what they are looking forward to is discovering what Santa will place in their stockings. But filling those stockings is proving more challenging this year than in the past. Hit toys and electronics are either not available or have long delivery times. This doesn't come as a surprise after the continued supply chain turmoil this year. Of course, I hope the gifts make in time for the big day. 

Changes to supply chains

The global supply chain is expected to remain a challenge through 2022, slowing down economies and fuelling inflation. The mismatches between supply and demand for a broad range of commodities from electronic chips, to furniture, bikes, paper and other goods could further intensify if economies pick up as expected. Shortage of labour could also exacerbate the imbalances. 

Investments in infrastructure expansion will alleviate some bottlenecks, but not nearly enough. Companies are grappling with this dynamic environment as they face extended waits for orders and increasingly impatient customers have no choice. They have to adapt to the changing supply chain reality and the series of new risks this brings.

Already many companies have reached the point where they increase supply chain resilience by relocating their production or adding new suppliers, according to the Swiss Re Institute's sigma report De-risking global supply chains: rebalancing to strengthen resilience. Approximately 20-30% of China’s current manufacturing capacity is expected to gravitate elsewhere over the next five years. Where it will settle is difficult to predict, but it’s likely to involve a mix of locations. Much is likely to move to other emerging Asian or African economies. With some of this capacity also heading closer to the domestic markets of the manufacturing brands in question. 

There are various effects from current supply chain developments that are cause for concern. The deglobalisation trend is likely to be accelerated by shifts to a green economy and preferences to "localisation". This will lead to structurally higher prices and weigh on household consumption in the long term. The move towards less cost-efficient production will cause prices to rise faster than wages. Lingering high energy prices, transition risks from climate change, like economic losses from weather events, may not only support inflation but also persistent stagflationary supply shocks, according to SRI's latest "Economic Insights".

Actions insurers can take

The role for insurers is now in assisting their clients to understand the impact of these changes on their risk profile. Swiss Re Institute estimates that changes to global supply will generate approximately $63 billion in additional insurance premiums over the next five years.

With the changing risk landscape of global supply chains, risk models and coverage must be adapted. Apart from diversifying the geographic locations of suppliers, there is also a big push to increase the transparency of the supply chain so that emerging disruptions can be detected in advance, before a crisis occurs.

When it comes to evaluating systemic supply chain risk, data is crucial. Being able to take single data points and understand their impact on entire networks is one of the foundations of supply chain risk management.

As a global reinsurer, Swiss Re is an aggregator of vast amounts of data regarding the movement of goods around the world. Combining external data sources with sophisticated risk and data modelling techniques gives us a clear understanding of risk throughout the entire supply chains. 

We use this knowledge to make evidence-based decisions, pinpoint vulnerabilities, and address risks with the appropriate insurance products. COVID-19 may have exposed vulnerabilities in some supply chains, but in many cases, what has really occurred is that it has served to accelerate changes already taking place. 

The impacts of climate change on supply chains are bound to last longer than those of the pandemic. This year alone, unusually heavy monsoon rains and flooding have affected vast swathes in Asia, including industry-intensive regions in India, Japan and China, complicating production and logistics for manufacturers worldwide. 

At Swiss Re we leverage opportunities arising from the transition to digitalisation to accumulate more granular data and analyse this information to improve our risk insights. Our proprietary geo risk tool CatNet® allows companies to chart key locations along the supply chain and examine the likely risks such as the impacts from floods and other natural catastrophe events.

In addition, robust global analytic capabilities can facilitate a forward-looking approach to risk management that anticipates emerging threats.

Visibility crucial for supply chain resilience

Risk management of supply chains become more sophisticated, with advancements in technology such as the Internet of Things (IoT) and 'digital twins' allowing more real-time information and transparency in the supply chain. Greater availability of better data improves not only modelling capabilities, but also helps to make the interaction between members of a supply chain ecosystem more efficient.

End-to-end supply chain visibility is the basis to build more resilient supply chains that are agile enough to prevent disruptions. Of course, this is also good news for customer service and sales teams that have to deal with unhappy customers. Today's customers don't hesitate to switch brands and retailers if their customer experience is not pleasant.  

A recent COVID-19 US Consumer Pulse Survey by McKinsey unveiled that rather than wait for a replenishment of an out-of-stock item, 39 percent of customers said they switched brands, while 32 percent went to another retailer.

And I must admit, I am also not very patient concerning my children's Christmas presents. I am scouting for alternative brands and checking out outlets I never used before. Santa has to deliver this Christmas! 

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