Value chains have grown in length and complexity as companies expand globally for margin improvements. Since 2000, the value of intermediate goods traded has tripled to over $10 trillion annually. Companies that successfully implemented a lean global model of manufacturing achieved improvements in indicators such as inventory levels, on-time-in-full deliveries, and shorter lead times. However, these operating model choices sometimes led to unintended consequences if not calibrated to risk exposure. Intricate production networks were designed for efficiency, cost, and proximity to markets but not necessarily for transparency or resilience.
Shocks affecting global production are growing more frequent and severe, with companies facing various hazards such as natural disasters, geopolitical uncertainties, and cyberattacks on their digital systems. Global flows and networks offer more “surface area” for shocks to penetrate and damage to spread. Disruptions lasting a month or longer occur every 3.7 years on average, and the financial toll associated with the most extreme events has been climbing.
Value chains are exposed to different types of shocks based on their geographic footprint, factors of production, and other variables. Labor-intensive value chains, such as apparel, are highly exposed to pandemics, heat stress, and flood risk. Food and beverage and fabricated metals have lower average exposure to shocks because they are among the least traded and most regionally oriented value chains.
Companies can 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. This report explores the rebalancing act facing many companies in goods-producing value chains as they seek to get a handle on risk. The risk facing any particular industry value chain reflects its level of exposure to different types of shocks, plus the underlying vulnerabilities of a particular company or in the value chain as a whole. Adjusted for the probability and frequency of disruptions, companies can expect to lose more than 40% of a year’s profits every decade.
Operational choices can heighten or lessen vulnerability to shocks, with practices such as just-in-time production, sourcing from a single supplier, and relying on customized inputs amplifying the disruption of external shocks and lengthening companies’ recovery times. Geographic concentration in supply networks can also be a vulnerability.
Value chain disruptions cause substantial financial losses, with companies expected to lose more than 40% of a year’s profits every decade on average. Building supply chain resilience can take many forms beyond relocation production, including strengthening risk management capabilities, improving transparency, building redundancy in supplier and transportation networks, holding more inventory, reducing product complexity, creating the capacity to flex production across sites, and improving the financial and operational capacity to respond to and recover quickly from shocks.
Source: McKinsey Global Institute, 2020. “Risk, resilience, and rebalancing in global value chains”, available at: https://www.mckinsey.com/capabilities/operations/our-insights/risk-resilience-and-rebalancing-in-global-value-chains
