Economists debate whether stubbornly high inflation, combined with interest rate hikes by central banks, have actually created a recession.
But what’s not up for debate are the ways in which the current economic downtown complicates supply chain management. From less consistency within the supply chain, to fewer available resources for manually tracking supply chain compliance issues, the economic environment is imposing significant challenges on businesses.
The Economy’s Impact on Compliance and Security
Economic uncertainty affects supply chain compliance initiatives in many ways – some obvious, and some less so.
1. The Bullwhip Effect and Lower Profitability
One of the most significant impacts results from what economists call the bullwhip effect. The term refers to the way in which mistaken assumptions about consumer demand tend to reverberate across the supply chain. For instance, if suppliers interpret a temporary uptick in demand for a product as a permanent trend, they may overinvest in production of the product. In turn, suppliers will then experience lower profit margins because they end up having to sell the product for less, due to lower-than-anticipated demand. Many economists blame the bullwhip effect as one reason why inflation has surged and corporate profits have dropped.
From the perspective of supply chain compliance, the bullwhip effect means that organizations across the supply chain face especially high pressure to squeeze profits out of their products in any way they can – including cutting corners, in some cases. For example, software companies may skimp on security monitoring or trade compliance for their products, placing organizations within their supply chain at risk. This makes the ability to detect supply chain compliance issues more important than ever in the present economic climate.
2. Labor and Fuel Cost Increases Across the Supply Chain
Factors like higher labor costs in regions where suppliers could historically find cheap workers and the increased cost of fuel only exacerbate the challenges faced by organizations.
It’s not only product manufacturers who are impacted by higher costs for labor and fuel. These costs flow down the supply chain to affect organizations of all types. A company that develops software is likely paying more for the hardware its developers use, due to the increased labor and shipping costs associated with producing that hardware. So the software company, too, is squeezed by economic challenges that don’t relate directly to software production.
3. Skimping on Cyber Insurance
The third trend that impacts supply chain compliance – and one that is easy to overlook – are the lower rates of cyber insurance uptake.
In good economic times, organizations would buy cyber insurance in a bid to protect themselves against cyberattacks. Such insurance doesn’t always guarantee solvency following an attack, but it may help in certain situations.
“Insurers have also been hit by the downturn, says Peter Mansfield, a partner at Reynolds Porter Chamberlain in London. “Policyholders will look to make savings, which may include buying less insurance or better insurance.”
With less money to spend, organizations choose to forgo cyber insurance or purchase less comprehensive coverage. In doing so, they place not only themselves, but also companies within their supply chain, at risk. A software company that suffers a cyberattack and doesn’t have sufficient insurance to recover will go out of business, leaving its products unsupported and insecure – a major risk for customers of those products.
Supply Chain Compliance Opportunities
The good news is that it’s possible to get ahead of supply chain compliance issues by taking advantage of tools that can manage supply chain risk efficiently, regardless of the economic environment.
A healthy supply chain compliance strategy for the economic downturn hinges on visibility. Visibility into how your supply chain works and how it impacts your organization is critical for making informed decisions about supply chain compliance issues. It can also help companies manage costs. As Ed Winterschladen, executive vice president Europe at Proxima, puts it, “In a volatile supply market, running towards cheaper options won’t necessarily deliver value – identifying waste and spending better will prove more effective than reducing costs in areas of essential spend.”
Smart organizations will achieve the visibility they need using AI tools. With the help of AI tools, companies can “make supply chain planning and sourcing more cost efficient through real-time analytics and insights to help drive efficiency and productivity through its supply chain,” according to GEP. GEP also reports that two-thirds of executives identify enhanced supply chain visibility as a top priority for mitigating disruptions in 2022.
The value of improved supply chain visibility extends beyond controlling costs and supply chain compliance issues. It’s also a way of demonstrating to partners, investors and customers that your organization can thrive through times of challenge. As Accenture notes, “Consumers, investors, governments and communities may ultimately judge companies on how they respond to this period of disruption.“
Harden your supply chain against uncertainty
In short, now is the time for organization’s to invest in efficient, comprehensive supply chain visibility and risk management. The threat of non-compliance within supply chains increases during times of economic uncertainty. AI-assisted supply chain visibility solutions make this challenge easy to meet without breaking the bank or burdening risk management teams with manual effort.