Mitigating risks by building resilient supply chains - Research - JLL
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Research Mitigating risks by building resilient supply chains
Introduction
The current pandemic has elevated the
importance of supply chain risk mitigation,
with a major COVID-19 risks perception survey
for the World Economic Forum highlighting a
protracted disruption to global supply chains
as one of the most likely ‘fallouts’ for the world.1
As a result, building greater supply chain
resilience will become an increasing area of
focus for companies globally. This will likely
result in some reconfiguration of supply chains,
including changes in the location of industrial
and distribution facilities.
This short paper aims to provide some guidance
for companies as to how they can mitigate
supply chain risks. In addition, we hope it is of
interest to investors in industrial and logistics
real estate, who need to be aware of what
resilient supply chain strategies may mean for
market demand and locations.
1
World Economic Forum/Marsh & McLennan and
Zurich Insurance Group, COVID-19 Risks Outlook. A
Preliminary Mapping and its Implications, May 2020.
Global Supply Chain Risk, 2020 | 2
Classification of supply chain risks
Over the past 20 to 30 years, the development of global supply chains has delivered many supply chain
benefits – in terms of greater efficiency and lower costs – but also heightened exposure to risks. This is
because global supply chains are typically more complex than national or regional ones, by being longer
and broader networks involving more parties and more nodes, including manufacturing and distribution
facilities. Moreover, the concentration of freight flows through a relatively small number of critical transport
corridors and hubs has exacerbated the vulnerability of global supply chains, as has the widespread practice
of ‘just in time’ logistics management.
Supply chain risks can be classified in different ways, but it is usual to distinguish between external, macro-
level or systemic risks on the one hand, and risks that originate from within a particular supply chain (for
example, from an upstream supplier or a downstream distributor) on the other.2 In addition, in some cases
the risks may stem from within the company reviewing its supply chain.
Types of supply chain risks
External, systemic risks Supply chain risks Company-specific risks
generated by economic, generated from anywhere generated from within
environmental, geopolitical, within the supply chain the company reviewing
societal and technological from upstream suppliers its supply chain
developments to downstream
consumers
Over recent years, the major examples of supply chain risks have been those arising from external, systemic
risks. COVID-19 is clearly not the first major disruptor of this type to global supply chains and it won’t be
the last. For example, the devastating tsunami in Japan in 2011 kept the auto industry reeling for months,
while flooding in Thailand in the same year affected the supply chains of many computer manufacturers
dependent on hard disks.
Today, COVID-19 is putting the spotlight on global supply chains and we can expect boards of directors
to ask probing questions of their CEOs as to how they are prepared to deal with the next big supply chain
disruption.
2
Macro-level risks can be broken down into a range of different
types such as economic, environmental, geopolitical, societal and
technological. See World Economic Forum/Marsh & McLennan
and Zurich Insurance Group, The Global Risks Report 2020.
Global Supply Chain Risk, 2020 | 3Risk mitigation approaches to consider
At present, many companies are having to find immediate solutions, or workarounds, to current COVID-19
related supply chain disruptions. But in the medium and longer term they will need to update, or undertake,
a more systematic evaluation of risks and take actions to build more resilient supply chains.
Key to this will be gaining complete end-to-end supply chain visibility, by digitally mapping company supply
networks and developing and implementing appropriate continuity strategies. Such an approach is likely
to involve organizing a risk report around each node and link in the supply chain map using a combination
of a risk monitoring service (such as Resilience 360) and a credit risk analysis of suppliers of inputs as well as
services, including transportation services. A significant bankruptcy, like that of the container carrier Hanjin,
can have long-lasting impacts. It is also worth companies monitoring their suppliers’ IT security, considering
how disruptive the ocean carrier Maersk’s computer virus attack was in 2017.
While the specific measures required to mitigate supply chain risks will clearly vary between companies and
their supply chains, the following provide some high-level approaches for enhancing supply chain resilience.
Global Supply Chain Risk, 2020 | 41. Supplier diversification and regionalization
The most basic rule is to avoid manufacturing or sourcing everything from one location
or from one company. This is not simply about reducing reliance on China or any
other single country, but also evaluating the upstream sources to lessen the risk of
disruption. A shift from China to Southeast Asia, India or Mexico for example - often
referred to ‘China + 1’ or ‘China + 2’ - will require companies to re-evaluate their domestic
distribution networks to ensure they are aligned. In some cases, taking a regional
approach may be appropriate, with goods sourced regionally to supply demand in
the same region. However, this may be difficult to achieve where the concentration of
production is particularly high in certain global regions, as is the case, for example, with
electronic components in Asia Pacific.
2. A ‘port diversification’ strategy
Although it might be more efficient and effective to import through one specific port, any
type of disruption at this node could effectively shut down a business, hence companies
should consider avoiding reliance on a single port in any one global region.
3. Less ‘just in time’ and more ‘just in case’ inventory management
Companies should maintain additional inventories of critical items, such as parts or raw
materials that are single or sole-sourced and/or for which the supply lead times are long
and highly variable. In a world of low interest rates the capital cost element of inventory
holding costs is also low, and creating regionalized buffer stocks of essential parts, raw
materials and/or finished goods in alternative distribution locations makes sense to
allow continuity of supply to customers in the event of an emergency.
4. Multimodal transportation options
Companies should consider investing in distribution solutions that are close to parcel
hubs, intermodal rail terminals or multimodal hubs (e.g. road, rail and inland waterway)
to mitigate the risk of tightened trucking capacity or skyrocketing freight costs.
5. Invest in automation
Retaining skilled labor has been a big challenge for companies globally given the high
demand for people, driven in large part by e-commerce. Rising unemployment resulting
from the pandemic may lessen labor pressures in the short term; however, as the cost
of investing in automation comes down, companies should explore opportunities to
reduce their reliance on people.
6. Network evaluation
Building supply chain resilience involves a range of different trade-offs as measures to
reduce risks impact on costs, efficiency and customer service. Therefore, companies
should periodically evaluate their supply chain networks to ensure they have the most
service-effective and cost-efficient solutions in place that provide overlaps in the event
of a shutdown in one of their locations.
Global Supply Chain Risk, 2020 | 5Conclusions
Supply chains are clearly critical to the global economy and corporate performance, but they are only as
strong as their weakest link. With the COVID-19 pandemic causing massive disruptions to global economic
activity and trade, now is the time for companies to put the spotlight on risk management and implement
strategies to forge greater supply chain resilience. This issue will not go away, because once COVID-19 has
been overcome, attention will fall back again on the elevated supply chain risks associated with the global
climate emergency.
If companies do invest in building supply chains that are more resilient, this will lead to some
reconfiguration of existing supply chain networks over the medium and longer term. As a result, we think
this will generate some significant changes in the demand for and location of industrial and distribution
facilities globally - with more sourcing closer to markets of consumption, higher levels of inventory
across supply chains (and potentially changes in the type and positioning of inventory due to changes
in consumption), more demand for facilities at intermodal or multimodal hubs, and higher levels of
automation in both manufacturing and warehouse operations. In addition, the shift to online (B2C and
B2B), which long predates COVID-19, will continue and potentially accelerate. Overall, therefore, the
redesign of supply chain networks will drive change in existing real estate market dynamics and cause some
shifts in the location, and to a lesser extent in the specification, of industrial and logistics facilities.
In our opinion:
• Companies that can build resilient supply chains should reap the benefits in terms of
improving supply chain agility and responsiveness to their customers, even if the costs
associated with some parts of their supply chain (e.g. inventory holding costs) may rise.
• Investors that can own the core assets within these resilient supply chains should secure real
estate outperformance.
The core assets that are likely to be required by companies will be in strategic locations to perform critical
functions in their supply chains and, reflecting this, we think in many cases they will be purpose-built (built
to suit) facilities let on relatively long leases, or owned. These buildings will also be ‘smart’ facilities that
incorporate substantial investment in technology to ensure that they optimize whatever function they
perform (e.g. the production, storage and movement of goods) and also the flow of information across the
supply chain network that is essential for end-to-end supply chain transparency.
Talk to us
If you are a company or an investor wanting advice about
what supply chain mitigation could mean for you, please
contact us or visit one of our websites for further information.
Americas Europe Asia Pacific
Global Supply Chain Risk, 2020 | 6Contacts Craig Meyer Guy Gueirard President, Americas Industrial Brokerage Director of EMEA Industrial & Logistics craig.meyer@am.jll.com guy.gueirard@eu.jll.com Kris Bjorson Jon Sleeman International Director, Industrial Brokerage, Americas Director, Industrial & Logistics Research, EMEA kris.bjorson@am.jll.com jon.sleeman@eu.jll.com Rich Thompson Patrick Remords International Director, Supply Chain & Logistics Solutions, Americas Director, Supply Chain Consulting, EMEA rich.thompson@am.jll.com patrick.remords@eu.jll.com Walter Kemmsies Stuart Ross Global Strategist Trade & Logistics, Americas Head of Industrial & Logistics, South East Asia walter.kemmsies@am.jll.com stuart.ross@ap.jll.com Mehtab Randhawa Michael Ignatiadis Director, Industrial Research, Americas Head of Supply Chain Consultancy, Asia Pacific mehtab.randhawa@am.jll.com michael.Ignatiadis@ap.jll.com Philip Marsden Peter Guevarra Lead Director UK & EMEA Capital Markets Director, Regional Research, Asia Pacific philip.marsden@eu.jll.com peter.guevarra@ap.jll.com jll.com This report has been prepared solely for information purposes and does not necessarily purport to be a complete analysis of the topics discussed, which are inherently unpredictable. It has been based on sources we believe to be reliable, but we have not independently verified those sources and we do not guarantee that the information in the report is accurate or complete. Any views expressed in the report reflect our judgment at this date and are subject to change without notice. Statements that are forward-looking involve known and unknown risks and uncertainties that may cause future realities to be materially different from those implied by such forward-looking statements. Advice we give to clients in particular situations may differ from the views expressed in this report. No investment or other business decisions should be made based solely on the views expressed in this report COPYRIGHT © JONES LANG LASALLE IP, INC. 2020. All Rights Reserve
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