China’s Energy Crisis Sheds Light on 2022 Risk Priorities

Expect to see repercussions of recent disruptions like China’s energy crisis, the chip shortage, labor shortages and more to unfold and run their course throughout 2022.

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China's energy crisis is another example of this past year’s supply chain chaos. With several regions of the country in the dark, the world’s manufacturing capital struggled to maintain production while balancing energy use with increasing coal prices.

Unfortunately, although the crisis may be easing, the challenges continue and are now cascading throughout the global supply chain. Could a crisis of this magnitude be foreseen, and can a business thousands of miles away be prepared?

Absolutely, but the necessary foresight requires rethinking legacy supply chain risk management practices.

China left in the dark

In September, power cuts and blackouts throughout China forced factories to slow or close production, specifically in eastern China where the overwhelming majority of the population works and lives.

Tighter restrictions on coal mining caused limited supply, and coal prices skyrocketed as a result. Also, the surge in petrol and diesel usage forced refineries and filling stations to ration fuel. China’s extreme weather this year made it even worse, disrupting supplies of renewable energy sources such as hydropower and wind, leaving those more climate-friendly alternatives off the table.

It's not hard to see why Chinese manufacturers struggled to keep operations up and running. With China making up 28.7% of global manufacturing output, the impact of this crisis has been felt globally. Shortages, delays, increased costs for downstream industries and prices for end-users and more are still ongoing amid the holiday season.

Today, many are questioning China’s status as the world’s capital for reliable manufacturing. But, even if it is feasible to do so, shifting manufacturing from China to another location isn’t the solution to supply chain disruptions. Disruptions can happen anywhere for a myriad of reasons.

The problem isn’t the darkness in China; it’s the darkness in supply chain visibility.  

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Operating in the dark

In this COVID-19 era, we’ve almost become accustomed to risk events resulting in disruptions. But, instead of accepting this new reality, improving supply chain resiliency dictates examining the shortcomings of legacy practices to rethink approaches. During today’s current dynamic risk environment, legacy practices have failed to support resiliency for the following key reasons.

Legacy risk practices are largely periodic in nature and too reliant on point-in-time assessments. What happens when the risk landscape changes between assessments? Data collected during a point-in-time assessment is quickly stale and counterproductive in today’s rapidly changing risk environment. By the time a company finds out about an event, the only option is to react. When teams only “check in” once a year or rely on their suppliers to keep them informed, risk factors can go unnoticed until it’s too late to take effective action.

Another shortcoming of legacy practices is the monitoring of a limited scope of risk, most typically financial and cyber. There’s no denying that financial and cyber metrics are critical to monitor, but they are often not leading indicators of trouble.

For example, China’s energy crisis started as a location risk impacting Chinese operations before it cascaded into a crisis that impacted global supply chains. Companies that were monitoring their supply chains for only cyber and financial risks were blindsided and ill prepared to make proactive adjustments. Failing to keep a 24/7 pulse on location-based factors for suppliers will leave you exposed. It may be business as usual in Los Angeles, but what if there is a crisis brewing for a key supplier in Singapore or Vietnam or Romania?

Location risks aren’t the only risks being inadequately monitored. Another example is environmental, social and governance (ESG) risks. Too often, companies aren’t aware of the ESG practices of their third, fourth and Nth-tier parties. Take the recent news around forced labor in Xinjiang. Companies partnered with a supplier with operations in that region suffered irreparable reputation and brand damage, unless they were able to see the problem and pivot before it made the headlines.

Shining the light on supply chains in 2022

Darkness doesn’t have to exist in the view of supply chains. There’s a way to shine a bright light. Continuously monitoring the supply chain across a broad spectrum of risk is the best way to improve visibility deep into supply chains.  

The past two years have proven that some of the largest financial and cyber catastrophes started as events in other risk domains, such as location, ESG, operations or compliance risks, making it critical to be informed of early risk exposure indicators. Disruptions that occur at one location or supplier can have a cascading nature, creating threats for the entire supply chain. Establishing constant visibility on a wide set of supply chain risk domains enables organizations to foresee early signs of risk while they can still proactively adjust.

In the New Year, companies should prioritize accelerating their transition to 24/7 risk management. Continuously monitoring risks puts crucial real-time intelligence at your fingertips. This always-on approach enables the proactive risk mitigation responses that enable companies to prevent disruptions and secure supply chains. And, the best part is, advancements in automation, artificial intelligence (AI), machine learning and data science can make this a reality even when human teams are away from their desks. Companies can build a risk action playbook that aligns risk event notifications with risk mitigation. By leveraging technology to automate a significant portion of these actions, human teams can be freed up to focus on the most urgent and important tasks.

Expect to see repercussions of recent disruptions like China’s energy crisis, the chip shortage, labor shortages and more to unfold and run their course throughout 2022. With that in mind, resolve to elevate risk management beyond legacy practices and equip teams with the real-time and continuous risk intelligence they need for clear supply chain visibility. Such visibility will enable teams to be well-informed for thorough, vigilant and quick responses to impending disruptions for more resilient supply chains.