A supply chain disruption is any major break in the global chain of manufacturers, suppliers, shippers, wholesalers, and retailers that stops goods and materials from moving as they normally would. When disruptions occur, manufacturers face shipping delays, delivery slowdowns, shortages or excess stock, higher costs, and ultimately higher prices for customers.

Some disruptions are predictable, such as the surge in holiday demand that empties shelves of popular items. Others, like a global pandemic, sudden labour strike, or major weather event, appear with little warning. Tariffs and trade restrictions are also a growing cause, since new or increased tariffs can suddenly raise import costs, squeeze margins, and disrupt established supplier relationships.

Efficiency vs Risk Reduction

Supply chains need to balance two competing goals: efficiency and risk reduction.

• Efficiency means running operations at the lowest possible cost, holding minimal inventory, and reducing duplication of routes, facilities, or safety stock.
• Risk reduction means identifying vulnerabilities, lowering exposure, and planning responses when disruptions occur.

The challenge for businesses is to strike the right balance. Lean, low-cost supply chains are efficient, but they are more fragile. Adding buffers and backups increases resilience, but often at a higher cost.

Internal vs External Risks

Disruptions generally stem from two main sources:

• Internal risks: These come from within a company, such as inefficient supply chain management (SCM), outdated systems, or human error like incorrect purchase orders. Improving SCM processes, particularly with automation, can reduce these risks by making demand planning more accurate and reducing waste.
• External risks: These are largely beyond a company’s control, including natural disasters, strikes, geopolitical conflict, tariffs, and trade embargoes. For example, a new tariff could suddenly raise the cost of key raw materials, forcing companies to either absorb the cost or pass it on to customers. One common response is diversifying suppliers, such as combining overseas and domestic sources, to spread risk. This can stabilise supply but often increases costs.

Real-World Examples

Recent years have shown how fragile global supply chains can be. When COVID-19 struck, driver shortages created massive backlogs at ports. Goods piled up, shelves emptied, and prices skyrocketed. Even today, trucking companies are still struggling to hire enough drivers, offering bonuses and lowering age requirements to attract recruits.

Other examples show how quickly disruptions spread. A drought in California can reduce avocado harvests, prompting US retailers to import from overseas. The added shipping costs, and sometimes tariffs, are passed on to consumers. Similarly, geopolitical tensions can lead to tariffs or embargoes that ripple through industries worldwide, from electronics to agriculture.

Using Technology to Manage Disruptions

While not all disruptions can be prevented, intelligent supply chain management tools can help companies prepare and respond. These include scenario modelling, predictive analytics, and AI-powered planning tools that can forecast risks, test different strategies, and recommend actions.

Key Takeaways

• Major disruptions are expected to continue in the coming years.
• Risks come from both inside companies, such as inefficient processes, and outside factors, such as weather, tariffs, strikes, or global conflict.
• Balancing efficiency and resilience is critical. Overly lean supply chains may save money short term, but they are less prepared for shocks.
• Technology and diversification strategies can help reduce risks, though they often increase costs.

General Advice Warning

This communication including any weblinks or attachments is for information purposes only. It is not a recommendation or opinion, your personal or individual objectives, financial situation or needs have not been taken into account. This communication is not intended to be a constitute personal advice. We strongly recommend that you consider the suitability of this information, in respect of your own personal objectives, financial situation and needs before acting on it. This document is also not a Product Disclosure Statement (PDS) or a policy wording, nor is it a summary of a particular product’s features or terms of any insurance product. If you are interested in discussing this information or acquiring an insurance product, you should contact your insurance adviser to obtain and carefully consider any relevant PDS or policy wording before deciding whether to purchase any insurance product.