Manmade disasters most dangerous to global supply chains; McKinsey

By Rahul Vaimal, Associate Editor
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According to McKinsey & Co says that businesses risk losing more than 40% of annual profit once a decade in a world affected by disasters such as trade wars, cyber attacks, pandemics and climate change.

They also predict that the COVID-19 crisis could top $5 trillion in economic losses worldwide.

In a study evaluating 325 businesses in 13 sectors, the New York-based consultancy quantifies that man-made and natural disasters are becoming more serious, more frequent and more costly, and supply chains around the globe need to change to limit exposure to business survival risks.

The five sectors that are most vulnerable to shocks account for some $4.4 trillion in annual exports, or nearly a quarter of world trade, according to the study. These are communications equipment, apparel, petroleum products, transport equipment and mining industries. Food and beverage, pharmaceuticals, fabricated metal, wood products, and medical devices are the least affected.

At the end of last year, when the US-China trade war seemed like a major blow to global trade, McKinsey initiated its research. The pandemic then delivered “the mother of all supply-chain shocks,” potentially causing losses of $5 trillion

Susan Lund Image
Susan Lund,
Partner, McKinsey Global Institute.

“The average company can expect to have a month to two months’ disruption of production every 3.7 years, which is incredibly frequent. So although you don’t know what the next shock is going to be, the fact is, in most industries these have become quite significant.”

“Companies that didn’t know that they had any link to Wuhan found out that they did,” she said, referring to the central Chinese city where the virus first emerged last year.

Even as companies are looking at geographically dispersed suppliers to improve efficiency, it is estimated that production of just 16% to 26% of world trade, could possibly move across borders over the next three to five years.

There’s a strong case for moving production from China to places like Bangladesh, Vietnam, India or Ethiopia for labour-intensive industries like textiles, apparel and furniture.

Ms Lund is of the opinion that the pandemic would intensify the transition to more regional trade as shifting production closer to home can reduce some risk, but it would do little to reduce geopolitical flare-ups resulting in higher tariffs, other trade barriers such as export controls or even full-blown trade wars.

Moreover, the McKinsey report cites research from the World Bank which states that 80% of trade involves countries with declining political stability.

“In that context, you need to start thinking about some things that five or 10 years ago maybe you weren’t scenario planning for,” said Ed Barriball, a McKinsey partner and co-author of the report.