However, these operating model choices sometimes led to unintended consequences if they were not calibrated to risk exposure. Intricate production networks were designed for efficiency, cost, and proximity to markets but not necessarily for transparency or resilience. Now they are operating in a world where disruptions are regular occurrences. Averaging across industries, companies can now expect supply chain disruptions lasting a month or longer to occur every 3.7 years, and the most severe events take a major financial toll.
This report explores the rebalancing act facing many companies in goods-producing value chains as they seek to get a handle on risk. Our focus is not on ongoing business challenges such as shifting customer demand and suppliers failing to deliver, nor on ongoing trends such as digitization and automation. Instead, we consider risks that manifest from exposure to the most profound shocks, such as financial crises, terrorism, extreme weather, and, yes, pandemics.
The risk facing any particular industry value chain reflects its level of exposure to different types of shocks, plus the underlying vulnerabilities of a particular company or in the value chain as a whole. We therefore examine the growing frequency and severity of a range of shocks, assess how different value chains are exposed, and examine the factors in operations and supply chains that can magnify disruption and losses. Adjusted for the probability and frequency of disruptions, companies can expect to lose more than 40 percent of a year’s profits every decade, based on a model informed by the financials of 325 companies across 13 industries. However, a single severe shock causing a 100-day disruption could wipe out an entire year’s earnings or more in some industries—and events of this magnitude can and do occur.