Global supply chains are the cornerstone of modern commerce, enabling the movement of goods and services and generating significant benefits such as increased productivity, higher incomes and improved standards of living around the world. However, in recent years, the risks associated with these networks have become more pronounced. A combination of global shocks and the inherent complexity of trade has led to frequent supply chain disruptions that can interrupt operations, impact profitability and damage brand reputation. According to Oliver Wyman’s 2025 Supply Chain SurveyCompanies have major concerns about the resilience of their supply chain going forward.
Understanding what supply chain risk is, why it is important to manage it, and how to mitigate these risks is essential for organizations that want to remain resilient in an uncertain environment.
What is supply chain risk?
Supply chain risk refers to the potential for disruptions or vulnerabilities within the supply chain that negatively affect the delivery of products or services. Modern supply chains rely on a vast ecosystem of suppliers, manufacturers, distributors and logistics providers. Risks can arise from many of these sources, as well as external factors such as the impacts of climate change, political tensions, cyberattacks, changing trade policies and labor shortages.
Why is supply chain risk management important?
Supply chain management is essential to business operations. Given the complexity of supply chains, risks can arise at any time, potentially harming operations, finances and reputation.
Effective supply chain risk management helps organizations:
- Protect yourself against disruption: Identify vulnerabilities and develop strategies to mitigate potential risks.
- Promoting financial stability: Avoid or reduce costly delays, increased expenses and lost revenue that impact the bottom line.
- Reputation management support: Avoid the types of product shortages, delays or quality issues that can damage brand trust.
- Comply with the regulations: Meet growing demands for transparency, sustainability and ethical sourcing.
- Diversify suppliers: Reduce dependence on single suppliers and assess risks between partners and suppliers.
- Create a competitive advantage: Build strategic resilience that differentiates the business.
- Stay ahead of emerging risks: Adapt to changing technologies and global business models with continuous risk assessments.
What risks can affect supply chains?
Supply chain risks encompass a range of internal and external threats, including:
- Global Events: Political and economic disruptions — such as conflicts, trade disputes, strikes and sanctions — can delay transportation, increase costs, change trade routes and cause shortages. For example, a wide range of industries are affected by price changes on steel and aluminumincluding automotive, construction and manufacturing.
- Operational risks: These include transportation and logistics failures, inventory management, human errors, supplier disruptions, production failures and cybersecurity threats. Cyber threat actors are increasingly targeting public services; reported incidents include unauthorized access to a Massachusetts Electric Utility for more than 300 days, as well as violations of other American critical infrastructure, endangering supply chains.
- Natural disaster risks: Extreme weather events such as hurricanes, floods and earthquakes can interrupt production, transportation and distribution. For example, droughts affecting the Mississippi River disrupted maritime trade, increased container costs and impacted the shipping of grains, fertilizers, metals and oil.
- Economic/financial risks: Credit risk, market volatility, labor shortages and financial instability of suppliers can affect supply, demand, pricing and quality. According to Marsh Global Construction Risk Review 2025Inflation and economic volatility are among the top business risks globally, particularly in the US construction sector, where they have been ranked as the top risk. In the construction industry, cash flow problems due to late payments can jeopardize large projects that require upfront investment.
Steps for Effective Supply Chain Risk Management
In the current environment, many companies, especially those in high-risk industries like automotive, manufacturing, energy, utilities, retail and wholesale, should prioritize the resilience of their supply chain and act accordingly.
Here are five steps to get started:
- View your complete supply chain: Although many companies understand their tier-one suppliers and known risks, visibility often diminishes further up the supply chain, creating blind spots and vulnerabilities. For example, Marsh McLennan Sentrisk™ found that 65% of companies have at least one bottleneck in their supply chain that could cause catastrophic disruption if it fails. Mapping the entire supply chain with a supply chain risk assessment is therefore essential to identify these vulnerabilities.
- Identify key suppliers and components in the supply chain: Evaluate whether risks can be spread by using multiple suppliers and logistics options. Mapping reveals critical nodes that, if disrupted, could stop production or damage brand reputation. This includes suppliers with limited alternatives, such as the consumer electronics and grocery sectors that have complex components, niche markets and rely on specific raw materials, or those that rely on critical infrastructure like roads or waterways, which could become choke points.
- Understanding the risks: Identifying potential hot spots early allows companies to focus on creating resilient supply chains through strategic planning. Additionally, understanding the concentration of risk exposure (e.g., most of the semiconductor industry’s commodity risks arise from concentration of supply rather than physical scarcity) can present more informed mitigation options.
- Anticipate risks through mitigation: Preparedness may include real-time monitoring, early warning systems, recovery plans for critical suppliers, and contingency plans for alternative supply lines. Risk quantification helps define risk appetite, set thresholds, and optimize strategies by balancing mitigation costs and risk reduction.
- Transfer risks where possible: Risk transfer complements risk reduction. Some risks cannot be fully mitigated and benefit from insurance solutions. While business interruption insurance coverage protects against financial losses due to physical damage to a company’s premises, coverage against upstream supplier disruptions, particularly beyond Tier 1, is more complex. Identifying exposure levels, understanding hazards at supplier sites, and quantifying risks are essential to developing effective risk transfer programs. More recent and innovative solutions are also emerging. For example, a custom parametric solution could respond based on a specified water level in a river that serves as a key transportation route, thereby guarding against possible disruption.
Staying Ahead of the Changing Nature of Supply Chain Risk
As global economies become more interconnected, supply, demand and connectivity shocks have become more complex. As such, supply chain risk management is no longer an option: it is a strategic imperative. By understanding the various risks that threaten supply chains and implementing comprehensive risk management practices, businesses can take steps to protect their operations, safeguard their financial performance and preserve their reputation. Combining transparency, risk identification, mitigation and transfer with advanced technology and strategic planning enables businesses to create resilient supply chains that can thrive amid uncertainty.