According to a new report from Wood Mackenzie, global economic volatility highlights the importance of managing supply chain risk.

“If the last three years have demonstrated anything, it’s that supply chains matter,” said the report. The Covid-19 pandemic, oil price volatility, Russia’s invasion of Ukraine. and extreme weather are just some examples of major global events that have had the potential to wreak havoc on the economy and on supply chains.

Supply chain disruption can have a far-reaching impact. For the energy sector in particular, the war in Ukraine shows how rapidly unprecedented events can send markets spiraling, with the availability of energy fuels plummeting in Europe and natural gas prices soaring by more than 100% as a consequence of Russia’s invasion.

According to the report, investing in supply chain risk management programs no longer provides companies with a competitive advantage. Such programs have now become a necessity.

In an ever-changing business operating environment, what are the key ingredients of effective supply chain management? Wood Mackenzie identifies three important steps.

1 – Identify and Quantify. “Managing supply chain risk effectively is complex,” said the report. This is particularly true in the energy sector, where companies are served by a diverse range of vendors, and where there are a multitude of ways that a single event can affect various aspects of a business. “Every vendor has unique relationships with subcontractors and original equipment manufacturers, which only adds to the challenge,” said the report.

As a first step, it is critical for supply chains to take stock and identify potential problem areas, such as cybersecurity, geopolitical exposure, product shortages, etc. “Sourcing high-quality data from a variety of stakeholders – both internal and external, including suppliers – is important here,” said the report.

Once that assessment is complete, businesses should focus on quantifying each of the risks, so that they can clearly understand the vulnerabilities to which they are exposed.

2 – Monitor and Prioritize. Effectively quantifying risk involves gathering and monitoring data for dozens of risk categories across multiple vendors. “Supply chain teams must stay on top of what’s changing in the global and regional economy to monitor emerging and existing risks,” said the report. “In the past few years, that has not been an easy feat, with material shortages, inflationary costs and high interest rates that have reduced investment appetite.”

While supply chain teams don’t have a crystal ball, they can pragmatically make assumptions about what might happen in the future by tracking current events and using data wisely,

according to the report. To make sense of the vast quantity of data, it’s vital that teams prioritize, so that they can stay abreast of the most pressing issues.

3 – Streamline Processes. “Businesses should encourage supply chain teams to maintain and grow risk management practices,” said the report. An ongoing process of data collection, monitoring, and prioritizing risk should become embedded, which will reinforce the importance of tracking and managing risk.

The report added that effective use of data will play a central role. “Over time, there will be an increasing number of data sources that can facilitate how risk exposure is measured,” said the report. Supply chain risk programs must have mature reporting and processes in place if they are to leverage the full benefits from all available data