In recent years, especially since the onset of COVID-19 and amid a changing climate, food security has become a growing concern, heavily influenced by supply chain disruptions. Consumers worry about food availability, while industry and society discuss the need for more resilient food supply chains. This heightened awareness underscores the critical importance of strengthening food supply chain resilience to withstand climate-related and human-induced disruptions.
Key to increasing food supply chain resilience is balancing it with efficiency. Efficient mitigation strategies are essential to ensure that only the minimum resources necessary are utilized in building a resilient supply chain. This will help minimize the impact that upfront costs can have on a supplier’s short-term competitiveness compared with industry peers that invest less in resilience. Executives and decision makers must navigate the complexities of interconnected and international supply chain designs to mitigate disruptions. Despite these challenges, securing supply chain resilience is fundamental to ensuring food security and long-term stability.
In a simplified form, the food and drink supply chain encompasses several key stages, each critical to ensuring the efficient movement of food from producers to consumers. Initially, raw materials and ingredients are cultivated by farmers. These materials are then sourced and transported to processing facilities, where they are made into more valuable products (e.g., turning grain into flour or combining water and sugar to create soda). Following processing, the products are stored and prepared for distribution. Subsequently, they are transported to and stored at retail locations. Finally, consumers purchase and consume these products.
A newly completed WTW supply chain survey highlights several key risks in the food and beverage sector. Cyber risks, environmental risks, geopolitical instability, natural disasters and reputation risks all pose significant threats to food security. While cyber risks affect data integrity and food traceability, environmental and geopolitical risks directly threaten food production, transportation and distribution. Given the interdependence of food supply chains, risk management strategies must account for vulnerabilities at each stage.
Industry reports indicate that 40% to 60% of losses due to supply chain disruptions originate from Tier 1 suppliers, followed by 19% to 30% from Tier 2 suppliers, and 10% to 13% from Tier 3 suppliers and above. Although specific figures may vary, the consistent finding is that each tier in a supply chain plays a crucial role in mitigating disruption risks, and disruptions in any tier can severely affect food availability, leading to shortages and price volatility. As the number of tiers increases, so does risk; however, when each tier implements effective mitigation strategies, the overall risk can be mitigated. At all tiers, a robust and resilient supply chain remains essential.
40% to 60% from Tier 1 suppliers
19% to 30% from Tier 2 suppliers
10% to 13% from Tier 3 suppliers
While day-to-day interruptions often originate from Tier 1 to Tier 3 suppliers, more systemic disruptions to food security — such as climate-induced agricultural failures or geopolitical conflicts — have a low probability but higher impact as disruption propagates throughout all levels of the supply chain. As these disruptions move through the supply chain, they exacerbate food shortages, increase costs and undermine stability across entire regions.
Food supply chain risk management is inherently complex, yet organizations can streamline the process through a structured five-step approach to enhance food security and mitigate disruptions.
Identify critical materials and resources
Mapping food supply dependencies supports early risk detection.
Conduct supply chain geospatial mapping
Supply chain geospatial mapping can create a detailed map of the supply chain, encompassing your own production and tiers, particularly tier 1 and 2, as well as identifying key agricultural, processing and distribution hubs. This visualization aids in understanding the geographic distribution of suppliers, manufacturers and distribution centers, enabling organizations to assess the potential impact of geospatial risks and identify critical points of vulnerability.
Develop a comprehensive risk register
Developing a comprehensive risk register is crucial for understanding exposure to various risks, including physical (e.g., building fires), climate-related (e.g., extreme weather events), cyber (e.g., data breaches) and geopolitical (e.g., trade restrictions). By systematically identifying and categorizing these risks, organizations can prioritize risk management efforts and develop targeted mitigation strategies.
Quantifythe impact of risks
Quantifying the financial impact of risks involves estimating revenue at risk, increased costs and net profit loss due to supply chain disruptions. Understanding financial implications allows organizations to make informed decisions about where to invest in risk mitigation measures and risk financing through insurance coverage to protect their bottom line.
Operationalize risk mitigation and risk financing strategy
Organizations can put risk mitigation and risk financing strategies into action through such measures as diversifying suppliers, enhancing cybersecurity protocols and establishing contingency plans. By operationalizing these strategies, organizations can ensure they are prepared to respond effectively to disruptions, and secure appropriate insurance coverage to finance potential crucial losses, thereby maintaining supply chain resilience and protecting stability.
Given the variations of effects from supply chain disruptions experienced through the tiers, it is vital to choose the right strategic suppliers for mission-critical components and materials to minimize risk.
Tier 1 suppliers have the most significant effect on the supply chain's stability and are directly controlled by the organization; therefore, businesses should prioritize partnerships with Tier 1 suppliers that demonstrate strong risk management practices, robust contingency plans and a proven track record of reliability.
Tier 2 and Tier 3 suppliers also play a critical role in the food security supply chain ecosystem. While their impact may be less direct and more difficult for the organization to control, their ability to manage risks effectively contributes to food security. Companies should ensure that these suppliers are equally committed to maintaining high standards of service and risk mitigation. This involves regular assessments, audits and collaborative efforts to enhance their preparedness for potential disruptions.
The selection of suppliers across all tiers is fundamental to building a resilient supply chain. By focusing on suppliers that are equipped to handle various risks, businesses can enhance their operational resilience, maintain continuity and ultimately protect their bottom line.
The recent supply chain survey indicates that nearly 50% of respondents in the food and drink industry view insurance as a must-have, while nearly 40% believe that some coverage is necessary. This strong consensus underscores the critical role insurance can play in safeguarding food security. Insurance mitigates risks such as supply chain disruptions, food contamination, recalls and natural disasters, providing a safety net that ensures continuity and stability. It offers financial protection against unexpected events that can lead to significant losses, which is crucial in a food and drink sector where margins can be tight and disruptions costly. Adequate insurance coverage is often required for compliance with regional industry regulations and enhances a company's reputation by demonstrating a commitment to risk management and consumer safety, thereby maintaining customer trust and loyalty.
Finally, insurance enables businesses to recover quickly from adverse events, minimizing downtime and ensuring operations can resume with minimal disruption, essential for maintaining supply chain integrity and meeting customer demands. Investors are more likely to support businesses with robust risk management strategies, including insurance coverage strategies, facilitating a smoothing factor to potential financial shocks, allowing growth and providing a competitive edge in the market. Risk management is not only a protective measure, but also a strategic asset that enhances the overall resilience and sustainability of businesses in the food and beverage sector.
The most frequently used insurance coverages for supply chain risks are:
