November 11th, 2013

Cyber Risk and its Impact on Supply Chains

Posted at 1:00 AM ET

Cyber risks are not isolated and are usually connected to other risks. Many companies that are exposed to cyber risks are, for example, also exposed in turn to risks to their supply chain. Due to technological innovation and advances, many parts of a company’s or industry’s supply chain have become interconnected and automated. Technology is indeed a critical enabler of a supply chain’s operations. Therefore a cyber attack has the potential to put an entire company’s supply chain at risk. Cyber security and supply chain risk management must therefore be considered in conjunction with one another.

The disruption potential of cyber risks on supply chains has often been overlooked or discounted. While technology has enabled individuals and companies to undertake new and innovative approaches, it has also added an element of structural vulnerability into the economy. One has only to look at the annual reports of any publicly traded company and the boilerplate statements of exposure to cyber risks to see that the risks of technology failure have become part of the fabric of overall operational risk.

As the economy becomes more interconnected, companies face significant threats from afar, including cyber risks. Economic losses associated with supply chain disruption have consequently increased significantly in recent years. Chaos theory with its butterfly wings is an apt analogy for the  interconnectivity and interdependence facing companies. Today, that butterfly is a technology company in a distant land rendering cloud-based services to a company in Wisconsin (or perhaps Worcestershire or Württemberg). No longer is there necessarily a  direct physical or even indirect physical connection between the holder of a company’s data and the company. The failure of that service provider ripples out as a cascading series of events that may all start with something as mundane as a local interruption to the power supply, leaving the Wisconsin company adrift as it no longer has access to a key part of its infrastructure.

These risks present serious challenges to just-in-time delivery strategies that have been widely adopted by several multinational companies. With many businesses running lean supply chains to reduce costs, disrupted operations at a key supplier can cause a ripple effect that goes beyond an entire industry and region.

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