By: Principal Health & Safety Scott DeBow & Vice President of Strategic Analytics Cheryl Wiebe, Avetta
The COVID-19 pandemic caused significant economic disruption and chaos across multiple industry sectors in the US. The measures implemented to contain the spread of the virus, such as lockdowns and travel restrictions, led to a sharp decline in consumer demand, supply chain disruptions, and increased costs. This resulted in significant revenue losses and supply chain disruptions for many companies. Furthermore, the pandemic created uncertainty and volatility in financial markets, leading to increased risk, lower investor confidence, and an extreme impact on economic activity in terms of Gross Domestic Product (GDP) as highlighted below in Figure 1. The pandemic also highlighted the importance of risk management and supply chain resilience in the face of unprecedented disruption.
Figure 1: GDP % change
Figure 2: Safety Incident rate change before/after COVID-19 Pandemic (OSHA vs Avetta) by Industry
Before the shock of 2020, supply chains had been getting safer, and suppliers and contractors had been reducing safety-related incidents, as shown in the decline in safety incident rates in 2019-2020, both for suppliers, as reported by OSHA, and for Avetta-managed suppliers (see Figure 2).
While suppliers within the Avetta Network also experienced the pandemic’s effects. Avetta suppliers in some industries reversed their trend of improvements—notably Agriculture—which temporarily experienced an increase in incident rates in the 12 months following the pandemic. But on the whole, these effects were briefer, as the incident rates resumed a downward trend after 2021 (see Figure 2 below).
Is supplier economic health a leading indicator?
Lining up the two Figure 1 charts by year illustrates the decline in economic performance from 2020,which perhaps drove the disruption of continuous improvement previously seen in the US.
The economic disruption and decline experienced in 2020 had a measurable impact on
Figure 3: Graphic comparison of economic vs safety metrics
The pandemic led to disruptions in supply chains, increased costs, and reduced capacity. The resulting economic pressures made it even more challenging for suppliers to maintain the necessary safety standards and protocols. A shortage of critical supplies made it difficult for suppliers to provide adequate safety equipment and training to workers. In some cases, the pandemic forced suppliers to cut corners, compromising safety standards to maintain profitability or even solvency.
Organizations also took on new initiatives to stay in business, like producing masks, hand sanitizers, and other new products. Production lines would be regularly re-engineered to meet distancing protocols as well as to achieve the new purposes. These changes in processes, and products, coupled with new pressures, introduced new risks.
Harvard Business Review studied the effects felt by companies who were struggling to meet financial expectations. Similar to the analysis above, these public companies experienced impacts on their safety record:
“injury/illness rates are 5%-15% higher in periods where a firm meets or just beats analyst forecasts.”
Considerable work has been done to understand the causes of safety incidents and fatalities; often centered around behaviors and practices. But the analysis above points to a higher-level effect. If economic conditions (declining credit score, financial difficulties, and other such business risks) are, as they appear to be, leading indicators of other risks this tells us that:
- Supply chain risks such as business and financial risks are interwoven and interact with other risks, such as safety.
- Even if economic factors are not strongly predictive in all cases, they may be a useful leading indicator, because they tend to happen first.
- If your supply chain players are experiencing business and particularly credit risk, you may expect the risk of safety-related incidents, serious injuries, and fatalities to be higher.
- Monitoring conditions specific to business and financial risk is a useful tool to focus attention and resources on vulnerabilities in your supply chain partners.
What should I do differently?
If an organization can reasonably be seen as under financial duress, we ought to consider what decisions are made at senior levels in that organization, and how these decisions affect the behavior of their workers in the field. A reasonable path forward might be to:
5. Include financial/business risk monitoring in a package of leading indicator monitoring of supply chain partners
6. Flag organizations with a changing financial risk score for potential re-evaluation for increased monitoring, review, or auditing, and
7. Look for other opportunities to link financial/business risk to other domains of risk, such as cyber security risk.