When the coronavirus crisis broke out in 2020, the medical emergency was accompanied by a severe shortage of hospital supplies. Respirators First: Everywhere, demand has skyrocketed, disrupting the supply chain. The production of these devices spanned several countries, with each part depending on other parts made in different places. And the longer the chain, the more complex the dependency, and the greater the exposure of one point to the interruption of another due to administrative closures.
Today, two years after the appearance of Covid, almost all sectors of the world economy seem to be worried. “Supply problems” have become so prevalent that they are a running joke. How to explain?
In recent decades, supply chains have become thinner and longer based on profitability. More and more steps have been added in the name of speed and cost; And by the same token, there are more and more places where something can go wrong between the time you order something online and the time it arrives at your door.
Supply chain problems have a financial ripple effect known as “trade credit contagion.” Companies delay payments to suppliers because their customers delay them, and so on. The cash on delivery model can lead to canceled or delayed shipments, which in turn can lead to bankruptcies.
Much of this business credit risk is not managed today, and insurance companies could fill this gap in protection in a post-pandemic world. Researchers are currently working on developing methodologies to identify the vulnerability of global supply chains and understand their contagion risks through trade credit. The goal is to make the systems as a whole more robust.
How to design insurance contracts to share risk effectively? How does it reduce delays in supply chains and replace the situation we face today of paying for something in advance with an unknown delivery date?
Artificial intelligence and complex network theory are proving useful in identifying structures that may pose systemic risk. They help identify which connection patterns are likely to lead to trade credit delays and contagion and which are more robust. Not all links in a chain can be secured, so a major challenge is identifying the most important steps in different crash scenarios.
With these tools, we can create large-scale simulators of global sourcing patterns that react to a wide variety of events, and then use machine learning techniques to spot trouble spots in the chain. This knowledge can be used to strengthen markets before another pandemic or disaster strikes.
Other recent inventions, such as blockchain, offer the promise of using high-quality information to analyze supply chain dependencies. This technology uses real-time data and transparent verification by multiple parties. Combined with other functionalities, such as smart contracts, it could quickly resolve disputes that arise throughout the supply chain.
Flexibility and resilience
Our research aims to mobilize the use of blockchain to streamline record keeping and payments. The adoption of the system is not easy. This is an old problem in economics. The cost of technology depends on the number of companies that adopt it, with each company facing specific costs based on its position in the supply chain, its tolerance for risk, and the costs it must bear to insure these risks. One’s decision remains uncertain because it depends on everyone else’s.
There are positive externalities: companies that adopt the technology in turn improve the operations of third parties. Real-time record keeping, transaction traceability, and blockchain immutability can help make supply chains more efficient. This is especially true when considering the entire system, where transactions need to be verified by multiple parties: supply chain participants and insurance companies.
Coming out of the pandemic, the development of these commercial credit insurance systems could depend on public-private partnerships. Indeed, in the recent period, governments have once again become central players in the economy.
The consumer will also have an important role. In a few years, supply chains may look different, with the overall goal being to reduce costs, as was the case before the pandemic, to reduce delays and trade credit risks. It is the final consumer who will determine the need to rewire the networks, replacing one supplier with another. Therefore, its flexibility will determine the resilience of the supply chain.
Created in 2007 to help produce and disseminate scientific knowledge on major social problems, the Axa research fund has supported some 650 projects around the world, led by researchers from 55 countries. For more information, link to Axa Research Fund website, also follow @AXAResearchFund on Twitter.
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