Zach Zacharia on Top 3rd Quarter Risks to Supply Chain

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Editor's Note: Six temporary lanes opened Friday, June 23, in the section of I-95 discussed in this podcast. The work was completed less than two weeks after the section had collapsed as the result of a gasoline truck fire. 

In this episode of Lehigh University’s College of Business ilLUminate podcast, we are speaking with Zach Zacharia about the state of the global supply chain in the first six months of 2023 and the biggest threats facing the supply chain in the third quarter of the year, as reported in the latest Lehigh Business Supply Chain Risk Management Index (LRMI).

Zacharia is an associate professor of supply chain management and director of the Center for Supply Chain Research at Lehigh University. The quarterly LRMI was developed in 2020 by the Center for Supply Chain Research and the Council of Supply Chain Management Professionals.

Zacharia spoke with Jack Croft, host of the ilLUminate podcast. Listen to the podcast here and subscribe and download Lehigh Business on Apple Podcasts or wherever you get your podcasts.

Below is an edited excerpt from that conversation. Read the complete podcast transcript [PDF]. 

Jack Croft: I’d like to start with something that's been much in the news lately, and that's the gasoline truck fire that collapsed a section of I-95 in Northeast Philadelphia, not far from Lehigh, on June 11th. The state and federal governments are pumping a lot of money and other resources into repairing what is the main north-south highway on the East Coast in record time, with the goal of reopening it to traffic by July 1. I think it's illustrative of something we've talked about on the podcast before, which is that in our global economy, an event that happens anywhere in the world can disrupt the global supply chain.

So, I wonder if you could talk a little about why this extraordinary effort is underway to minimize the disruption to the supply chain caused by the section of the highway that collapsed.

Zach Zacharia: First of all, it's important to realize that I-95 is the busiest interstate in the U.S. and has the dubious distinction of having the slowest interstate section in the country. There's a particular section in New Jersey where the average speed is 29 miles per hour. That is the slowest average speed anywhere in the country for an interstate. It serves nine million trucks per year. $195 billion in freight goods move every year.

And of course, I'm not at all talking about the commuter traffic that has to go in there as well. I'm just talking about freight traffic. So yes, this is very critical. Trucks, if they want to avoid this section completely, they'll have to potentially travel about 40 miles to completely detour. As a matter of fact, yesterday, I just traveled that section. And you go through a series of traffic lights and local roads, and just imagine that you've got these large interstate-traveling trucks having to commute through somewhat local roads is definitely going to add delays. And I think the real key issue is it's going to add costs to the system.

So clearly, the federal government and the Pennsylvania state government know that they have to get these things up as quick as possible. And their ambitious target is to get back up and open in two weeks. But if they don't do that, the costs to the economy are huge. That's just the basic impact.

To answer your other question, clearly ... supply chains are very much interconnected. ... Even simple events can have cascading effects throughout the supply chain.

Croft: Let's turn to the third quarter risk index report. Let's start with the average risk, which heading into the third quarter this year came in at 65.18. How does that compare to the average risk in the past couple of years, and what does that tell us? 

Zacharia: 65.18 is a low risk. For the last three quarters, we were hovering around 65. But just over a year ago, we were at 69.5. And remember, as I had talked [in a previous podcast], an increase of four points is not a linear increase. Actually, it's a little bit more. It's not necessarily an exponential curve. But the number four is not just an arithmetic increase. So that is significant. For most parts, supply chain managers think that there has been less risk these last three quarters than there was a year ago.

Croft: For the second quarter in a row, Cybersecurity and Data Risk leads the 10 risk categories included in the index. But it has opened a wider gap on the second risk category, which remains Economic Risk, increasing significantly by five points to 82.86 on the risk index. So what factors go into Cybersecurity and Data Risk? And what are some of the biggest threats that supply chain professionals reported they're most concerned about?

Zacharia: The kind of factors we talk about is cyberattacks, data corruption, data theft, system viruses, security platform controls. And I think that, as more and more people work from home, there is less security from those kinds of remote workers. So there is a greater risk.

I don't have any absolute evidence to back this up, but there is a sense that the cyberattacks are, in many cases, state-sponsored, with Russia and China being actively involved as opposed to just a bunch of hackers sitting in some basement somewhere. So now, our U.S. companies have become very, very good targets. And companies know they have to invest to try and protect.

But the majority, if not all of these kinds of attacks, only get through because a human being clicked on something that they shouldn't have. … It's not necessarily that the companies don't have excellent systems in place. They can be bypassed by just an inadvertent choice that a single employee makes.

Croft: Economic Risk had hovered above 80 on the risk index for seven straight quarters from the third quarter of 2021 through the first quarter of this year, peaking at—I believe this is still the all-time high for any category—90.72 in the third quarter of last year. It remains number two in the new index, inching up just slightly from the previous quarter to 75.96. So what are some of the main factors that go into this category?

Zacharia: The kind of factors we look at is increasing energy costs, commodity price volatility, labor shortages, demand shocks, global energy shortages, border delays.

Croft: Even though Economic Risk has dropped a whopping 15 points in just the past year, it obviously remains a concern to supply chain professionals. So what are some of the issues you're hearing about that they see as most threatening now?

Zacharia: Some of our comments that the people who fill out the survey talked about was inflation, bank failures. We had one person that said that the Fed is being out of touch as they continually try and increase the rates, which makes the Economic Risk resource scarcity, especially qualified labor. And the feds are trying to be very careful, right? You have to sort of manage-- you don't want the economy necessarily to go into a recession, but you have to manage the inflationary pressure. So these are all factors that really weigh in on the economy.

Croft: You had mentioned the labor shortage. And obviously, this became a huge issue during the worst of the global pandemic. What is driving that now that the problem is persisting so strongly across the board?

Zacharia: One of the things that COVID did-- I mean, COVID did so many changes. But as you know, some people really questioned, "What are they doing?" And they started to find you couldn't just necessarily throw money at the problem.

My students that I actually have at university and are entering the workforce, they are very much concerned about a life balance, a work-life balance. They are concerned about things like the potential to work remotely, to have flexible schedules, and things like that. And just throwing additional money isn't necessarily going to make a difference.

Some of the research I've looked at suggested that you have senior management who actually became successful because they put 60 hours, 70 hours a week working at their job, and that's how they climbed the ranks. So when they're faced with new workers entering the workforce that say, "No, we want to finish in 40 hours, and can we perhaps look at some way of making that even more flexible?" There's a real disconnect with senior management versus new workers.

And you're seeing that ripple effect of labor issues going throughout the supply chain. So I think that this is still going to be an issue going forward. I mean, people are really going to push for more flexibility. And I think that companies are going to be very hard-pressed to continue insisting on a regular five-day workweek when they can. Obviously, certain kinds of hospitals, manufacturing, particular kind of things that still run 24/7, have got to just figure out ways to deal with these kinds of labor issues.