World supply chains under most threat from economic risk

24 November 2014

Economic risk – not war or an international epidemic – is the biggest threat to world supply chains.

CIPS’ Q3 2014 Risk Index has found that while supply chain risk in the Middle East and sub-Saharan Africa has increased, neither the Ebola outbreak nor the advance of the Islamic State has led to a significant increase in international supply chain risk.

Instead, it is the economic slowdown in Germany and China that could jeopardise supply chains, it found.

However, the index, which analyses socio-economic, physical trade and business continuity, also found that supply chain risk has reduced for the twelfth consecutive month to 77.9 in Q3 from 78.1 in Q2. The index reached an all-time peak of 82.4 in Q3 2013.

Supply chain risk has thus far been checked by the relative economic stability of the world’s three most important contributors to world supply chains, the USA, China and Germany, but that could change in Q4 as the economies of both Germany and China look increasingly fragile.

The combination of Russian sanctions, the rise of Euro-scepticism and a reduction in demand for German products, could see Germany lose its position as the most reliable component of world trade, the index suggested.

Concerns are also growing in China over an economic slowdown, with the World Bank urging the country to slash its growth target for 2015.  Local government and industrial sectors in the country are struggling to pay back loans taken out during the 2008-09 crash.

“Businesses from London to Laos are reliant on the economic stability of a handful of countries, whose goods and services touch on supply chains across the world,” said John Glen, CIPS economist.

“Economic faltering in China and Germany will therefore have a distorting effect on the riskiness of global supply chains which could well extend deep into 2015 and across all industries.

“Supply chain professionals will increasingly be trying to balance the desire to hold sufficient inventory to meet emerging sales opportunities with the risk of investing just as the growth of demand starts to slow.”

Andrew Williamson, lead economist at Dun & Bradstreet, added: “Apart from the US and UK, growth appears to be softening in the advanced economies, especially in the major markets in the euro zone. Geo-political risks remain elevated although the crisis in Ukraine appears to have stabilised somewhat since September."

 

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