Supply chain risk hits three-year high

Rebecca Ellinor Tyler is former editor of Supply Management
22 August 2016

Global supply chain risk climbed to 80.8 in the second quarter of 2016, a level not seen since 2013, according to the latest CIPS Risk Index.

The index, which is produced by Dun & Bradstreet, said the result continued a worsening trend in global risk and was among the highest rated levels of risk since records began in 1995.

The report said amid slow global economic growth and subdued commodity prices, the UK’s vote to leave Europe rippled through global supply chains.

“The UK’s departure from the EU could lead to some of the most dramatic shifts and severe implications for global supply chains in the coming years,” said CIPS economist John Glen. “While the full impact of the leave vote is still unfolding, confusion and uncertainty surrounding the current situation has already driven supply chain risk to a worryingly high level.”

He said businesses needed to develop bespoke contingency plans and should ensure their supply chains are agile and flexible enough to adapt and react quickly to changes.

“In the short term, supply chains will be exposed to exchange rate volatility risks which may be difficult to hedge. It may therefore be appropriate to crystallise exchange rate exposure by paying suppliers ahead of contracted payment days.

“In the longer term, measures such as dual sourcing of key components should be considered so that, where practical, key supplies are not purchased exclusively from Europe.”

He said businesses should also consider more local sourcing, to avoid a potential rise in costs of key supplies imported from overseas.

“In the end, businesses may need to rebuild their distribution channels to match the new trade map,” he added.

Bodhi Ganguli, lead economist, Dun & Bradstreet, said the weak oil price in particular, and weak commodity prices in general, have so far had a far more visible effect in reducing growth in oil- and commodity-exporting countries than in stimulating consumption and investment elsewhere.

“Political and economic uncertainties, such as the extent of the growth slowdown in China, emerging markets’ financial vulnerabilities, the impact of terrorism on cross-border movements, and the fallout from Brexit, continue to weigh on global business sentiment,” he said.

At a global level, the UK’s vote to leave the EU underlines concerns about a wider shift towards protectionism. In France, it said the UK vote has given a boost to the National Front, which is campaigning for more economic protectionism; the party also wants to hold an EU membership referendum. In the US, the presidential election shows that a significant proportion of the population feel that global trade has not been in their interest.

Elsewhere, it added concerns about a near-term collapse in China’s growth have subsided and the associated rise in commodity prices has taken some of the strain off Australia. Likewise, the partial recovery in oil prices in Q2 took some pressure off oil producing countries in the Middle East and North Africa. “This, however, has not been strong enough for governments to revise plans to slash public spending,” it said.

And in sub-Saharan Africa, the report warned the lack of a significant rebound in commodity prices had widened fiscal deficits and hampered public sector spending on much-needed areas like infrastructure and healthcare.

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