International supply chain risk hits peak in CIPS Index

4 May 2016

Repeated natural disasters have revealed stark regional differences in the resilience of global supply chains, according to the latest CIPS Risk Index. 

The level of international supply chain risk grew from 79.3 in the last quarter of 2015 to 79.8 in the first quarter of 2016. This is the joint highest recorded level of supply chain risk in a first quarter since the index, produced by Dun & Bradstreet, was launched in 1995.

Levels of risk grew in North Africa, Western Europe, Asia and Latin America.

Despite this, natural disasters including a 6.4-magnitude earthquake in Taiwan occurred (a 5.8 magnitude quake in Japan fell outside the quarter) failed to have a major impact on world supply chains.

The index report explained: “Building regulations designed to prevent widespread infrastructure damage after the catastrophic 1999 earthquake appear to have made supply chains in the region far more resilient.”

It added though, that the collapse of the residential Weiguan Golden Dragon complex in Taiwan was a reminder that regulations are not consistently observed.

Electronics manufacturers in Taiwan were able to swiftly resume production following the earthquake using inventory to plug any gaps.

Despite damage to TSMC, a major supplier for Apple’s iPhone, only 1% of shipments were affected by damage to its facilities, it reported.

Other manufacturers, including LCD panel producers and chipmakers, said their plants were able to shut down and restart without further disruption.

The index said the increase in Asian supply chain risk this quarter, from 26.68 to 26.79, came from suppliers in New Zealand and Australia struggling to make ends meet because of persistently low commodity prices and the economic slowdown in China.

Businesses with supply chains that involve Chinese manufacturing or construction face particular ethical concerns as labour disputes in these sectors have risen as cash-strapped firms increasingly opt to withhold pay.

Both South Africa and Ethiopia are struggling to cope with the prolonged drought caused by the El Nino weather system, but Sub-Saharan Africa’s low contribution to the global supply chain means the region only contributed 2.47 of the 79.8 points of risk this quarter.

In Europe, the Brussels bombings have helped to fuel the growth of far-right political groups in France and Poland. This has increased calls for the passport-free Schengen zone to be abandoned, a move that could slow the flow of goods around Europe considerably.

As a result, risk in Western Europe grew from 23.77 at the end of 2015 to 23.98 this quarter. 

So far, fears the UK could leave EU have only had a minor impact on supply chains with businesses waiting until after the vote to make any preparations.

John Glen, CIPS economist and senior economics lecturer at the Cranfield School of Management, said: “The first step to building resilient supply chains is to identify what those risks are. The experience of businesses in Japan and Taiwan goes to show that even the most traumatic of events can be navigated safely.”

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