Global supply chain risk drops from record high

posted by Jacki Buist
in Risk
26 May 2017

Supply chain risk fell in the first quarter of 2017 following a year of record highs, according to the latest CIPS Risk Index.

The improvement in the index, powered by Dun & Bradstreet, reflected a better growth outlook though risk still "lurks beneath the surface".

“The growth outlook is brightening, headwinds are diminishing, and forecasts generally point to better outcomes than we had expected a year ago,” said Bodhi Ganguli, lead economist at Dun & Bradstreet. "Yet, underlying this feel-good momentum, the global economy continues to face risks … from the fanning of protectionist inclinations by the rise of right-wing populism, to a one-off hit to supply chains from North Korean aggression.”

Businesses must consider these risks when developing strategies, he said, and use data and insights to take advantage the rising tide of global growth.

The latest score of 81.9 out of 100 is still higher than any quarter in 2014 or 2015, and closer to highs seen in 2013, when the financial crash of 2009 was still being felt. Meanwhile, the index has been recalibrated to reflect lower oil prices and this may have contributed to the fall in risk. 

Andrew Coulcher, CIPS membership and knowledge director, added: “From Trump’s deteriorating relationship with an increasingly isolated Russia, to civil wars in Libya, Iraq and Syria bearing down on land based supply chains, the global economy will come under more pressure.”

Ganguli said: “We rebased the export weights for the 132 countries covered from 2010 to 2015. This is essential to capture the changing dynamics of trade and supply chains, and provides a more accurate assessment of the global economy.”

The most recent weighting of individual countries according to export - and therefore their influence on supply chain risk - is anchored to 2015 economic indicators for the first time. The significant change in the price of oil since 2010, the previous anchor, has been the key driver in this change, reducing the risk factor for a number of regions.

In North America, the new weighting has produced little change – while the oil price drop since 2010 has reduced the region’s exports less significant (and therefore less risky) America has increased its export of energy. These two factors balance each other out, and the Q4 2016 risk figure was little changed for Q1 2017.

Prospects in Canada are hopeful, with employment picking up, and an expectation that wages might rise. The country’s household debt, on the other hand, remains third highest after New Zealand and Australia. And its access to the US market and free trade agreements will be a key decider in the future of the country's economic wealth. 

In Western and Central Europe, the most likely scenario for Brexit, according to the report, sees the UK leaving the EU in an orderly fashion with a free trade agreement coming into force in early 2020. Iceland’s risk rating has improved following the formation of a government, and Cyprus, with an increase in domestic output and investment growth.

As migrant numbers entering the EU via Italy and Greece have remained low for a few quarters, the report expects temporary border controls to several states will be abolished later this year, easing the movement of goods and reducing risk for just-in-time delivery.

With significant oil exports coming from Eastern Europe and Central Asia, the changes in calculations has led to a reduction in risk for this region. However, instability remains across the region, and the low oil prices, banking sector stresses, domestic political instabilities and geopolitical tensions all contribute to supply chain risk. Romania specifically contributes to this where, despite a recovery from public protests in February, the government has lost the trust of much of the electorate.

India's demonetisation last November prompted a slowdown in credit growth and a drop in crop prices amongst other thing, adding to the broad picture of stalling investment. As activity picked up again early this year, the major ports suffered congestion – planned infrastructure development is clearly needed to ease supply chain operations. On the horizon too in India is a goods and service tax, which is expected to lead to warehouse consolidation and improved operations. But there may be a period of unsettlement from mid-2017.

Social unrest in Bangladesh has escalated in recent months, with garment sector strikes for fairer pay leading to cost disruptions, and factory closures to contain the protests.

The changed export value in global trade had dropped for the remaining three regions, cutting risk ratings. In the Middle East and North Africa, localised political and economic problems in Jordan and Bahrain have increased risk, while Egypt and Tunisia’s outlook are both more settled.

Rebalancing of risk across Latin America, based largely on commodity price drops, has afforded the region a lower risk rating, supported by good growth prospects in Argentina, and despite conflicts in Chile affecting local supply chains.

The underlying trend in Sub-Sarahan Africa indicates the worst of the commodity bust is over, and all eyes will be on China and its appetite for the region’s exports.

The CIPS Risk Index, attributing a value to pressures acting on supply chains by region

Sourcing professionals can use the CIPS Risk Index, powered by Dun & Bradstreet, to understand their supply chains’ exposure. It provides a quarterly analysis of the socio-economic, physical trade and business continuity factors contributing to supply chain risk across the world. And each region is given a global indication of risk, where 0 is low risk, and 100 is high.

The scores are delivered across each region, weighted according to the contribution to global exports of 132 individual countries. In the first time since its launch in 2014, the country weightings have been amended – from 2010 export contributions to 2015 contributions.

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