CIPS News


CIPS Risk Index shows supply chain risk jumps to a nine month high

CIPS 12 February 2015

Supply chains are rocked by the collapse in commodity prices.

-The CIPS Risk Index reversed its improving trend, moving to 78.2 in Q4 2014 from 77.9 in Q3

ThCIPS Risk Index reversed its improving trend, moving to 78.2 in Q4 2014 from 77.9 in Q3
- Lower fuel prices have made it cheaper for businesses to internationalise – and therefore lengthen – their supply chains
- Suppliers across Sub-Saharan Africa, Asia, Eastern Europe and Latin America pose an increasing risk to the businesses they work with
The world opened up for procurement managers in Q4 2014 with an abundance of cheap oil and gas making suppliers in far flung corners of the world instantly more competitive. Combined with low commodity prices in everything from gold in Ghana to soy beans in Brazil, manufacturers at the top of the global supply chain have grown the complexity and length of their supply chains whilst reducing their input costs. 
However, declining commodity prices have also had a considerable unforeseen impact on suppliers at the very base of world supply chains. Whilst commodity producers themselves are the most obvious sufferers from the slump in prices, worsening trade deficits have slashed the value of currencies and cut the spending power of national governments which have had a negative effect on suppliers in certain parts of the world. 
Suppliers in Asia, Latin America, Eastern Europe and Sub-Saharan Africa are particularly feeling the pinch, with reduced fuel costs opening up competition for contracts beyond national borders. This means there is a heavy downward pressure on the prices all suppliers can charge, a pressure which will impact the quality of their products, their delivery speed and the working environments for their employees.
 
Global (Risk up) Sub-Saharan Africa (Risk up) Middle East & North Africa (Risk up) Western & Central Europe (Risk down) Eastern Europe & Central Asia
(Risk up) Asia Pacific
(Risk up) Latin America
(Risk up) North America
(Risk static)   
Q4 2014 78.2 2.40 7.22 24.16 6.74 25.65 5.77 6.30   
Q3 2014 77.9 2.38 7.20 24.20 6.57 25.55 5.73 6.28  
*Higher numbers represent a larger contribution to global supply chain risk. 
Australia, in particular, has seen commodity prices put pressure on the mining industry, where a combination of low levels of investment and falling levels of unemployment have forced down competitiveness. The importance of Australian raw materials across Asia Pacific is the principle driver for the region’s increased risk score in Q4, up to 25.65 from 25.55 in Q3.
In Latin America, Brazilian, Chilean and Argentinian suppliers are all suffering from lower soy bean and copper prices. Taken together with austerity measures necessitated by the economic recession, Brazil is experiencing violent political protests which could see supply chains disrupted further.
In Sub-Saharan Africa, meanwhile, the drop in commodity prices has had a serious impact on national budgets, with Nigeria, for instance, earning 90% of its government revenue from oil. With budget deficits rising, infrastructure improvements, which have proved a vital source for growth in recent years, may be cut and with them access to foreign markets. Finally Eastern Europe, already one of the most risky regions for supply chains to enter, has been further hit by a combination of deteriorating oil prices and the knock-on effects of further EU sanctions against Russia.
Only Western Europe has seen a marginal reduction of supply chain risk (from 24.20 to 24.16), with advanced manufacturers in Germany especially, able to pass on the benefits of lower input costs to consumers with the price index for consumer durables falling by 0.4% year on year in December. Even here, however, the outlook is bleak with the resulting deflation threatening to leave the region in a spiral of price reductions.
John Glen, CIPS Economist and Senior Economics Lecturer at The Cranfield School of Management said:
“Reductions in commodity prices are not universally beneficial. Those at the top of the supply chain are immediate benefactors but those further down the chain have to contend with increased pressures from a variety of sources.  
“The lower prices manufacturers are paying for commodities will put pressure on their suppliers, who must cut their costs to compensate. In the long term this means corner cutting, declining working conditions and delayed deliveries from suppliers.
“To mitigate the challenges these pressures pose, strict adherence to best practice is essential for procurement managers with supply chains reaching into growing risk areas, such as Australia and Brazil.”
Andrew Williamson, Global Leader and Leading Economist, Dun & Bradstreet:
“As we cautioned in the last edition, the CIPS Risk Index score reversed its improving trend in Q4, deteriorating for the first time in five quarters. The sluggish and uneven pace of the global recovery has kept the risk score uncomfortably close to the historical high recorded in Q3 2013, and in Q4 2014 this unfavourable background was exacerbated by the impact of the low commodity prices on key emerging markets and by increasing geopolitical risk.
“Apart from the US and the UK, growth in the developed world remains sluggish. Nor are emerging markets able to drive global growth, as key economies (Brazil, China, Russia) are also experiencing a slowdown. Geo-political risk remains high, with the conflict in the Ukraine still smouldering and large parts of the Arab world in a state of open conflict or unstable peace. Meanwhile, the most immediate and visible effects of the oil price collapse have been negative, with a deterioration of energy-exporting countries’ external and fiscal positions. However, we expect to see more positive consequences of the low cost of energy in 2015, as the favourable impact on companies’ costs and consumers’ disposable incomes is reflected in higher economic growth in most countries.”
---ENDS---
Notes to Editors:
About the CIPS Risk Index:
The CIPS Risk Index is a composite indicator of pressures acting upon supply chains globally. The Index analyses the socio-economic, physical trade and business continuity factors contributing to supply chain risk across the world, weighting each score according to that country’s contribution global exports.
The Index helps sourcing professionals understand the risks to which to their supply chains are exposed, articulate questions and scenarios for key suppliers, inform assurance activities, check the readiness of contingency plans, support the negotiation of risk transfer in contracts, and establish factors which may impact the financial stability of tier one and sub-tier suppliers upstream.  Regular production of this Index will help procurement and supply professionals communicate and justify risk-informed sourcing decisions and support effective Supplier Relationship Management.
About the Chartered Institute of Procurement & Supply:
The Chartered Institute of Procurement & Supply (CIPS) is the leading international body representing purchasing and supply management professionals.  It is the worldwide centre of excellence on purchasing and supply management issues.  CIPS has a global community of 110,000 in 150 different countries, including senior business people, high-ranking civil servants and leading academics.  The activities of purchasing and supply chain professionals have a major impact on the profitability and efficiency of all types of organisation and CIPS offers corporate solutions packages to improve business profitability.  www.cips.org
About Dun & Bradstreet:
Dun & Bradstreet (NYSE:DNB) is the world's leading source of commercial information and insight on businesses, enabling companies to Decide with Confidence® for 172 years.  D&B's global commercial database contains more than 235 million business records.  The database is enhanced by D&B's proprietary DUNSRight® Quality Process, which provides our customers with quality business information.  This quality information is the foundation of our global solutions that customers rely on to make critical business decisions.
D&B provides two solutions sets that meet a diverse set of customer needs globally.  Customers use D&B Risk Management Solutions™ to mitigate credit and supplier risk, increase cash flow and drive increased profitability; and D&B Sales & Marketing Solutions™ to provide data management capabilities that provide effective and cost efficient marketing solutions and to convert prospects into clients by enabling business professionals to research companies, executives and industries.
For more information, please visit www.dnb.co.uk- The CIPS Risk Index reversed its improving trend,moving to 78.2 in Q4      2014 from 77.9 in Q3-The CIPS Risk Index reversed its improving trend, moving to 78.2 in Q4 2014 from 77.9 in Q3

-Lower fuel prices have made it cheaper for businesses to internationalise – and therefore lengthen – their supply chains

- Suppliers across Sub-Saharan Africa, Asia, Eastern Europe and Latin America pose an increasing risk to the businesses they work with

The world opened up for procurement managers in Q4 2014 with an abundance of cheap oil and gas making suppliers in far flung corners of the world instantly more competitive. Combined with low commodity prices in everything from gold in Ghana to soy beans in Brazil, manufacturers at the top of the global supply chain have grown the complexity and length of their supply chains whilst reducing their input costs. 

However, declining commodity prices have also had a considerable unforeseen impact on suppliers at the very base of world supply chains. Whilst commodity producers themselves are the most obvious sufferers from the slump in prices, worsening trade deficits have slashed the value of currencies and cut the spending power of national governments which have had a negative effect on suppliers in certain parts of the world. 

Suppliers in Asia, Latin America, Eastern Europe and Sub-Saharan Africa are particularly feeling the pinch, with reduced fuel costs opening up competition for contracts beyond national borders. This means there is a heavy downward pressure on the prices all suppliers can charge, a pressure which will impact the quality of their products, their delivery speed and the working environments for their employees.

 

Global

(Risk up)

Sub-Saharan Afric

(Risk up)

Middle East & North Africa (Risk up)

Western &Central Europe

(Risk down)

Eastern Europe &Central Asia

(Risk up)

 

Asia Pacific

(Risk up)

Latin America

(Risk up)

North America

(Risk static)

Q4 2014

78.2

2.40

7.22

24.16

6.74

25.65

5.77

6.30

Q3 2014

77.9

2.38

7.20

24.20

6.57

25.55

5.73

6.28

*Higher numbers represent a larger contribution to global supply chain risk. 

Australia, in particular, has seen commodity prices put pressure on the mining industry, where a combination of low levels of investment and falling levels of unemployment have forced down competitiveness. The importance of Australian raw materials across Asia Pacific is the principle driver for the region’s increased risk score in Q4, up to 25.65 from 25.55 in Q3.

In Latin America, Brazilian, Chilean and Argentinian suppliers are all suffering from lower soy bean and copper prices. Taken together with austerity measures necessitated by the economic recession, Brazil is experiencing violent political protests which could see supply chains disrupted further.

In Sub-Saharan Africa, meanwhile, the drop in commodity prices has had a serious impact on national budgets, with Nigeria, for instance, earning 90% of its government revenue from oil. With budget deficits rising, infrastructure improvements, which have proved a vital source for growth in recent years, may be cut and with them access to foreign markets. Finally Eastern Europe, already one of the most risky regions for supply chains to enter, has been further hit by a combination of deteriorating oil prices and the knock-on effects of further EU sanctions against Russia.

Only Western Europe has seen a marginal reduction of supply chain risk (from 24.20 to 24.16), with advanced manufacturers in Germany especially, able to pass on the benefits of lower input costs to consumers with the price index for consumer durables falling by 0.4% year on year in December. Even here, however, the outlook is bleak with the resulting deflation threatening to leave the region in a spiral of price reductions.

John Glen, CIPS Economist and Senior Economics Lecturer at The Cranfield School of Management said:

Reductions in commodity prices are not universally beneficial. Those at the top of the supply chain are immediate benefactors but those further down the chain have to contend with increased pressures from a variety of sources.  

“The lower prices manufacturers are paying for commodities will put pressure on their suppliers, who must cut their costs to compensate. In the long term this means corner cutting, declining working conditions and delayed deliveries from suppliers.

“To mitigate the challenges these pressures pose, strict adherence to best practice is essential for procurement managers with supply chains reaching into growing risk areas, such as Australia and Brazil.”

Andrew Williamson, Global Leader and Leading Economist, Dun & Bradstreet:

“As we cautioned in the last edition, the CIPS Risk Index score reversed its improving trend in Q4, deteriorating for the first time in five quarters. The sluggish and uneven pace of the global recovery has kept the risk score uncomfortably close to the historical high recorded in Q3 2013, and in Q4 2014 this unfavourable background was exacerbated by the impact of the low commodity prices on key emerging markets and by increasing geopolitical risk.

“Apart from the US and the UK, growth in the developed world remains sluggish. Nor are emerging markets able to drive global growth, as key economies (Brazil, China, Russia) are also experiencing a slowdown. Geo-political risk remains high, with the conflict in the Ukraine still smouldering and large parts of the Arab world in a state of open conflict or unstable peace. Meanwhile, the most immediate and visible effects of the oil price collapse have been negative, with a deterioration of energy-exporting countries’ external and fiscal positions. However, we expect to see more positive consequences of the low cost of energy in 2015, as the favourable impact on companies’ costs and consumers’ disposable incomes is reflected in higher economic growth in most countries.”

---ENDS---

Notes to Editors:

About the CIPS Risk Index:

The CIPS Risk Index is a composite indicator of pressures acting upon supply chains globally. The Index analyses the socio-economic, physical trade and business continuity factors contributing to supply chain risk across the world, weighting each score according to that country’s contribution global exports.

The Index helps sourcing professionals understand the risks to which to their supply chains are exposed, articulate questions and scenarios for key suppliers, inform assurance activities, check the readiness of contingency plans, support the negotiation of risk transfer in contracts, and establish factors which may impact the financial stability of tier one and sub-tier suppliers upstream.  Regular production of this Index will help procurement and supply professionals communicate and justify risk-informed sourcing decisions and support effective Supplier Relationship Management.

About the Chartered Institute of Procurement & Supply:

The Chartered Institute of Procurement & Supply (CIPS) is the leading international body representing purchasing and supply management professionals.  It is the worldwide centre of excellence on purchasing and supply management issues.  CIPS has a global community of 110,000 in 150 different countries, including senior business people, high-ranking civil servants and leading academics.  The activities of purchasing and supply chain professionals have a major impact on the profitability and efficiency of all types of organisation and CIPS offers corporate solutions packages to improve business profitability.  www.cips.org

About Dun & Bradstreet:

Dun & Bradstreet (NYSE:DNB) is the world's leading source of commercial information and insight on businesses, enabling companies to Decide with Confidence® for 172 years.  D&B's global commercial database contains more than 235 million business records.  The database is enhanced by D&B's proprietary DUNSRight® Quality Process, which provides our customers with quality business information.  This quality information is the foundation of our global solutions that customers rely on to make critical business decisions.

D&B provides two solutions sets that meet a diverse set of customer needs globally.  Customers use D&B Risk Management Solutions™ to mitigate credit and supplier risk, increase cash flow and drive increased profitability; and D&B Sales & Marketing Solutions™ to provide data management capabilities that provide effective and cost efficient marketing solutions and to convert prospects into clients by enabling business professionals to research companies, executives and industries.

For more information, please visit www.dnb.co.uk

Page Loading
Page Loading