CIPS News


Global supply chain risk climbed to record highs, driven by uncertainty around the UK’s departure from the EU

CIPS 22 August 2016

The full impact of Brexit is still unfolding, but in the near term uncertainty is likely to elevate supply chain risk

  • Global supply chain risk climbed to 80.8 in Q2, a level not seen since 2013
  • Amid slow global economic growth and subdued commodity prices, the UK’s unexpected leave vote rippled through global supply chains
  • The full impact of Brexit is still unfolding, but in the near term uncertainty is likely to elevate supply chain risk

 

Global supply chain risk climbed to 80.8 in the second quarter of 2016, which is amongst the highest levels since records began in 1995, according to the CIPS Risk Index, powered by Dun & Bradstreet. This continued the worsening trend in global risk which has been following this trajectory since Q4 2015. Amid sluggish growth across developed and emerging market economies in Q2, the UK’s vote to leave the EU at the end of June marked an unprecedented event that is expected to have a reverberating effect on supply chains in the region, and also across the rest of the world. The Index, produced for the Chartered Institute of Procurement & Supply (CIPS) by Dun & Bradstreet economists, tracks the impact of economic and political developments on the stability of global supply chains. The UK’s risk rating was downgraded by Dun & Bradstreet from DB2a to DB2c, as a result of the leave vote. Immediately after the result, a dramatic fall in the Pound Sterling led to soaring costs for businesses that relied on importing, prompting many to reconsider their sourcing strategies. In addition, early evidence of a drop in consumer spending and business investments in the weeks following the EU referendum result increased the risk of the UK economy falling into contraction in the third and fourth quarters. A similar picture was seen across Western Europe, with early signs of a dip in consumer and business confidence raising concerns about a wider economic slowdown. As a result, Western Europe’s contribution to the CIPS risk index grew from 23.98 in early 2016 to 24.48 this quarter, the largest increase of all regions.

While the UK will still have access to the EU’s single market for at least another two years after it invokes Article 50, the medium-term outlook is less clear. If the UK and the EU are unable to find an agreement about post-Brexit market access, the effects on supply chains could be significant, potentially bringing big changes in trade and investment.

CIPS Risk Index

At a global level, the Brexit vote underlines concerns about a wider shift towards protectionism in global trade policy. In France, the UK vote has given a boost to the Front National which is campaigning for more economic protectionism; the party also wants to hold an EU membership referendum. A victory for Marine Le Pen, the party’s leader, in the parliamentary and presidential elections next year is an unlikely scenario, but if it happens, it could lead to another sharp rise in supply chain risk. In the US, the presidential election shows that a significant proportion of the population feel that global trade has not been in their interest. While the US risk score remained stable in Q2, the outlook is uncertain. If Donald Trump wins, he is likely to seek to increase trade barriers with countries such as China and Mexico, two countries at the top of the global manufacturing food-chain. This in turn will have a significant impact on global supply chain networks.

Meanwhile, 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. The country’s risk rating, as a result, improved by one quartile from DB2d to DB2c in June 2016. 

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. At the same time, the threat of political uncertainty and presence of Islamic State continued to increase the difficulties businesses endure, amplifying supply chain risk. Overall, the Middle East and North Africa’s contribution to the CIPS risk index increased slightly from 7.25 in Q1 to 7.37 in Q2. 

In Sub Saharan Africa, the lack of a significant rebound in commodity prices has widened fiscal deficits and hampered public sector spending on necessary categories like infrastructure and healthcare. Brexit’s immediate impact on the region has been limited in the wake of the UK’s referendum vote, but could increase uncertainty. Overall, the region’s contribution to the CIPS risk index increased slightly from 2.47 in Q1 to 2.50 in Q2. A comprehensive policy response could help the region weather the latest period of sub-par growth, positioning it to accelerate over the medium term.

John Glen, CIPS Economist and Director of the centre for Customised Executive Development at The Cranfield School of Management said:

“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. While the full impact of the leave vote is still unfolding, the confusion and uncertainty surrounding the current situation has already driven supply chain risk to a worryingly high level.

In these volatile times, businesses must develop bespoke contingency plans for possible scenarios. This must start with gaining clear visibility of the supply chain in order to accurately assess emerging risks. The next step would be to ensure supply chains are agile and flexible to adapt and react quickly to changes and disruptions.

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 to avoid any further exchange rate downside risk. 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. 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.

While there is a lot of uncertainty, we need to avoid talking ourselves into a recession. This requires business leaders and politicians to develop a narrative which outlines actions that can be taken to meet the economic challenges which the UK faces as a result of Brexit. At the moment Governor Mark Carney and the Bank of England are lone voices in trying to provide this narrative and they require broader support.”

Bodhi Ganguli, Lead Economist, Dun & Bradstreet

“The global operating environment remains high risk, reflecting the slowdown in emerging markets and the failure of developed economies to embark on a robust recovery. The weak oil price in particular, and weak commodity prices in general, have to date 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.”

---ENDS---

Notes to Editors:

About the CIPS Risk Index, powered by Dun & Bradstreet:

First launched in April 2014, the CIPS Risk Index, powered by Dun & Bradstreet, 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 to global exports.

The Index helps sourcing professionals understand the risks to which 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.

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