Natural disasters test global supply chain resilience as risk edges higher

Supply chain risk rose for the second consecutive quarter in Q1 2016, with several natural disasters revealing stark regional differences in the resilience of global supply chains according to the CIPS Risk Index, powered by Dun & Bradstreet.

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. International supply chain risk grew from 79.3 in Q4 2015 to 79.8 in Q1 2016, the joint highest recorded level of supply chain risk in a first quarter since records began in 1995 with North Africa, Western Europe, Asia and Latin America all seeing levels of supply chain risk grow.

Despite a 6.4-magnitude earthquake in Taiwan and a 5.8 magnitude quake in Japan (the latter falling just outside the quarter's end) natural disasters failed to have a major impact on world supply chains. 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, although the collapse of the residential Weiguan Golden Dragon complex is a reminder that these regulations are not consistently observed. Taiwan's electronics manufacturers have been able to swiftly resume production, using stock reserves to plug any gaps.

TSMC, a major supplier for Apple's iPhone, reported that only one percent of shipments would be affected by damage to its facilities, while other manufacturers including LCD panel producers and chipmakers have reported that their plants were able to shut down and restart without taking damage. In Japan, meanwhile, manufacturers were well prepared, having expanded their inventories and adopted multiple sourcing to prevent a repeat of the widespread disruption experienced following the 2011 earthquake.

Indeed, the slight increase in Asian supply chain risk this quarter, from 26.68 to 26.79, comes from manmade causes as suppliers in New Zealand and Australia struggle to make ends meet during persistently low commodity prices and the economic slowdown in China. There will be particular ethical concerns for businesses with supply chains which involve Chinese manufacturing or construction, however. Labour disputes in these sectors have risen as firms struggling with cash flow increasingly opt to withhold pay. With new evidence this quarter that the majority of supply chain managers lack the skills to detect the mistreatment of workers in their supply chain, it remains difficult to assess the scale of the problem.*

While Asian manufacturers have effectively contained the impact of natural disasters, the same cannot be said of Sub-Saharan Africa. South Africa and Ethiopia, in particular, are struggling to cope with the prolonged drought caused by the El Nino weather system. South Africa's output of white corn alone has fallen by 31% this year. Despite these factors, the relatively low share of exports coming from Sub Saharan Africa means that it only contributed 2.47 of the 79.8 points of risk in global supply chains this quarter.

Western Europe, which provides the second greatest proportion of global supply chain risk after China, saw its contribution grow slightly from 23.77 at the end of 2015 to 23.98 this quarter. The change here was driven by manmade factors with the Brussels bombings helping to fuel the growth of far right political groups in France and Poland, with the rule of law suffering significant damage in the latter. The attacks have increased calls for the passport free Schengen zone to be abandoned, a move with the potential to slow the flow of goods around Europe considerably.

The possibility that the UK could leave the EU following the referendum on June 23rd has so far only had a minor impact on supply chains with business waiting until after the vote to make any preparations. Nevertheless, there remains some evidence that long term orders are being delayed as supply chain managers wait to see how and whether new trading agreements might impact their business.

Supply chain risk in the Middle East and North Africa remained relatively stable this quarter, although there are growing signs that optimism over Iran's reintegration into global supply chains following the end of nuclear sanctions might be misplaced. Nevertheless, European businesses are particularly nervous about doing business in Iran while Iranian business culture requires personal relationships to develop gradually before deals can be agreed.

John Glen, CIPS Economist and Senior Economics Lecturer at The Cranfield School of Management said: "The latest Risk Index shows that a lack of trust between businesses can be just as damaging to global supply chains as a natural disaster.

"The weak link in your supply chain is just as likely to be a lack of cultural understanding among procurers as it is the threat of a freak weather system.

"The first step to building resilient supply chains is identifying 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."

Oana Aristide, Interim Lead Economist, Country Risk services, Dun & Bradstreet, said: "Soft commodity prices and the lack of global growth engines combined to increase supply chain risks in the first quarter."

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