Most supply chain disruption could be prevented with good use of data, says Adriano Lanzilotto of FM Global;
Multinational companies are increasingly dependent on emerging economies for production, new facilities and suppliers. According to McKinsey Global Institute, by 2025 nearly half of the Fortune Global 500 companies are likely to be based in developing countries – up from only 5% in 1990 and 26% in 2013.
This migration to developing countries makes supply chain management increasingly important for organisations today. With global supply chains come new risks for disruption, which is a major threat to business continuity. Disruption can reduce a company’s revenue, cut into market share, inflate costs or threaten production and distribution.
Using data to identify and prioritise risk
The majority of loss is preventable, and sound research and data are crucial to identify and prioritise the risks facing your supply chain. By using data and financial analysis, we can recognise and avoid potential disruption, protecting revenues and supply chains, to stay resilient to changing risk dynamics.
Having the right data on emerging markets can go a long way to providing multinationals with the knowledge they need to build a resilient supply chain. That is the reason we created the FM Global Resilience Index in 2013.
Now an annual index, the FM Global Resilience Index is the first interactive, publicly available tool of its kind, and ranks the supply chain resilience of 130 countries and territories. The ranking is created by aggregating nine drivers of business resilience into three factors – economic, risk quality and supply chain that can affect the vulnerability of a business in those regions.
Below are some of the results from 2016:
- Overall, Switzerland and Norway retained the top two places in the index from last year, though this year Switzerland ranked first. Switzerland’s top position reflected the country’s high scores for an extensive and efficient infrastructure, prime quality local suppliers, strong economic productivity and resilience to oil shock. Declining oil prices were at the root of Norway’s drop from first place.
- For the second year in a row, the lowest-ranked country was Venezuela, reflecting its exposure to the twin natural hazards of wind and earthquake, perceptions of lack of control of corruption and poor infrastructure, as well as ill-perceived local supplier quality.
- Crude oil prices cut both ways. Armenia, ranked 52, and Malawi, ranked 84, were two of the biggest risers in the index this year, driven by an increased resilience to oil shock. Since their consumption of oil has fallen, the countries are less exposed to the dynamics of the oil market.
- In contrast, among the biggest fallers in the index this year were Cameroon, ranked 103, Morocco, ranked 89, Colombia, ranked 119, and Kuwait, ranked 59, all of which now have a lower resilience to oil shock. For Cameroon and Morocco, the primary cause was an increase in oil consumption. For Colombia and Kuwait, however, oil consumption remained stable while lower oil prices fed through to a fall in gross domestic product (GDP). This fall in economic productivity, while maintaining the same level of oil consumption, resulted in greater vulnerability to an oil shock.
- In Europe, France, ranked 19, and the United Kingdom, ranked 20, retained their positions from last year, while Germany rose by two places up to number 4.
Giving executives easy access to authoritative information on factors that could disrupt their supply chains is a simple way to analyse the potential for business risk and drive better decisions. Resilient supply chains give businesses a distinct advantage by protecting their operational integrity, revenue stream, market share and shareholder value. A fragile supply chain, on the other hand, can bring a company to its knees, sometimes for the long term.
The FM Global Resilience Index, and other tools like it, will help businesses understand exactly where they are susceptible to loss. While insurance is crucial for any business, it is only part of the story. To avoid permanent loss of market share and share price slides, businesses must evaluate overseas risk, and use data and technology to make good supply chain decisions, improve their risk profiles and mitigate loss.
Adriano Lanzilotto is Client Service Manager, London Operations at FM Global, who will have more on the Resilience Index at their Airmic conference stand.
This article was first published by Business Risk Europe, and can be viewed here