Global Supply Chain Risk Climbs to Highest Level in 24 Years
Thursday, February 16, 2017
Global supply chain risk grew to a record high at the end of 2016 as the CIPS Risk Index, powered by Dun & Bradstreet, rose to 82.64, from 79.14 at the end of 2015. The figures put global supply chain risk at the highest level in 24 years following a year in which the pace of globalization appeared to slow.
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.
A combination of economic nationalism, rebounding commodity prices and the growth of a burgeoning Chinese middle class is making long international supply chains a more risky prospect while there has been an average of 22 new trade restrictive measures a month in the World Trade Organization's latest report.
The upward trend in supply chain risk is clearest in Western Europe, where contribution to global risk rose to 30.681 in Q4 from 30.048 in Q1. Amid sluggish growth across developed and emerging market economies in Q2, the UK's vote to leave the EU at the end of June heightened global supply chain risk for the rest of the year. Supply chains in the UK were severely hit by a depressed pound which followed the Brexit vote in June. This pushed up the cost of imports, leading to some early conflicts in Q3 between retailers and their suppliers over who should shoulder these costs. The increasing likelihood of a “hard” Brexit, and the UK's departure from the single market, will add further disruption to supply chains throughout Europe.
North America's contribution to global risk remained static over 2016 as the North American economy continued on a trajectory of growth and U.S. consumer spending remained strong. This risk score is likely to increase in 2017 if the U.S. builds trade barriers with Mexico and China, who are significant players in the global manufacturing supply chain network.
Asia Pacific remained the highest contributor to supply chain risk in 2016 due to the region's importance to global supply chains. Asia Pacific's contribution to global risk fluctuated between 33.566 in Q1 to 33.168 in Q4. The emergence of a larger middle class in China has gradually reduced the competitiveness of Chinese exports in 2016 with wages increasing by 10 percent.
As a result, suppliers have begun moving their supply chains into nearby Indonesia or even beginning the process of reshoring back into their domestic markets. Going forward, the rising tide of global protectionism poses a considerable threat to supply chains relying on Chinese exports with the yuan falling to an eight-year low against the US dollar in the week of Donald Trump's election.
Elsewhere, the impact of rising oil costs in Q4 has driven up the costs of other commodities. 2016 saw a trend of persistently low commodity prices disrupted when OPEC restricted supply, pushing oil prices up by $10 per barrel in Q4. This worsened the cash flow crisis for oil exporters in Eastern Europe and Central Asia, the Middle East, North Africa and Sub-Saharan Africa. This increase in transport costs is encouraging businesses to have shorter supply chains although it remains to be seen how long the new agreement will hold. Contribution to global risk in the Middle East and North Africa increased from 9.08 at the beginning of the year to 9.09 in Q3.