Tips for Gauging Your Supply Chain Risk and Resilience

Supply chain risk: Everyone knows it’s important to watch, but chief executives often delegate supply chain management to their senior executives until there’s a problem.

Although delegating supply chain management generally makes sense, it’s critical for business leaders to bear in mind that hidden threats to supply chains—whether fires, natural hazards, political risks, terrorism, corrupt officials, weak economies or shaky infrastructures—can disrupt and even devastate businesses. These disruptions could mean products don’t reach customers on time, causing both selling and buying companies to lose revenue, market share and customer trust. These losses can deeply erode shareholder value and become a board-level concern.

Yet, in their efforts to become more resilient, many businesses are focusing too little on supply chains and perhaps too heavily on traditional elements of business continuity, such as computer networks, data storage and power generation. “Companies have paid much less attention than they should to other issues that are just as important to resilience, but over which they have less control,” states a recent Conference Board report. These issues include “improving the adaptability of supply chains and the ability of employees to recover from a disaster.”

The quality of adaptability, the resistance to potential business disruption, and the ability to quickly bounce back from disaster epitomize organizational resilience. The resilience of a supply chain depends, to a considerable degree, on where in the world your key facilities are located and what is occurring in those regions.

The 2016 FM Global Resilience Index ranks 130 countries and territories on nine drivers of business resilience to supply chain disruption, spotlighting variables that can affect business vulnerability in those regions. The findings can help inform supplier selection, siting of facilities, assessments of existing supply chains and identification of vulnerable customers.

Rankings reflect threats to resilience such as depressed oil prices, natural catastrophes and the spread of terrorism. For example, declining oil prices are at the root of Norway’s drop to second place in this year’s Index. The oil producer was replaced by Switzerland, which was ranked second last year. Oil-rich Kuwait (ranked 59 this year, down from 50 last year) experienced one of the biggest declines, since its gross domestic product (GDP) was hit hard by lower oil prices. Economic productivity suffered similarly in Colombia, which fell from 110 to 119.

Crude oil prices, however, cut both ways. Armenia (ranked 52) and Malawi (ranked 84) are 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.

Political risk can be another severe constraint on business resilience. A component of political risk is terrorism. Already in 2016, there have been deadly acts of terrorism in numerous countries, including Pakistan, Belgium, Côte d’Ivoire, Nigeria and Turkey.

In addition to oil intensity and political risk, other drivers affecting countries’ resilience to supply chain disruption include GDP per capita, exposure to natural hazards, quality of natural hazard risk management and fire risk management, as well as control of corruption, quality of infrastructure and local suppliers.

Users can compare countries against one another by their rankings and scores year-over-year and by any driver.

So as a practical matter, what can executives do with this information? Here are some examples:

1. Planning where to locate new facilities. When practical, executives should consider choosing a country with the highest resilience to supply chain disruption.

2. Selecting new suppliers. When a business is considering suppliers, it’s wise to evaluate the resilience of the country where each is based.

3. Evaluating the resilience of the countries already hosting existing facilities. When a company is assessing its exposures to ensure business continuity, executives should pay special attention to facilities in less resilient regions. The Index can help see potential vulnerabilities with more clarity.

4. Assessing the resilience of countries where customers’ businesses are located. If the customers that a business is supplying are vulnerable to disruption, the reciprocal revenue stream may be at risk as well.

Ultimately, if a country’s ranking in the Resilience Index causes you to pause (e.g., you learn that a key facility of yours is in a region of declining resilience), ensure you understand those key drivers that underpin the Index which may have moved the ranking down. For example, a country’s low quality of fire risk management might prompt you to look closely at the level of fire protection at key facilities there. Other measures might include deploying a team of engineers to assess risk quality of key facilities, contingency or emergency response planning, or even taking efforts to restructure your supply chain away from a region.

And while the Index contains vetted data from sources such as the International Monetary Fund, World Bank and World Economic Forum, the country rankings are just one informative piece of a larger supply chain optimization puzzle. You still need to look at costs of land, construction, labor, distribution, shipping and myriad other factors.

In the end, with your supply chain resilient, you can return your focus to concerns that tend to occupy chief executives every day, including attracting top talent, expanding in key markets and outperforming less resilient competitors.