How data and analysis can help businesses mitigate risks from overseas relocation, outsourcing and operations.
European companies are becoming dependent on the emerging economies for production, new facilities and customers. Today, over half of the income from the global 500 occurs outside the country of domicile, proving we have shifted towards a truly global business landscape. More than 90 Global Fortune 500 companies are headquartered in emerging markets, whereas in 1996 there were none. This shift means many businesses are facing new risks that must be analysed, understood and overcome.
A growing number of businesses are outsourcing manufacturing and purchasing parts and services from outside companies, using techniques such as just-in-time inventory strategies and relying on single source vendors. While the financial benefits are obvious, the added risks are often overlooked. When transferring a significant portion of the day to day operating risk to a supplier, a business is vulnerable to the financial consequences of major supply disruption.
It is not that companies should never outsource to higher risk countries, but rather, that they can help themselves by factoring the attendant risks into the decision-making process and, having identified those potential risks, put measures in place to prevent them from becoming a reality.
Extended supply chains
Multi-nationals are beginning to look at changing the way supply chains are designed. Often problems are exacerbated by the continuing issue of the clustering of industries in one location. When there is a high concentration of manufacturers of a specific product in one area, if a natural disaster strikes companies may find they have no supply chain alternative. Businesses need to make sure that they have a plan B.
The Japanese tsunami in 2011 is a good example of this. Unforeseen disaster halted the supply of many products, resulting in significant aggregate loss to market. One of the key lessons learnt was just how complex the supply chain was, particularly in the automotive industry, which was radically affected by the quake and tsunami. Some manufacturers suffered more than others, and it is well documented that particular models were out of production longer than others. For affected companies, this damaged their income streams and brand reputation. It was inevitable that the businesses that returned to production sooner gained competitive advantage.
One key thing businesses need to consider is natural catastrophe exposure. As more companies are locating in, and supplying to, rapidly developing economies, they often unknowingly take on greater exposure to natural disasters, lower safety standards and less reliable legal systems. Businesses must acknowledge the new risks and protect their bottom lines.
The Thailand floods a couple of years ago caught many companies by surprise, although it shouldn't have, considering that affected businesses were located in a flood zone. While many electronics manufacturers were adversely affected, companies with strong risk management solutions in place managed to get back on their feet more quickly.
In fact, analysts gave the floods in Thailand as the primary reason for Seagate Technology recapturing the worldwide lead in hard disk drive shipments in the last quarter of 2011. Seagate chose to locate their HDD manufacturing plant in Thailand on high ground, which meant that the company was less adversely affected by the floods. As a direct result, Seagate outperformed its competitors and gained the market leadership position.
The message is clear: companies that are well risk-managed will withstand losses more effectively than those that are not. Companies that seek market-leading loss prevention advice across their networks are far more likely to implement solutions to mitigate risks. If they do, companies will recover well and prove themselves to be resilient in a complex supply chain environment. They gain credit for their recovery plans and find their reputation considerably enhanced.
Using data to identify and prioritise risk
Businesses cannot afford to experience an interruption in production, as this will prevent them from providing products or services, resulting in a negative impact on market share and even shareholder value. Companies that manage risks well, see less interruption to product flow. This bolsters their reputation as reliable suppliers. How then, can executives strengthen their businesses, mitigate risks and ensure that resilience remains a competitive advantage?
A robust supply chain is a resilient supply chain. Robustness requires a variety of factors, including well-maintained infrastructure, strong economies that are resistant to shock, and research based technology to protect facilities against natural catastrophes.
To make good supply chain decisions requires lots of data and context. When building resilience to natural catastrophes and other property losses, companies need to have a better understanding of how the risk landscape has changed, in order to identify the "pinch points" where problems may cause business interruption. Using data, companies can analyse the risks they face and prevent or control them.
New data from the resilience index
We have spent nearly two centuries analysing risks and helping companies prevent business interruption. We worked with Oxford Metrica, aggregating hard, reliable, resilience-related data to help organisations answer the question, ‘where in the world is your company vulnerable?’.
The result is a first-of-its kind, interactive online tool called the FM Global Resilience Index. It ranks the supply chain resilience of 130 countries around the world, helping executives prioritise where they should focus their risk management and investment efforts. The index aggregates nine drivers of resilience into three factors – economic, risk quality and the supply chain itself.
The idea was to give decision makers the data to enable them to generate powerful insights about risk and opportunities in the supply chain to guide their operating strategy in four key areas:
1. Selecting suppliers based on the supply chain risk/resilience of the countries in which they are located
2. Deciding where to locate facilities
3. Evaluating the resilience of the countries hosting existing facilities
4. Assessing the supply chain resilience of countries where customers’ facilities are based
We found that countries with strong economies, high-quality infrastructures and a high level of risk quality (such as fire safety standards) score well. This is why Norway, Switzerland and Canada appear in the top three slots in 2014. Norway leads the way, helped by its North Sea energy supply, making it highly resistant to the threat posed by any shock to energy prices.
Ireland, in spite of its 27th position for supply chain drivers, makes it into the top five because of its strong commitment to risk management and low exposure to natural hazards. By contrast, the Philippines (14th from the bottom) has a huge exposure to natural hazard risk, as the slow recovery from Typhoon Haiyan has shown, and too little economic strength to demonstrate strong resilience.
Because the data is refreshed annually, the Resilience Index also enables executives to identify countries that are working to make themselves more attractive supply chain partners. In 2014, Bosnia and Herzegovina rose 19 places due to significant improvements in its infrastructure as well as in the quality of its suppliers.
Other big risers are Armenia, Tajikistan, Kazakhstan and Jordan. In the case of Tajikistan and Kazakhstan, the improvements are due to improved quality in fire risk management, while Armenia and Jordan enhanced their natural hazard risk management capabilities. Greece, while it only rose one position in the composite rankings, made the biggest improvement in risk quality, which balanced out its poorer political and economic environment.
The Resilience Index also reveals surprising rankings for some leading economies with apparently strong supply chains. South Korea (69) has strong scores on economic factors, but is dragged down by its risk quality scores, which capture exposure to natural hazards, quality of natural hazard risk management and quality of fire risk management.
Companies now have more access to data and information about the countries they operate in. As we become more reliant on outsourcing various operations, it’s important that we fully understand our new risk exposures. Supply chain risk is recognised in today’s economy as a major threat to business continuity, as a break in the supply chain can reduce a company’s revenue, cut into market share, inflate costs, or threaten production and distribution.
The Resilience Index, and other tools like it, will help UK businesses understand exactly where they are susceptible to loss. Sophisticated and broad insurance is crucial for any business, but it is only part of the story. To avoid permanent loss of market share and share price slides, businesses must use data and technology to analyse supply chain decisions, improve their risk profiles and mitigate loss.