The commodity crunch

This year’s map includes a Commodity Crunch Exposure Matrix, which identifies the countries most vulnerable to political instability in 2009 if commodity prices continue to fall, as has been suggested by some forecasters. According to Roger Schwartz, senior vice president of Aon Trade Credit,

Volatility in global commodity prices contributed to political and economic instability in a number of countries in the 1970s and early 1980s. Countries that until recently benefited from very high commodity prices may now suffer as they fall. The types of commodities we are talking about include oils, metals and minerals.

Interestingly, Norway makes an entrance on this list, with a medium to medium-high risk. Should I be worried?

Understand – Identify – Mitigate

According to strategicrisk.co.uk, Alex Hindson, head of enterprise risk management at Aon Global Risk Consulting, says:

The key to managing supply chain risk is to gain an understanding of the risks. Mapping key supplier dependencies is the first step in taking control of the risk exposures. By identifying single point failures and quantifying exposures, organisations can take conscious decisions to mitigate exposures. Mitigation might include multiple sourcing, safety stock holding, consignment stock or business continuity plans based on rerouting manufacturing through alternative manufacturing facilities. As always plans needs to be put in place and tested prior to the event to be any guarantee of supply chain resilience.

Downloads

• aon risk map : Aon Political Risk Map

Global Risks

In 2008, the World Economic Forum published a report on Global Risks 2008 that highlighted the risk potential that global supply chains have, and the report on Global Risks 2009 even put whole countries at risk.

Related

• husdal.com: Global  Risks 2009
• husdal.com: Global Risks 2008

Some die, some survive

Nonethless, it’s not all bad, according to The Economist.Your competiors misfortune may actually be your fortune:

Today’s lack of demand creates the spare capacity that allows customers to find a new supplier quickly if theirs goes out of business.

So, while before demand had the suppliers stretched to the limit, now the lack of demand has resulted in an abundance of leftover suppliers competing fiercly for any available contracts. In other words: a buyer’s market. Or is it?

Fewer suppliers, fewer choices

According to a recent article in BusinessWeek, supplier woes may actually mean fewer choices for shoppers

Companies concerned about the future are cutting back their shipments, which is having a big impact on the supply chain, he said, leaving stores struggling to figure out which vendors are stable and which are not.

Suppliers that survive will focus on their main items and are not going to take chances on new products. Suppliers are likely to go lean, and worse:

Production streamlining and cost cutting by clothing makers could ultimately mean the disappearance of some labels from store shelves.

So, if you had to change your bank recently, soon you may also have to settle for a new favorite shirt,since you ‘old’ favorite shirt supplier is no more. “Change” is coming here, too.

Related

• husdal.com: The top ten challenges of offshoring: A risky business?

Four major challenges for 2008

Global Risks 2008, a report prepared by the World Economic Forum, maybe an unlikely source of information on supply chain risks, or maybe a particular source of information in this era of globalization,  looks at global risks from a range of different perspectives.

The report focuses on four emerging issues that are shaping the global risk landscape:

• systemic financial risk
• food security
• supply chains
• energy

Supply Chain Risks for 2008

On supply chains, the report investigates a hidden set of vulnerabilities in the global economy and their affect to supply chain disruption:

Let me highlight some excerpts from the report concerning supply chain disruptions:

All companies and governments dependent on external suppliers are exposed to the risks of
disruption in their supply chain. But the extent and complexity of current global supply chains mean that the problem of supply chain management is not limited to a single enterprise or industry: even a relatively small supply chain disruption caused by a global risk event may ultimately have consequences across the global economic system.

Akin to the infamous “Butterfly effect”, your minor disruption could have major and global implications. Or conversely, some other company’s disruption may affect you severely, even though you in no (business) way are connected to said company.

However, despite their importance both at the level of individual enterprises and at the level of the global economic system, vulnerabilities to the supply chain are generally poorly understood and managed. This is partly because the risks in the supply chain are obscured, as enterprises and governments may be indirectly exposed to a global risk disruption through
a complex range of sub-supplier arrangements. But in some measure this is due to the range of possible global risk disruptions – from geopolitical risk to a natural catastrophe to pandemics. A US- or European-based company which sources key components from Asia will indirectly face risks that they may never encounter domestically, as well as very different cultural approaches to the management of risk.

As supply chains grow more and more complex and intertwined, the risk of cross-contamination from risky supply chains to secure/safe supply chains increases, and managing risks, and in particular disruptions, can become very difficult, if cultural barriers add to the confusion and lack of common understanding and consensus of what should be done:

The fragmentation of ownership of global risks and the complexity of interdependencies will make equitable and sustainable management of global risks hugely
challenging.

The looming financial crisis

The report was published early in 2008 and given the current global economic state and fears of economic recession as of July 2008 I could not help but notice this:

Should systemic financial risk lead to a serious deterioration in the world economy, the prospects for collaborative (risk) mitigation may be reversed on several fronts simultaneously as attention turns to more immediate concerns.

Does this mean that supply chain disruptions are likely to increase now, as companies and governments are struggling to keep the economy afloat?

You can read the full report here: Global Risks 2008

Reference

World Economic Forum (2008) Hyper-optimization and supply chain vulnerability: an invisible global risk? In: Global Risks 2008 – A Global Risk Network Report, REF: 090108, World Economic Forum, Switzerland.

Related

• husdal.com: AON Risk Map 2009
• husdal.com: Global Risks 2009