Risk centers and connectors

This year’s risk map is rather different from the map presented in 2011. Last year, the map was presented in a likelihood-impact risk matrix fashion, and not that easy to read, since there were simply too many risks and too many connections. Economic disparity and global governance failures were at the center, with other risk scattered around:

This year the map has changed. Based on a survey of 469 experts and industry leaders, the report identifies 5 centers of gravity (top 5 risks), and 4 critical connectors, hence the diamond shape of the diagram:

To me, this makes the report and its conclusion much easier to understand.

A new methodology

The seventh edition of the Global Risks report is based on a revamped methodology combining surveys, workshops and interviews that engage various stakeholders of the World Economic Forum. The starting point is a set of 50 global risks – which are defined as having global geographic scope, cross-industry relevance, uncertainty as to how and when they may occur, and high levels of economic and/or social impact requiring a multi-stakeholder approach to response. They are divided into five categories: economic, environmental, geopolitical, societal and technological risks. In each category there is a center of gravity and four connectors between the category, with additional weak signals at the outer edge.

Centers of gravity

- Chronic fiscal imbalances (economic)
- Greenhouse gas emissions (environmental)
- Global governance failure (geopolitical)
- Unsustainable population growth (societal)
- Critical systems failure (technological)

Connectors

- Severe income disparity (economic)
- Major systemic financial failure (economic)
- Unforeseen negative consequences of regulation (economic)
- Extreme volatility in energy and agriculture prices (economic)

Weak signals

- Vulnerability to geomagnetic storms (environmental)
- Proliferation of orbital debris (technological)
- Unintended consequences of nanotechnology (technological)
- Ineffective drug policies (societal)
- Militarization of space (geopolitical)

Three constellations of risks

Three distinct constellations of risks that present a very serious threat to our future prosperity and security emerged from this year’s set of risks:

- The seeds of dystopia

Dystopia, the opposite of a utopia, describes a place where life is full of hardship and devoid of hope. Many countries are currently heading towards dystopia, where the failure to manage ageing populations, youth unemployment, rising inequalities and fiscal imbalances may lead to greater social unrest and instability in the years to come.

- How safe  are the safeguards?

Safeguards and regulations are necessary and needed in a world that depends on technology, but as the systems on which the global economy relies become increasingly interdependent and complex, what is meant as a mainly national regulation can capable of having unintended repercussions globally. What one country does, can affect many.

- The dark side of connectivity

The critical infrastructure15 that underpins our daily lives increasingly depends on hyperconnected online systems. The security of these systems are no longer just a matter of private concern, they have become a public good and new mechanisms are urgently required to secure private investment in exploring existing system vulnerabilities before they can be exploited.

Conclusion

Now in its seventh edition, the Global Risk Report is perhaps the most comprehensive report on the most important global risks that have the potential to shape our shape, change and disrupt if not destroy our future. It is a report that should be read and acted upon, it is not a mere whitepaper, it is a tool for a less worrysom future.

Related link

• weforum.org: Global Risks 2012 (interactive)
• weforum.org: Global Risks 2012 (pdf)

Related posts

• husdal.com: Global risks and global supply chains
• husdal.com: Transportation risks in global supply chains

My point of view

The reason why I came across this initiative is that I was invited to contribute to it, by sharing my thoughts and insights about what I think are most pressing issues in supply chain risk management. In particular I was asked regarding systemic exogenous supply chain risks, their distribution (whether they are acute and concentrated or dispersed and pervasive) and their current state (whether these are emerging or constant risks).

One of the most pressing issues that I see is the consolidation of third party logistics providers (3PLs). As more and more supply chains span the globe, many of them are operated by the same 3PL, using the same equipment or carrier for many supply chains.

If there is a disruption it will only affect one supply chain, but many, and the affected companies will all scramble to find alternative sources, and whoever is the fastest will win, as Nokia did over Ericsson in 2000. The 3PL may also have to prioritize which affected customer that should receive the most help, and probably whoever pays the most will receive the most help here.

The point is that 3PLs have become increasingly important in not only “orchestrating supply chains“, as Zacharia et al. write, they are also orchestrating the risk management of supply chains.

The Supply Chain and Transport Risk Initiative

The reason for establishing the initiative is best explained in their one-page flier:

In our physically and virtually interconnected world, the risk of systemic supply chain and transport disruptions is becoming ever more acute, affecting economic, security and geopolitical interests. The global economy has been built on the free movement and circulation of goods, components and labour.

Vast transportation networks have developed, spanning the globe, while inefficiencies, delays and slack have been eliminated in pursuit of lower cost margins and ever-more efficient supply networks.

But where do we draw the line? In our quest for greater efficiency and greater choice, are we developing robust global transport networks or building a house of cards?

The aim of the initiative is to bring together a range of leading experts from across WEF’s diverse communities to explore the most critical threats facing supply chain and transport networks and to apply new risk response tools that can promote efficient risk management, security and resiliency in our complex global trading environment.

I feel honored and privileged that I was given the opportunity to contribute, although not in a direct meeting with said experts (that would have been something), and only by phone interview with some of the key staff of the project, but nonetheless, I see it as a stamp of quality to the work I have laid down in creating this blog, and for that I am thankful.

Global Risks Meeting

The World Economic Forum’s Risk Response Network (RRN) was launched in Davos in January 2011 to bring together the world’s experts in managing risk from all sectors of society. Just three months later, the inaugural Global Risks Meeting in New York on 6 and 7 April gathered over 80 decision-makers and experts to figure out ways to better manage, respond to, prepare for and capture opportunities associated to global risks.

When reading the online report from the meeting, in particular the chapter on supply chains, my attention was immediately drawn to a figure on page 43 that looked oddly familiar:

Yes, if you are an observant reader of this blog, it is the figure I used in my post on Sheffi’s disruption profile that he used in his book on The Resilient Enterprise. Actually, from the way it is set up, I can see that the figure in the report is taken from a slide in my 2008 lecture on supply chain risk. Well, I cannot claim to be the owner of the figure, as it was drawn by Sheffi originally, but it is nice to see that my adaptation was used. This makes me wonder…did they perhaps use more of my slides at that meeting? I guess I will never know…

Supply Chain Dependencies

The chapter on supply chains is highly recommended reading for anyone interested in supply chain risk. These are the issues that the world’s leading decision-makers and experts are concerned about:

The tendency is to underpredict how vulnerable systems are, especially when they are functioning well or taken by surprise, such as when volcanic ash closed much of the European air space in 2010, almost causing an international supply chain breakdown.

Whether in transportation or cybersystems, weaknesses exist in how to communicate to the public that risk is a shared responsibility. A massive paradigm shift that takes into account a robust bottom-up approach is needed, especially with regard to first responders to a disaster.

Another vulnerability to global systems are the obstacles presented when countries have different laws and regulations governing supply chains and trade; regulators often think nationally, not globally. The challenge is to ensure that governments and regions apply consistent standards so that supply chains run more smoothly and industries can invest without too much cost to customers.

While larger companies have the capacity to monitor an entire supply chain or network, often SMEs have no control, especially when there is a disruption.

Other risks that can undermine supply chains are not just catastrophic events but also non-state actors such as terrorists and organized crime.

I think they are on the right track, and this is indeed a highly commendable follow-up of the Global Risk Report 2008, where supply chain vulnerability was highlighted as an important and perhaps invisible global risk that should no go unattended.

Supply Chain and Transport Risk Issues

What I found most delightful was that the report from the Global Risks Meeting  features “scribes” of the discussions from the meeting session. I think the supply chain and transport scribe is very illustrative, don’t you?

Perhaps not the easiest scribe to follow if you weren’t there, but it works, and brings together all the issues mentioned above. Maybe I should use this figure in my supply chain risk lecture for 2011 and spend the whole three hours dissecting all its details? Unfortunately my students will probably have a lot less to say about the figure than the experts at the meeting, but you never know…

Recommended reading

In conclusion, the website of the Supply Chain and Transport Risk Initiative, along with the Risk Response Network, and especially the report from Global Risks Meeting should absolutely be on your reading list, without any doubt. That said, what do you think supply chain experts and decision-makers should focus on in terms of risk?

Related links

• weforum.org: Supply Chain and Transport Risk Initiative
• weforum.org: Risk Response Network
• weforum.org: Global Risks Meeting Report 2011
• weforum.org: Global Risks

Related posts

• husdal.com: Future Value Chain Trends 2020
• husdal.com: Supply chain risk – an invisible global risk?

Why is road quality important for competitiveness?

Let me cite from the report:

Extensive and efficient infrastructure is an essential driver of competitiveness. It is critical for ensuring the effective functioning of the economy, as it is an important factor determining the location of economic activity and the kinds of activities or sectors that can develop in a particular economy.

Effective modes of transport for goods, people, and services—such as quality roads, railroads, ports, and air transport—enable entrepreneurs to get their goods to market in a secure and timely manner, and facilitate the movement of workers to the most suitable jobs.

Infrastructure is important, but how important is it really? Are roads more important than computers?

Norway’s predicament

This is how it looks like for Norway’s infrastructure (rank out of 134)

Quality of overall infrastructure……………………………28
Quality of roads……………………………………………………48
Quality of railroad infrastructure …………………………31
Quality of port infrastructure………………………………12
Quality of air transport infrastructure…………………10
Quality of electricity supply ………………………………10

The air transport ranking is unsurprising, given the fact that Norway maintains close to 50 airports serving less than 5 million people. The road quality, however, is a different story.

A constrained infrastructure?

Not only the state of transportation infrastructure, but also the access to transportation is a problem for Norway. In a paper I presented at TRB 2009, Does location matter – Supply chain disruptions in sparse transportation networks, I suggested a new framework for the categorization of transportation networks based on the number of transportation modes and links available:

Sidenote: about the report

The Global Competiveness Index GCI is based on 12 pillars of competitiveness, providing a comprehensive picture of the competitiveness landscape in countries around the world at all stages of development. The pillars include: Institutions, Infrastructure, Macroeconomic Stability, Health and Primary Education, Higher Education and Training, Goods Market Efficiency, Labour Market Efficiency, Financial Market Sophistication, Technological Readiness, Market Size, Business Sophistication and Innovation.

The rankings are calculated from both publicly available data and the Executive Opinion Survey, a comprehensive annual survey conducted by the World Economic Forum together with its network of Partner Institutes (leading research institutes and business organizations) in the countries covered by the report.

The report contains a detailed country/economy profile for each of the 134 economies featured in the study, providing a comprehensive summary of the overall position in the rankings as well as the most prominent competitive advantages and disadvantages of each country/economy based on the analysis used in computing the rankings.

Links

• World Economic Forum: World Competitiveness Report
• aftenposten.no: Norsk veistandard på bunn i Europa

Related

• husdal.com: Are roads more important than computers?
• husdal.com: How come one of the world’s richest countries has one of the world’s worst road network?

Supply chains?

Supply chains not mentioned anymore, simply because the risk scenarios have changed so dramatically since the last report. Nonetheless, the report does highlight the risk of underinvestment in infrastructure, an important asset in any supply chain.

Links

• World Economic Forum: www.weforum.org

Downloads

• Global Risks 2009: Download the report

Related

• husdal.com: AON Risk Map 2009
• husdal.com: Global Risks 2008

Related

World Economic Forum – Global Risk Reports

A dire prediction

The report said, in these words:

From a relatively positive picture of the stability of the world economy in early 2007, the world is entering 2008 under conditions of considerable economic uncertainty. The possibility of a US recession has undoubtedly increased, but there is considerable debate as to how this would impact global prosperity.

I don’t think there is much debate anymore. The impact is being felt worldwide, and has dominated the news headlines during the last weeks, each day revealing an ever-worsening picture of the crisis, even in my own country, where the Norwegian government today announced drastic measures.

The IMF to the rescue?

Even the International Monetary Fund IMF is now stepping up its actions. Normally, I associate the IMF as an institution that lends money to countries with balance of payments difficulties, i.e. low-income countries, where the money is being used especially for poverty reduction. If the IMF is stepping in to help the global economy, I reckon that things really are serious, serious enough to warrant this quote from the Global Risks 2008 report:

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.

The biggest risk: Asset price collapse

I should have seen it coming. The aforementioned report shows a risk matrix of the 26 core global risks, indicating their likelihood and their severity of impact. An “asset price collapse” is tanked as having more than 20% likelihood, and the impact is estimated at more than 1 trillion US$. Is that 1 trillion globally or 1 trillion in the US alone. The latter seems more true than the former these days.

I can only hope that the global financial turmoil does not translate into a global supply chain turmoil. Considering how interwoven supply chains are, it is not unlikely that some companies will experience a collapse in their supply chain as a result of financial instability.

Link

• 3E Intelligence: Another Cassandra call? WEF’s pessimistic outlook for 2008

Related

• husdal.com: Hyper-optimization and supply chain vulnerability: an invisible global risk?

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