At the end of 2016, global distribution supply chain risk grew to a record high according to the Chartered Institute of Procurement & Supply CIPS Risk Index, powered by Dun & Bradstreet. The Index, monitors the effect of economic and political changes on the strength of global supply chains. The CIPS Risk Index increased to 82.64 in 2016, from 79.14 in 2015. This indicated that global supply chain risk is at its highest level in 24 years, as the pace of globalisation seemed to stagnate. A mixture of economic nationalism and recovering commodity prices are making extensive international supply chains a more risky prospect, and there has been an average of 22 new trade restrictive measures per month according to the World Trade Organisation’s latest report. Let’s look at some of those factors which increased distribution supply chain risk in 2016 and where globally the issues lie and how businesses can mitigate and control their exposures…
Global manufacturing and distribution supply chain risks from an emerging new socio-political landscape
The CIPS Risk Index indicated the increase in supply chain risk is greatest in Western Europe. Slow moving growth across developed and emerging market economies in Q2, and the vote for Brexit at the end of June heightened global supply chain risk for the rest of the year. UK supply chains were affected by the decrease in the value of the Pound which followed the Brexit vote. In turn, the cost of imports rose, leading to conflicts in Q3 between retailers and their suppliers over who should absorb these costs. The UK’s departure from the single market is set to add further disruption and uncertainty to supply chains throughout Europe in 2017 and beyond as Article 50 is triggered shortly.
In addition, there has been a wider renewal of interest in trade-restrictive measures across Europe. 2017 elections are predicted to see advances for populist parties with France’s National Front, Italy’s Five Star Movement, the Freedom Party in the Netherlands and the German Alternative for Germany all centring their policies on Euroscepticism and restrictive trade and labour measures.
Globally, Donald Trump’s election emphasised an additional shift towards Protectionism in trade policy. The closing of borders and pursuit of bilateral trade deals over multilateral ones, signals that the gap is broadening between an interdependent global economy and the pursuit of national interests. As multilateral trade agreements such as the Trans-Pacific Partnership are dismantled, global supply chains face unparalleled uncertainty. It is important to note that the North American 2016 economy sustained a trajectory of growth with US consumer spending remaining strong. However, the risk score is expected to increase in 2017 if the USA builds trade barriers with Mexico and China who are substantial players in the global manufacturing and distribution supply chain network.
Asia Pacific’s contribution to global risk fluctuated between 33.566 in Q1 to 33.168 in Q4. The growth in the Chinese “middle class” (wages increasing by 10%) has progressively reduced the competitiveness of Chinese exports in 2016. More suppliers have moved their supply chains into Indonesia or are beginning to move back into their domestic markets. The rising tide of global protectionism poses a substantial risk to supply chains relying on Chinese exports, with the Yuan dropping to an eight year low against the Dollar in the week of Donald Trump’s election.
Elsewhere, the increase in oil and transport costs is encouraging businesses to have shorter supply chains, although it remains to be seen how long this will last.
How can operations managers hedge the distribution supply chain risk?
John Glen, CIPS Economist and Director of the Centre for Customised Executive Development at The Cranfield School of Management comments, “Amidst exchange and commodity volatility, currency hedging will remain vital, while contingency plans must be put in place to protect supply chains from foreseeable trade barriers. Re-shoring supply chains will be an increasingly attractive prospect in the months to come. But, these are uncertain times for supply chain managers and there is no quick fix for the months ahead…It is more important than ever for supply chain managers to listen to their suppliers, develop closer relationships with them and to monitor any changes, so they can react quickly and ensure their supply chains remain resilient.”
It’s a challenging time for distributors operating a global supply chain. Moving forward, distribution leaders may look to invest in both technology and analytical resources in order to more efficiently use warehouse resources, reduce overtime, measure supply chain efficiency and improve productivity. ERP systems such as Microsoft Dynamics 365 for Operations and Microsoft Dynamics NAV enable distributors to maximise profits by identifying areas where they can increase efficiency and improve margins. Distributors are able to easily identify their most profitable buyer/market profiles with intuitive dashboards and querying tools, as well as measuring the cost of fulfilling orders. For a deeper insight into how technology can aid best practice in distribution and provide valuable insight, download our distribution best practice white paper or contact Prodware today.
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