Data and technology key to managing new risks
Over the past twenty years, most of the focus on growth and investment has been on Brazil, Russia, India and China (the BRICs) – with Brazil, China and India, in particular, enjoying sustained GDP increases. Now though, we are also seeing a shift towards emerging markets such as Africa, Turkey, The Philippines and Mexico.
This shift means many businesses are facing new risks that must be analysed, understood and overcome, writes FM Global executive vice-president Chris Johnson.
One 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.
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.
Companies that manage supply chain risk will see less interruption to product flow and less volatility in their earnings as valuable human resources remain focused on productive activity. How then, can executives strengthen their businesses, mitigate risks and ensure that their resilience to disruption is a competitive advantage?
Most companies with an exposure to cross border business (whether internal or with other parties) are now looking at changing the way supply chains are designed. In this world of interconnectedness and big data, it is a business imperative to turn potential risk to a competitive advantage.
We recently embarked upon a study with analytics and advisory firm Oxford Metrica, aggregating hard, reliable, resilience-related data to help organisations answer the question, ‘where in the world is your company’s supply chain vulnerable?’
The result, the FM Global resilience index, ranks the resilience of 130 countries and territories to supply chain disruption. The index aggregates nine drivers of resilience into three factors – economic, risk quality and the supply chain itself.
So how do some of the strong emerging economies shape up?
Mexico, a new emerging market, ranks 59 out of 130 countries and territories in the 2014 index. Of the three core factors underpinning the index – economic, risk quality and supply chain, Mexico’s weakest factor is economic, where the country ranks 90th in the world, due to having low gross domestic product per capita and higher political risk.
Mexico also ranks lower when it comes to the control of corruption, where there is significant room for improvement. While the country has only a moderate exposure to natural hazards, improvements to its commitment to managing such property-related exposures would likely increase the country’s resilience to supply chain disruption.
Turkey also ranks 58 out of 130 territories in the index, just above the mid-point of the worldwide ranking. While the country maintains average local supplier quality, the country places poorly for its risk quality, where the country ranks 111th in the world, primarily due to its very high earthquake exposure.
Turkey’s performance is also is weakened by significant political risk within the country that could contribute to government instability. Similarly, corruption lowers the country’s position in the index.
As we become more reliant on outsourcing various operations, it’s important that we fully understand unknown risk exposures.
Sophisticated and broad insurance is crucial for any business, but it is only part of the story. To maintain competiveness, contain costs, avoid permanent loss of market share and share price slides, businesses must use data and technology to inform their supply chain decisions, improve their risk profiles and mitigate loss.