Business performance depends on the integrity of your supply chain. Jeff Burchill discusses the data from the FM Global Resilience Index, including the resilience factors and drivers.
FEI Daily: Can you describe the FM Global Resilience Index?
Jeff Burchill: The FM Global Resilience Index is the definitive global ranking of nearly 130 countries’ business resilience to supply chain disruption. It’s reflective of the conditions inherent to a country that tend to contribute to companies’ supply chain risk or resilience.
The unique data-driven tool aggregates nine drivers of resilience into three factors – economic, risk quality and the supply chain itself. The three drivers of the economic factor are gross domestic product (GDP) per capita, political risk, and oil intensity, which is a measure of a country’s vulnerability to changes in oil prices and supply. The risk quality factor consists of a country’s exposure to natural hazards, the quality of its natural hazard risk management, and the quality of its fire risk management. The supply chain factor consists of how well a country controls corruption, the quality of its infrastructure, and the quality of local suppliers.
FEI Daily:How is the Resilience Index relevant to financial executives?
Jeff Burchill: Supply chain resilience is vitally important to the issues financial executives care about, including a company’s revenue, reputation, market share and shareholder value. Most any supply chain disruption you face is an opportunity for your competitors to gain an advantage.
The Resilience Index can support prudent supply chain decision-making as companies plan where to locate new facilities, select new suppliers, evaluate the resilience of the countries already hosting their existing facilities, and assess the countries where customers’ facilities are based.
FEI Daily: Were there any notable shifts from previous years? If so, why?
Jeff Burchill: I’ll give you two examples. Norway fell to second place, losing its top spot to Switzerland. Declining oil prices were at the root of Norway’s drop, given that they produce oil. And for the second consecutive year, Ukraine (ranked 125, down from 107) was among those countries with the biggest drop, reflecting the high degree of tension within the country as well as with Russia (ranked 75). For any ranking in the Resilience Index, countries’ positions are relative to one another versus absolute measures of resilience.
FEI Daily:Were there any surprises in the data?
Jeff Burchill: Yes, oil can actually cut both ways. Oil-rich Kuwait (ranked 59 this year, down from 50 last year) experienced one of the biggest declines, since its GDP was hit hard by lower oil prices. Economically, Colombia was affected similarly, and fell from 110 to 119.
Armenia (ranked 52) and Malawi (ranked 84), however, are two of the biggest risers in the Resilience Index this year, driven by an increased resilience to oil shock. Since their consumption of oil has fallen, the countries are less exposed to the dynamics of the oil market.
FEI Daily: What are some of the more common reasons a country would rise or fall on the Resilience Index from one year to another?
Jeff Burchill: Changes in their economic drivers, as measured by the Index, is probably number one. Many regions also are seeing changes in political risk and terrorism, which we expect could move rankings in coming years. Through Q1 in 2016 alone, there have been deadly acts of terrorism in Belgium (ranked 17), Turkey (ranked 79) and Pakistan (ranked 117) which could impact next year’s rankings for these countries and others.
The Brexit debate over whether the UK should leave the EU could impact the country’s future rankings too. If the UK leaves the EU, there could be a significant risk to the UK’s productivity and growth prospects, which could subsequently impact the country’s drivers affected by GDP (i.e., GDP per capita and oil intensity).
FEI Daily: What can be done to mitigate risk when it comes to selecting suppliers and siting facilities?
Jeff Burchill: The first step is to understand the supply chain risk inherent to the region you’re looking at. That’s what the Resilience Index helps you do. Conducting all that research yourself without a tool like the Index would be a tremendous undertaking for any individual. However, regardless of how you gather the information, such data helps you be more prudent as you go about making supply chain decisions. For example, we see a lot of executives wringing costs from their supply chains and making them lean – often too lean. When you’re too lean, especially in a high-risk region, your supply chain can get brittle and prone to disruption. For example, tight production supply chains were blamed for Toyota’s shutdown after the April earthquakes in Japan.
So to mitigate risk, look at every link in your supply chain, how likely it is to break, how much money your company would lose if it did, and your options for avoiding disruption.
FEI Daily: How important is monitoring a region to understand if its risk profile changes suddenly?
Jeff Burchill: It’s very important because your business performance really does depend on the integrity of your supply chain. The Resilience Index looks at the major factors and drivers of supply chain resilience, so if there’s a significant shift in a region’s risk profile, that is something for a business leader to investigate. In the Resilience Index, the data is updated annually, so a region’s ranking only has the potential to change once a year. But, if following the news on a daily basis reveals a rapidly emerging risk – say, a civil war brewing in a country you may depend upon – you may want to pay attention to that issue sooner.
FEI Daily:What recommendations would FM Global make to a company already committed to a region that ranks lower in the Index?
Jeff Burchill: If your key suppliers, facilities or customers are in a low-ranked region, view it as a red flag. Look deeper than the overall ranking and ensure you understand the key drivers within the Index that have moved the ranking down. Your response would depend on what the Resilience Index and your subsequent analysis shows. For example, a low quality of fire risk management ranking may set in motion your improvement of in-house fire protection at key facilities. Other measures you might take in response to various low resilience driver rankings include elevating equipment above flood-prone levels, finding secondary suppliers, deploying a team of engineers to conduct further evaluation, creating your own communications infrastructure, or even planning to get out of that region.
FEI Daily: Central United States ranked the highest of the 3 regions. What factors were taken into account when considering the U.S.?
Jeff Burchill: All nine of the Resilience Index’s resilience drivers were taken into account, and the primary reason Central U.S. ranked better (ranked 7) than the coasts is its lower exposure to natural hazards.
The East Coast region’s placement in the Resilience Index (ranked 11) is influenced by its exposure to windstorm, as exemplified by 2012’s Superstorm Sandy, the second costliest hurricane in U.S. history. The West Coast region’s position in the annual rankings (ranked 21) reflects its exposure to earthquakes. Understand, however, that all three of the U.S. regions are in the Index’s top 16 percent overall, which is very good.
FEI Daily: How seriously should a CFO consider this data when making supply chain decisions?
Very seriously as a starting point, in our opinion, because resilience has profound implications on revenue, reputation, market share and shareholder value. And what better way is there to gauge resilience than by aggregating vetted data from sources such as the International Monetary Fund, World Bank, World Economic Forum, as well as FM Global’s database of more than 100,000 insured locations?
On the other hand, understand that the Resilience Index scores are just one piece of a larger supply chain optimization puzzle. You still need to look at costs of land, construction, labor, distribution, shipping and myriad other factors. All else being equal, you’ll probably want to produce your goods near your customers.•