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CIPS Risk Index: Economic risk in Germany and China keeps business on its toes as the impact of Ebola and IS on global supply chains fails to materialise

Thursday, November 20, 2014

- Headline supply chain risk reduces for 12th consecutive month to 77.9 in Q3 from 78.1 in Q2
- Faltering economies of supply chain power houses, Germany and China, pose the most serious risk for Q4
- Ebola is yet to contaminate world supply chains whilst IS expansion fails to deliver substantial changes to world oil supply

Economic risk, rather than war or an international epidemic, is the biggest threat to world supply chains according to the Q3 2014 CIPS Risk Index, as twelve consecutive months of lowering supply chain risk threatens to reverse course.

Supply chain risk in the Middle East and sub-Saharan Africa increased in Q3 but neither the Ebola outbreak nor the advance of Islamic State has delivered a significant increase in international supply chain risk. Instead, it is the economic slowdown in the supply chain power houses of Germany and China which could jeopardise supply chains.

Risk Index Table

Whilst the spread of Ebola has captured the world’s attention, the relative economic isolation of Guinea, Sierra Leone and Liberia has prevented the region’s economic woes from have an impact on the stability of international supply chains. That could change, however, if disease spreads to the surrounding economies of the Ivory Coast, Ghana and Nigeria.

In the Middle East, meanwhile, businesses trading with Iran, Jordan and Turkey are faced with the challenge of passing through new and hostile borders. Nevertheless, the relative safety of major oil fields has prevented a serious constriction in the region’s major export.

Despite these risks, the Index crawled to a further 0.2 point improvement reaching 77.9 in Q3 2014 having reached an all-time peak of 82.4 in Q3 2013. Supply chain risk has thus far been checked by the relative economic stability of the world’s three most important contributors to world supply chains, the USA, China and Germany, but that could change in Q4 as the economies of both Germany and China look increasingly fragile.

The combination of Russian sanctions, the rise of Euro-scepticism and a reduction in demand for German products, could see Germany lose its position as the most reliable component of world trade. Although the number of bankruptcies continues to fall in Germany, there is concern for global businesses relying on German business partners, with the ability of German businesses to pay on time deteriorating for ten consecutive months. Just over 14% of German businesses fail to pay on time.

In China, meanwhile, concerns are growing over an economic slowdown, with the World Bank urging the country to slash its growth target for 2015. A major concern for businesses working with China is the incipient credit crunch, as local government and industrial sectors struggle to pay back loans taken out during the 2008-09 crash. The letters of credit needed by suppliers trading with the country have already become more expensive in the first sign that the country’s slowdown is having an impact on global procurement.

John Glen, CIPS Economist and Senior Economics Lecturer at The Cranfield School of Management said:

“The tragic human cost of Ebola and conflict in the Middle East have not translated into a major risk for world supply chains with old fashioned economic concerns posing the biggest threat for Q4.

“Businesses from London to Laos are reliant on the economic stability of a handful of countries, whose goods and services touch on supply chains across the world.

“Economic faltering in China and Germany will therefore have a distorting effect on the riskiness of global supply chains which could well extend deep into 2015 and across all industries.

“Supply chain professionals will increasingly be trying to balance the desire to hold sufficient inventory to meet emerging sales opportunities with the risk of investing just as the growth of demand starts to slow.”

Andrew Williamson, Lead Economist, Dun & Bradstreet said:

“The CIPS Risk Index score fell again in Q3 (indicating lower global operating risk). However the pace of improvement has decelerated sharply and the risk score still remains uncomfortably close to its historical record high of Q3 2013. This year will not be the much-hoped for one of a synchronised economic recovery led by the advanced economies which many were expecting at the start of the year, six years after the onset of the Great Recession.

“The global business operating environment has been buffeted by increasingly strong headwinds since the summer. Apart from the US and UK, growth appears to be softening in the advanced economies, especially in the major markets in the euro zone. Geo-political risks remain elevated although the crisis in Ukraine appears to have stabilised somewhat since September.

“The spread of Ebola will impact global travel. All will discourage the much-needed boost in business investment expenditure as uncertainty continues to discourage capital and research spending. On the upside, weakening commodity prices may provide a fillip to economic activity into 2015. The recent drawback in financial markets in the advanced economies is also draining away risk from one of our previous concerns regarding frothy asset markets.”

Notes to Editors:

About the CIPS Risk Index:

The CIPS Risk Index is a composite indicator of pressures acting upon supply chains globally. The Index analyses the socio-economic, physical trade and business continuity factors contributing to supply chain risk across the world, weighting each score according to that country’s contribution global exports.

The Index helps sourcing professionals understand the risks to which to their supply chains are exposed, articulate questions and scenarios for key suppliers, inform assurance activities, check the readiness of contingency plans, support the negotiation of risk transfer in contracts, and establish factors which may impact the financial stability of tier one and sub-tier suppliers upstream.  Regular production of this Index will help procurement and supply professionals communicate and justify risk-informed sourcing decisions and support effective Supplier Relationship Management.

About the Chartered Institute of Procurement & Supply:

The Chartered Institute of Procurement & Supply (CIPS) is the leading international body representing purchasing and supply management professionals.  It is the worldwide centre of excellence on purchasing and supply management issues.  CIPS has a global community of 106,000 in 150 different countries, including senior business people, high-ranking civil servants and leading academics.  The activities of purchasing and supply chain professionals have a major impact on the profitability and efficiency of all types of organisation and CIPS offers corporate solutions packages to improve business profitability.  www.cips.org

About Dun & Bradstreet:

Dun & Bradstreet (NYSE:DNB) is the world's leading source of commercial information and insight on businesses, enabling companies to Decide with Confidence® for 172 years.  D&B's global commercial database contains more than 235 million business records.  The database is enhanced by D&B's proprietary DUNSRight® Quality Process, which provides our customers with quality business information.  This quality information is the foundation of our global solutions that customers rely on to make critical business decisions.

D&B provides two solutions sets that meet a diverse set of customer needs globally.  Customers use D&B Risk Management Solutions™ to mitigate credit and supplier risk, increase cash flow and drive increased profitability; and D&B Sales & Marketing Solutions™ to provide data management capabilities that provide effective and cost efficient marketing solutions and to convert prospects into clients by enabling business professionals to research companies, executives and industries.

For more information, please visit www.dnb.co.uk

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