Country Risk -- What You're Overlooking

Nov. 21, 2011
Country risk encompasses political, economic and commericial risks.

Natural disasters, political uprisings, trade policy changes and economic crises can have devastating impacts on supply chain operations. Why? Because it is difficult to say where and when they will strike next.

Manufacturers can take many measures to mitigate the impact of supply disruptions, but when it comes to the unpredictable, it's all about how quickly they can respond.

From the tsunami in Japan and flooding in Thailand to the political uprisings in the Middle East, the events of 2011 put a spotlight on the importance of knowing where your suppliers -- and their suppliers -- are located and what risks come with the territory.

More Than a Thumbtack on a Map

Companies need to shift how they think about supplier risk management. Procurement professionals now need to have a handle on a wide gamut of things from deep intelligence on supplier financial health to predictive information about commodity prices. One area, however, that needs more attention is country risk.

Sure, someone at your company knows where to send payments, but a supplier's physical location is more than just a pinpoint on a map -- it is tied directly to the shifting political, social and economic forces of its region.

Country risk, which encompasses the risks associated with a supplier's geographic location, shows up in many forms:

  • Political risk-- Egypt and Libya dominated the headlines as their leaders were taken down through violent uprisings. As a result, production in those countries was halted for weeks. Companies need to understand what's going on around a supplier's location - Is the leadership stable? Do the leaders and their policies foster a healthy business environment?
  • Economic risk -- Greece, Italy and even the almighty U.S. fell victim to debt crises. The economic troubles caused breakdowns of supply chains and forced some businesses to close. Companies need to determine if a country's finances -- debit, credit rating, currency, etc.-- are stable. Is a particular country/region a hot pocket of activity or will the country sustain long-term growth? Currency volatility is starting to have a major impact on supply chains -- how can companies hedge against these fluctuations?
  • Commercial risk -- With a larger-than-ever focus on CSR, companies are digging deep before deciding to partner or buy from another company. They want to understand everything there is to know about a product -- even where its raw materials are sourced from. Global trade is not an isolated business. It is important to understand if other companies (particularly competitors) want to source from a certain area.

Where in the World are Your Suppliers' Suppliers?

If you can identify where your suppliers are on a map -- and the risks associated with those regions -- you're ahead of the game. But where are their suppliers located?

Let's assume a specific component for your product is made in China; however, the manufacturing of the component's parts is outsourced to sub-Saharan Africa. Your company may have that data -- buried in a database or a separate system -- but the team monitoring supplier risk may not.

Visibility into the multiple tiers of the supply chain empowers companies to mitigate risks they may not have known existed - like an impending credit downgrade or political unrest.

Learning How to Juggle

It's a tall order -- companies need to address the challenges of knowing, planning and managing the unpredictable risks associated with doing business across borders to effectively mitigate risk.

Instead, many take on a 'hope and pray' strategy. Nearly 80% of companies have no process in place, 10% only have an outline -- and on the other side of the spectrum, 10% have a process so complex, so resource intensive, that it's impossible to put into practice.

Country risk encapsulates a lot into a single concept. Before penning a risk strategy, take a step back and ask yourself how you can make your business successful, and what can hinder that success. What are the commodities that could sink your company if they suddenly became scarce or unavailable? The focus for your contingency planning and supply risk strategy lies in that answer.

The next step is to understand what insights you need to have and create a plan for obtaining that data by deciding which processes to incorporate and what technical underpinnings you need to have to enable decision-making.

Manufacturers have spent the last decade nailing down efficiency. Now companies need to plan for the unplanned -- something that's both a science and an art, and requires a very different set of skills and information. If the events of 2011 are any indicator of the uncertainty that lies ahead, now is the ideal time to shore up this capability.

By Jim Lawton, president and GM of D&B Supply Management Solutions.

About the Author

Jim Lawton | Vice President, Universal Robots

Jim Lawton is vice president of product and applications management at Universal Robots.

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