We Americans love lists and data, ranking best and worst restaurants, hotels, doctors, doughnuts, professors, and on and on. If you can find something that does not have a ranking system, then do I have a business opportunity waiting for you.
Now in the procurement equation, while spend indeed matters, getting the goods delivered and services that you are spending on - performed on time and as promised - matters even more. And so this is where supply chain risk comes into play. So how can executives assess the relative risk of their unique supply chains – and even those of their competitors? It’s a matter of applying the right analytical tool to the right data. And surprisingly, in a day and age when supply chains routinely span many companies, many countries, and many miles, there really has not been a go-to source focused on this area.
Thus, the new 2014 FM Global Resilience Index, issued by FM Global, a leading U.S.-based property risk insurer, along with Oxford Metrica, an analytics and advisory firm focused on risk analysis, is an exciting development that C-level executives not just in the procurement area, but also marketing, IT, and overall corporate management will likely find useful for assessing supply chain risk. This newly created index takes a data-driven approach to looking at countries where firms and their suppliers are located and assesses these operational bases on three key dimensions that provide these areas both stability and the ability to recover from potential disruptive events - whether they be caused by preventable or non-preventable forces. Even looking beyond a firm’s inbound supply to the sites involved with both distribution paths of its products and the locations of end-customers, the index can allow companies to examine the relative risk of critical parts of its entire value chain from a location perspective.
In constructing the resilience index, FM Global developed a formula which assessed both proprietary risk data the firm has on over 100,000 commercial properties around the world and data from outside agencies, including the International Monetary Fund, the World Economic Forum, and the U.S. Energy Information Administration.
In all, FM Global evaluated the relative risk - and resilience capacity to recover from disruptive events - of 130 countries. Their analysts developed risk index scores for each nation. These assessments were based on nine drivers identified by FM Global and its partner, Oxford Metrica. The nine drivers were grouped into three broad categories that enable scoring countries’ risk in regards to the combined forces of their economy, political stability, dependence on foreign oil, susceptibility to natural disasters, and ability to respond, along with the impact of corruption and public/private infrastructure. The schema behind the index’s composite factors and the drivers for each are depicted in the table below.
Source: FM Global - Resilience Index: 2014 Executive Summary - June 2014
FM Global has created a very interesting and user-friendly interactive site where you can explore countries’ individual assessments on the main index score, each of the three factors, and the component drivers that make up those factor scores and rankings. This makes it easy to take a look at key countries and regions for your firm and for industry competitors. Here are the top 10 most and least resilient countries:
The 10 Most Resilient Countries (Scored out of 100)
1. Norway: 100
2. Switzerland: 98.9
3. Canada: 93.2
4. Australia: 92.1
5. Ireland: 90.4
6. Germany: 89.8
7. Luxembourg: 89.7
8. Netherlands: 87.6
9: Belgium: 87.6
10: United States Region 3: 87.4
The 10 Least Resilient Countries (Scored out of 100)
1. Dominican Republic: 0
2. Venezuela: 2.5
3. Kyrgyzstan: 6
4. Mauritania: 8.6
5. Bolivia: 11.6
6. Pakistan: 11.6
7. Nicaragua: 12
8. Guyana: 14
9: Jamaica: 14
10: Egypt: 14.2
That was not a typo in regards to the U.S. Interestingly, the developers of the index divided both the United States and China each into three distinct regions, due to the fact that “the geographic spread of these countries produces significantly disparate exposures to natural hazards.” The three U.S. regions (not named by FM Global) are:
- Region 1: Eastern U.S. (stretching from Texas to Maine mostly along the Eastern Seaboard)
- Region 2: Western U.S. (stretching from California to Washington State, including both Alaska and Hawaii)
- Region 3: Central U.S. (stretching from Arizona to Idaho all the way to Tennessee and up to Ohio and Pennsylvania).
And so while the Central U.S. was ranked in the top 10 of all countries, the higher risk of natural disasters (hurricanes for the Eastern U.S. and earthquakes for the Western U.S. caused those areas to fall in the overall rankings - to numbers 18 and 21 respectively. And the same is true with the three Chinese regions, as the area encompassing Shanghai is particularly vulnerable to typhoons and other natural risk factors.
The interplay of the three factors make for some interesting results than should cause executives to take more in-depth looks at their own company and industry-specific circumstances. For instance, countries that are strong economically, such as Qatar and South Korea, were dragged down both by their susceptibility to natural disasters and the quality of their risk management efforts. Also, while this was the initial release of the FM Global Resilience Index, the analysts behind it charted the 130 countries on the assessment measures over a four-year time frame.
This longitudinal analysis showed that countries can rise or fall dramatically year-over-year based on their own unique situations. For instance, in just one year, Bosnia and Herzegovina rose 19 places in the rankings both due to the improved political situation in the country and the higher quality of the nation’s suppliers. Likewise, Bangladesh fell precipitously in the overall rankings.
All in all, the initial publication of this measure for supply chain risk and vulnerability should be a welcome development for corporate executives and industry/financial analysts alike. Jonathan Hall, an executive vice president with FM Global, recently framed the matter as follows:
“As supply chains become more global, complex and interdependent, it is essential for decision makers to have concrete facts and intelligence about where their facilities and their suppliers’ facilities are located. The Resilience Index is a dynamic resource to better understand unknown risk in order to strategically prioritize supply chain risk management and investment efforts.”
By better understanding that the “where” factor does matter quite a bit, procurement can increase its stake in the overall smooth operation of today’s increasingly complex and far-flung corporate supply chains. In doing so, this will help elevate the important role that acquisition plays in making the entire value chain proposition work better for companies in 2014 and beyond.
The fact that the U.S. is not in the top five in the rankings should serve as a call to action. Policymakers at the federal, state, and local levels should become more informed about the factors and drivers underlying supply chain risk, most of which are really extraneous to the supply chain itself. This will help spur greater investment in American regions as a destination of choice for supply chain partners, creating jobs and opportunity in the process.