Looking at Supply Chain Risk Like an Insurance Provider: Evaluating Risk Elements

- July 17, 2014 9:39 AM
Categories: Supply Chain Management, Supply Risk | Tags: ,

FM Global recently released their Global Resilience Index of countries covering supply chain risk elements associated with geographies. As they call it, the index is “an equally-weighted composite of nine core variables that affect business resilience to supply chain disruption.” In other words, the study is not just about supply chain risk itself, but the ability of countries (and organizations) to withstand the shock of supply chain risk. The full study, available here, is a useful read and we’ll be covering it in more detail in the coming weeks.

But today, I thought it would be useful to look first at the some of the elements that factor into supply chain resilience. In FM Global’s resilience index, three overall factors are factored into the risk equation. These include economic risk (e.g., GDP per capita, political risk, oil intensity), risk quality (e.g., exposure to natural hazards, quality of natural hazard risk management, and quality of fire risk management), and the supply chain itself (e.g., control of corruption, infrastructure, and local supplier quality).

As FM Global notes, “from an initial test-bed of 38 variables, nine core drivers emerged” that were then grouped into these categories. One particularly curious item in regards to economic risk is that “terrorism was found to be highly correlated with political instability, so these variables are combined into a single driver: political risk.” Further “oil intensity captures the vulnerability a country has to an oil shock – oil shortage, disruption, or sudden price hike – measured as oil consumption divided by GDP.”

Country risk will no doubt differ from company and industry specific supply chain risk elements. But by examining the two together, it becomes possible to quantify the costs of potential risk adjusted – including likelihood of supply chain disruptions.

Which countries do well (and which do not) in FM Global’s study? Stay tuned for upcoming coverage, or read the report.

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