Top supply chain risks for European companies by industry – Q1 2019
The quarterly “Global Supply Chain Risk Report” investigates the level of perceived supply chain risk faced by European companies with international supplier relationships. Using four key metrics – supplier criticality, supplier financial risk, global sourcing risk, and foreign exchange risk – it assesses overall supply chain risk and provides businesses with a view of trends within their industry sector and the wider economy. By analysing trends by sector, the report highlights areas for monitoring and consideration in procurement decisions.
The Q1 2019 report finds that the retail sector experienced the greatest increase in risk since Q4 2018 out of the seven sectors measured, with three out of the four metrics increasing significantly. Three out of the four metrics are also at the highest level of all seven sectors reported. Data for the retail sector indicates high levels of dependency on suppliers, which suggests a propensity to off-shore to low-cost, high-risk countries where suppliers are more likely to be financially unstable.
Construction industry’s top supply chain risks and opportunities
The construction sector had a small increase of 0.6% in Supplier Criticality, maintaining the very high level of 84% of relationships reported within this sector being classified as critical or key, showing a high perception of dependence on suppliers. On the other hand, Financial Risk for this sector continued a declining trend, reducing by a further 5%, showing a 10.5% reduction compared to three quarters ago and indicating that a higher proportion of suppliers are financially stable. Both Global Sourcing Risk and Foreign Exchange Risk remained exceptionally low, because the majority of the suppliers are located in Europe (if not the buyer’s country), where country risk ratings tend to be low and the transaction currency is euros.
Current risks and opportunities in manufacturing industry
The manufacturing sector has enjoyed an overall reduction in risk, where three metrics have remained the same and Global Sourcing Risk has continued a downward trend – decreasing by 8% over the last quarter and by 31% over the last two quarters. This indicates a slowing (but still noticeable) downward trend in buying companies sourcing from suppliers in high-risk countries. Further, manufacturing is no longer at the highest level of the seven sectors reported, since retail has experienced a marked increase in Global Sourcing Risk this quarter. Meanwhile, the Supplier Criticality metric for the manufacturing sector was around 36%, the second lowest for the sectors reported, indicating that the perception of dependence on suppliers is relatively low. Financial Risk was around 22%, and Foreign Exchange Risk was around 42%, second highest out of the sectors reported.
Infrastructure sees increase in supply chain risk
The infrastructure sector – which comprises companies in transportation, communications, electric, gas, and sanitary services – increased overall risk in Q1 of 2019, continuing the trend from the last quarter of 2018. Supplier Criticality did go down 8% in the first quarter, but it’s still up 78% over the last three. And Infrastructure still has the third-highest Supplier Criticality of the seven sectors, at 73.8%. Foreign Exchange Risk continued its increasing trend, rising 22% over the last quarter and 34% over the last three quarters. This rise may be because buying companies in this sector are increasingly sourcing from other countries or are more willing to pay suppliers in different currencies (possibly to exploit currency exchange fluctuations such as the GBP/EUR exchange rate). There was a slight drop (1.5%) in Financial Risk, and the already very low Global Sourcing Risk stayed flat at 0.25%.
Supply chain risk in wholesale industry
The wholesale sector has experienced a reduction in two metrics and an increase in the other two through the last quarter. Global Sourcing Risk increased by 15%, and Financial Risk increased by 12%. This could suggest an increasing propensity to offshore to low-cost, high-risk countries, where suppliers are often more likely to have low financial stability. On the other hand, Foreign Exchange Risk has reduced by 5%, suggesting that buying companies may be insisting on paying in the suppliers’ own currency, possibly to exploit exchange rates. This is supported by the falling trend in Supplier Criticality, which reduced by 6% in the last quarter and by 14% over the last three quarters (indicating a reducing dependency on suppliers and possibly increased buying power).
Greatest overall risk increase is in Retail
The retail sector has experienced the greatest overall increase in risk of all seven sectors, with a reduction only in the perception-based metric, Supplier Criticality, and an increase in the three objective measures. Further, while retail Supplier Criticality has reduced by 5% over the last quarter, it remains the highest out of the seven sectors reported, at just over 84% (showing a sustained perception of high dependence on suppliers). At the same time, Global Sourcing Risk increased by 34%, Financial Risk by 15%, and Foreign Exchange Risk by 33%. This could suggest an increasing propensity to source from low-cost, high-risk countries, where suppliers have different currencies to the European buying companies and can be more likely to have low financial stability. The very high levels of supplier dependency indicated by the Supplier Criticality figure could also mean that the buying companies do not have the power to insist on paying suppliers in their own currency, where this might exploit exchange rates.
Reduced overall risk in financial services
The finance sector has seen the greatest overall reduction in risk, with all four risk metrics continuing a reducing trend over the last quarter and exhibiting marked reductions over the last three quarters. Supplier Criticality has reduced by 13%, Financial Risk by 8%, Global Sourcing Risk by 7%, and Foreign Exchange Risk by 7%. This suggests that the finance sector is taking a more cautious approach to sourcing from low-cost, high-risk countries and that this is contributing to reductions in Foreign Exchange Risk. It could also be that the low levels of supplier dependency indicated by Supplier Criticality mean that buying companies have higher buying power and can insist on paying in buyers’ own currency to avoid currency fluctuations.
Supply chain risks in services sector mostly stable
The services sector has enjoyed a stable quarter, with only the perception-based Supplier Criticality measure experiencing a significant change. Indeed, Supplier Criticality has seen a marked increase of 50%, suggesting buying companies feel far more dependent on their suppliers. Now 34% of buying companies perceive their suppliers as critical or key. Given that the other risk metrics have remained stable, this suggests a consolidation in the supplier market, possibly leading to fewer qualified suppliers or to increased demand.
About the report
Experts from Cranfield’s Centre for Logistics and Supply Chain Management have analysed data supplied by Dun & Bradstreet, drawing conclusions from around 200,000 anonymous transactions between European buyers and their suppliers located in more than 150 countries worldwide.
The report looks at four key risk metrics (Supplier Criticality, Supplier Financial Risk, Global Sourcing Risk and Foreign Exchange Risk) to assess supply chain risk and provide businesses with a view of trends within their industry sector and across the wider economy. The focus industry sectors are construction, manufacturing, retail, infrastructure, wholesale, finance, and services.
By analysing trends by sector, the report highlights areas for monitoring and consideration in supplier management decisions.
The full “Global Supply Chain Risk Report” is available to download from the link below.