European retailers and manufacturers are actively looking to find suppliers in lower cost and higher risk countries, in part because of the ongoing uncertainty around Brexit, a new study suggests.
The Global Supply Chain Risk Report Q3 2019, produced by Cranfield University and Dun & Bradstreet, analysed 178,000 anonymised transactions between European buying companies and their suppliers in more than 150 countries around the world. It found rising levels of supplier criticality – the percentage of buyer-supplier relationships where the supplier is in a high risk country (+2%) – and of global sourcing risk (+5%). It found supplier criticality was highest in the retail sector at 89% – following a 5.4% rise in the third quarter. Global sourcing risk also rose in the sector – by 2.9%. Financial risk is also higher in retail – at 22.5% – despite a fall of 1.6% over the last quarter. That indicates that suppliers’ financial stablility has improved slightly, with a reduced risk of insolvency.
Manufacturing companies saw increases across all four risk areas analysed in the report: supplier criticality (+6.7%), financial risk (+2.1%), global sourcing risk (+10.6%) and foreign exchange risk. That suggests, the report authors say, that more companies are sourcing from higher risk countries whilst being more dependent on suppliers. That is likely to mean those companies have a greater degree of financial risk and a higher probability of going insolvent.
Dr Heather Skipworth, associate professor in logistics, procurement and supply chain management at Cranfield University, says companies are looking to find alternative countries to source from because of the continued lack of clarity about whether customs tariffs or other barriers to cross-border trade will be introduced as a result of Brexit.
“The manufacturing sector in Europe is facing the ongoing uncertainty around Brexit, encouraging many businesses to take more risks with the location of suppliers to avoid the possible trade tariffs and other non-tariff barriers such as quotas, embargoes, sanctions, and levies,” said Skipworth. “This is likely to increase their perceived criticality of, and dependency on, suppliers, as choices become more constrained.”
She added, “China is no longer as attractive as a source of low-cost manufacturing due to rising wages and companies are increasingly looking at alternative, higher risk countries such as India, Bangladesh, Vietnam and Romania.”
Chris Laws, head of UK product and strategy at Dun & Bradstreet, said: “2019 has been a challenging year and Q3 analysis shows the manufacturing sector continues to have the highest level of global sourcing risk. The good news is that businesses can take steps to alleviate such risks. Having full visibility of supply chain relationships and working with a more diverse range of suppliers across multiple locations can help to identify and mitigate reputational and operational risk.”