Natural Disaster in China Would Severely Disrupt Global Supply Chains

December 7, 2011

A natural catastrophe in China on the scale of the 2011 Japan earthquake and tsunami would have an even more severe impact on supply chains, given China’s critical role in global manufacturing.

That is according to a study commissioned by global business property insurer FM Global. The FM Global Supply Chain Risk Study surveyed 100 financial executives at large multinational corporations based in North America. It shows there is significant concern among companies for the potential of natural disaster-related supply chain disruptions in China, along with a growing acceptance that firms must be more diligent in addressing their exposures in the region.

China is exposed to significant natural threats, including earthquakes, windstorms, floods and tsunamis.

The FM Global study underscores the fact that supply chains in the region are more likely to face business disruption by a natural disaster, particularly because China has not yet fully embraced many of the risk management practices followed in Europe and the United States.

“A secure and resilient supply chain creates a competitive advantage,” says Ken Davey, senior vice president, FM Global. “Delivering products and services when others can’t results in satisfied customers and opportunities to secure new ones. A fragile supply chain is clearly a competitive disadvantage if a disruption occurs.”

The FM Global research uncovered the following:

  • Twice as many companies surveyed (86 percent versus 43 percent) say they are more reliant on China as part of their supply chain for their key product lines than they are on Japan.
  • Eighty-three percent of companies surveyed consider supply chain disruption a moderate to great risk.
  • Ninety-five percent of companies reliant on China for their supply chain are concerned about natural disaster-related disruptions.
  • Sixty-five percent of companies surveyed are considering “increasing collaboration with suppliers on mitigating risk at their locations.”

Vinod Singhal, a professor at the Georgia Institute of Technology’s College of Management, said the results should be a “wake-up call” for companies that depend heavily upon supply chains in China.

“A natural disaster-related supply chain disruption in China would have far-reaching and long-lasting negative economic impact. It would slow down the global economy because China is not only a major exporter of goods, but also a major importer of goods. It would cause shortages in many consumer and industrial products that could lead to inflation and devastate the share price of companies,” Singhal said.

The findings point to how interdependent risks can have severe financial consequences in global supply chains, according to Dr. Howard Kunreuther, of The Wharton School of the University of Pennsylvania.

“Firms need to undertake proactive measures, such as finding several sources of supply so that they are not dependent on one company that may be adversely affected by a natural disaster. There needs to be a realization that the process of developing a resilient supply chain takes time,” Kunreuther said.

Supply Chain Advice

Rhode Island-based FM Global recommends businesses ask four questions when looking at their organization’s resiliency, especially when it has, or could have, a critical reliance in emerging markets such as China:

  1. Does your senior management view resiliency as a competitive advantage and has it made the necessary commitment to addressing supply chain risk?
  2. Has your organization examined how it can mitigate risk within its product design and manufacturing processes?
  3. How well does your company collaborate with its suppliers to assess and mitigate risk?
  4. Does your corporation have appropriate business continuity and disaster recovery plans in place for supply chain disruptions in emerging markets, such as China?

Source: FM Global

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