Last week saw the publication of the World Economics Forum Global Risks 2012 report, a report based on a survey of 469 experts from industry, government, academia and civil society that examines 50 global risks and the latest in a series of reports from different institutions aiming to categorise how risks are changing over time.
The 50 global risks were divided into 5 categories: economic, environmental, geopolitical, societal and technological. Although all 5 categories may present a risk to the correct functioning of a supply chain, the category ‘economic’ addresses those areas that are of greatest concern in terms of likelihood and impact in the area of macroeconomics and so has the most bearing on managing commodity risk in global supply chains.
In terms of likelihood the survey participants ranked chronic fiscal imbalances as the key economic risk for 2012 followed by commodity price volatility. As current developments out of Europe testify, fiscal imbalances may have wide ranging impacts including financial failure, geopolitical failure and societal risks relating to the collapse of governments and international trade. Meanwhile commodity price volatility was seen as both highly likely while also having a great impact due to the way that it directly impacts and magnifies other key risk categories – particularly geopolitical and societal. Indeed highlighting its importance, commodity price volatility is the only risk that has featured in the top 5 risk impacts in the last 6 surveys.
Many of the risks identified, particularly in the economics category have many cross-overs with other risks. This is certainly the case with ‘hard landing of an emerging economy’. This risk was deemed by the survey participants to have a relatively low likelihood of occurring while also being of relatively low impact. I believe this is an underestimation both in terms of likelihood and impact.
Environmental impacts have also had a large impact over the past year in terms of managing commodity risk in global supply chains, the Japanese earthquake and Thai floods being prime examples. Interestingly survey respondents rated man-made environmental risks such as rising greenhouse gases, failure to adapt to a changing climate and environment mismanagement as being more likely to occur and having a greater impact than natural disasters.
While highlighting the key risks people know about today, their interconnectivity and identifying means of mitigation is an asset to any business, it is those high impact, low probability risks, or ‘black swan’ events that businesses should also plan for. While the survey behind the report did offer participants a means of identifying a key risk which wasn’t one of the 50 identified by the authors the report would benefit from a greater discussion of these largely unforeseen events.