How will recent world events such as the Ebola outbreak in West Africa and sanctions on Russia effect the security of global supply chains?

Williamson says that “absolute transparency” has never been more important given the “astonishing amount of interdependencies in modern supply chains”. He cites the example of the Japanese tsunami in 2011, which affected car production in the UK globally.

In an ever more connected world, what happens on one side of the globe can directly impact businesses thousands of miles away. With that in mind, UK retailers will be keeping a close eye on current global events – from the Ebola outbreak to the ongoing conflicts in the Middle East – with a view to mitigating the impact on their supply chains.

Managing risk is a fundamental requirement of any business, but it is also one of the most challenging. Risk by its nature is dynamic and unpredictable and planning for where the next supply chain breakage could occur can be the retail equivalent of pinning the tail on the donkey.

In its latest global risk rating for the period April to June 2014, the Chartered Institute of Procurement and Supply (CIPS) reported an improving trend owing to strengthening economic performance, particularly in Western Europe, but warned that growing concerns over political crises in a number of countries threatened the recent recovery.

“There is currently a large amount of geo-political risk,” says Andrew Williamson, global leader of economic analysis for Dun & Bradstreet, which compiles the CIPS risk index.

Williamson highlights the political instability in the Ukraine and conflict in the Middle East as two key areas of risk.

The greatest potential impact of the Middle East situation in particular is on the price of oil which, while on a downward trajectory at present, would be at great risk of volatility should the so-called Islamic State make further inroads into Iraq and take control of key oil fields.

“Further down the line the higher risk premium on oil would feed down to the price consumers are paying on the shelves,” says Williamson.

So how do supply chain risks affect retailers and what can they do to minimise the disruption?

Assessing vulnerabilities

Professor John Glen, CIPS economist and senior economics lecturer at the Cranfield School of Management, uses the example of the Ebola outbreak to highlight where the vulnerabilities may lie. “[Whether you’re affected by Ebola] really does depend on whether your supply chain reaches that part of the world.

“If you’re buying food or flowers from Sub-Saharan Africa, how much is that affected by people unable to turn up for work or restrictions on the free movement of trade and services? You may be able to secure alternative sources of supply but can you get the volume at the price you require?”

Sectors such as grocery that have lean supply chains and are reliant on basic commodities are arguably most exposed to risk.

Cocoa prices, for example, have surged this autumn on mounting concerns that the Ebola outbreak will reach the Ivory Coast or Ghana, which produce about 60% of the world’s cocoa.

In order to manage such risks, Williamson says retailers must follow some golden rules. “Diversification is important. It’s also vital to keep track of events and know where you are most vulnerable to geo-political instability because of the proximity of your suppliers to those risks.”

“Transparency allows you to manage risk more effectively”

John Glen, Cranfield School of Managemen

Williamson adds that “absolute transparency” has never been more important given the “astonishing amount of interdependencies in modern supply chains”. He cites the example of the Japanese tsunami in 2011, which affected car production in the UK as globally important suppliers of electrical parts in northeastern Japan were all but wiped out.

Natural disasters such as tsunamis are near impossible to predict and their knock-on effects can be immediate and significant. In 2010, for example, WHSmith blamed the Icelandic volcanic ash cloud which grounded UK flights for a fall in sales in its travel business.

 “The key point is that transparency allows you to manage risk more effectively,” says Glen. “There are going to be events that you simply can’t predict. You may not be able to predict an Icelandic ash cloud but if you know exactly what your exposure is to Iceland your brain can click into gear immediately.”

Systemic failures

Other events that may be easier to predict can emerge as risks because of systemic failure or even complacency. The horse meat scandal of 2013 exposed failures in supply chains that enabled horse meat to pass through multiple links in the chain without detection. It also exposed the fact that fraud wasn’t acknowledged as a major risk in food supply chains and hence the systems in place were not sufficiently robust to prevent such adulteration occurring. That failing was highlighted in the recent Elliott Review into the integrity and assurance of food supply networks.

“In meat, standards for traceability and food safety don’t go to the level of testing raw materials,” says Nikki Samme, marketing and portfolio development manager at Alcumus. “That’s where there can be complacency among food suppliers.”

Doubts over whether retailers took the risk of supply chain fraud seriously prompted the Elliott Review to recommend that opportunities for fraud need to be recognised in company risk registers and that paper trails alone may not be sufficient to stave off the threat of prosecution under the Proceeds of Crime Act (2002) should a future horse meat-style scandal erupt.

Risk registers are a fundamental part of any retailer’s operational planning. Earlier this year New Look paused expansion in Russia because of the political crisis in the Ukraine and has since revealed it is near to completely exiting both Russia and the Ukraine. The fashion retailer recognises disruption to its supply chain arising from strikes, civil unrest, political turmoil or natural disasters and says it regularly reviews supply chains and routes to maximise flexibility and sustain fulfilment of product demand across all channels.

Tesco, meanwhile, has in place business continuity and crisis management plans, which it tests for eventualities. Disaster recovery plans are in place for key IT systems and data centres and it has security systems and processes that review the risks of incidents or activism across the group, including liaison with the UK national coordinator for counterterrorism.

Risk registers are a good basis from which to build a risk management strategy, but ultimately no amount of planning can make supply chains entirely free from risk. Retailers need to ensure they are doing everything in their power to manage those risks, or face getting burnt by the next global crisis.

Focus on: risk in Germany

Recovery in the German industry is promoting stability in the eurozone and beyond. The UK imported more than £5.6bn worth of goods and services from Germany last year, but its products also play a vital role in France, Ireland, the Netherlands and Italy, which together supply a further £8.7bn worth of imports for UK businesses and consumers.

There remains plenty of room for improvement in the second half of this year, however, claims CIPs. Despite a recent 6.8% reduction in the number of bankruptcies in Germany, failed businesses in the country still left more than £6bn worth of unfulfilled orders in their wake in the beginning of 2014. That is a cost paid not just in Germany but by any company whose supply chains involve German-made products at any stage.

Unusual supply chain risk: Insect contamination

Supply chain disruptions can come in the unlikeliest of forms. Earlier this year an Amazon staff member fell ill at one of its depots after handling packaging on goods imported to the UK. GMB, the union for staff at Amazon, believes the illness is linked to insects carried in the packaging, citing that in May 2014 the Ecological Society of America showed that the emerald ash borer had been carried into North America with the wooden packing material of imported goods.

The union has called for Amazon to conduct a thorough, independent risk assessment of the dangers of insect contamination in wood and other packaging of goods imported from abroad. The upshot is that UK businesses using wood packaging materials for shipping goods could be putting the health and safety of staff at serious risk and causing untold damage to the UK economy, according to Jim Hardisty, managing director of Goplasticpallets.com.

“Although all wood packaging used for transporting goods into the EU or out of Portugal (a known pinewood nematode area) must be heat treated in accordance with ISPM 15 regulations to kill off pests, it’s clear that insect invasions from abroad remain a very real threat,” says Hardisty.