The economic impact of supply chain risk

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What impact does our understanding of supply chain risk have on economic performance? And, just when is the US economy going to get us out of this mess?

Concerns over the state of the US labour market continue to generate conjecture over the possibilities of a double-dip recession. As one might expect, there have been quite a number of reasons put forward as to why the US recovery has stalled in recent weeks – the rise in the price of oil, European debt, reduced fiscal support, bad weather, the Japanese earthquake. President Barack Obama called it a ‘bump in the road’.

Interestingly, the Federal Reserve’s ‘Beige Book’ cites widespread disruption to US supply chains caused by the Japanese earthquake as a positive point, suggesting that growth will bounce back from a recent ‘soft patch’ when supplies return to normal. Is this just a vaguely feasible excuse, or is it a true cause for optimism? Do supply chain issues resulting from catastrophic events really affect economic activity and performance to such a marked degree? If so, it is in the wider interests of business and governments that supply chain risk is more accurately assessed and mitigated for.

It may also be that the aftermath of the financial crisis of 2008/9 sowed the seeds for the supply chain disruption that followed the Japanese earthquake. The resulting downsizing and the reductions in the number of suppliers may have compromised the supply chain risk strategies of many companies in the electronics and automotive sectors. Whereas a component may have been sourced from a number of factories, a single plant may now be responsible for production. At least, this was a viewpoint put forward by the president of one of the world’s largest PC makers.

It appears supply chain risk, and the way we manage it, may play a more significant role in the performance of the wider economy than we might think.

Let’s hope the ‘Beige Book’ is correct in its assessment and that supply issues will ease, leading to a pick-up in the US economy. Then we might all start feeling a little more optimistic.

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