Proxima: Assessing Sourcing Risk in Global Supply Networks

A new Global Sourcing Risk Index from Proxima, developed in collaboration with Oxford Economics, investigates the sourcing landscape, which is littered with a range of challenges.

This tool is pivotal for companies as they navigate complex supply chain landscapes by analysing the top 20 global economies alongside 10 fast-emerging markets, collectively accounting for 85% of global GDP and 65% of international trade. It evaluates across 10 key sectors and eight risk dimensions, including geopolitical conflict, climate, governance, human rights and supplier concentration.

This index serves as a strategic tool for sourcing leaders by offering insights into high-risk, country-sector combinations and providing guidance on maintaining control over these risks.

Understanding trade-offs in high-risk destinations

In the current assessment, Mexico, Turkey and Russia stand out as high-risk destinations, primarily due to vulnerabilities in climate disruption, governance limitations and geographic concentration factors. Compared to these, European economies present lower-risk profiles but come with higher cost structures.

The presence of risks in these countries does not preclude sourcing from them. Instead, companies must weigh potential risk trade-offs in light of economic benefits, adjusting their supply strategy wisely.

Simon Geale, Executive Vice President at Proxima, emphasises the importance of understanding these trade-offs, stating: "This really is key. There is risk in every relationship and a businesses 'risk appetite' will dictate just how much of that risk they are prepared to take for the price paid or relationship put in place."

"Managing risk out gets incrementally more expensive and not all companies have the economic means to support this, margins could be too low to take on this cost internally, or customers might have a ceiling price which means it can't be passed on, or both."

He advises a structured approach: "Step one is to be informed of potential risks in a location, step two is to agree the balance or risk, cost, reward (or appetite), and then step three is to take any associated managing or mitigating steps."

The forces reshaping supply chains

Global sourcing has evolved beyond just cost and efficiency, now influenced by five major forces. A key shift is the reorientation of trade along geopolitical lines, evidenced by Mexico surpassing China as the US's top trading partner in 2023, indicating trends like nearshoring and friend-shoring.

Poland, Turkey, India, Colombia, Brazil and ASEAN countries are benefiting significantly from these shifts.

Simon notes that US procurement leaders face unique challenges: "The US as a sourcing destination fares mid-table in our report with top 10 scores in geopolitical conflict risk, labour input costs and climate." He indicates that climate risks are localised, despite the US's strong adaptive and coping capacities. Labour price risks are particularly relevant in manual labour sectors like manufacturing and logistics.

This complexity requires US procurement leaders to adapt to evolving global sourcing dynamics, especially with growing tensions between the US and China and the vital need for alternative supply sources.

Additionally, other forces reshaping supply chains include:

Reindustrialisation: Onshoring is surging, particularly in high-value sectors, with investments forecasted to rise to USD 4.7 trillion by 2025. This trend is driven by a strategic focus over short-term profits.

Digitisation: Technologies like AI, automation, IoT and digital twins are transforming supply chain management, enhancing real-time risk mapping and smarter, more domestic-focused decision-making.

Sustainability: With 70% of companies now prioritising sustainability in procurement, challenges remain uneven across regions. Europe shows strong legislative frameworks, whereas the US sends mixed signals.

Risk and Resilience: Emphasising resilience, businesses now prioritise predictability and control over cost minimisation, thereby enhancing shareholder value.

Global trade: Realigning, not collapsing

While the pace of globalisation may be slowing, global trade remains deeply interconnected. This concept is well-supported by forecasts from the IMF and WTO predicting moderate growth in global trade volumes, illustrating a realignment rather than an apocalyptic collapse.

Simon underscores the dynamic shifts in sourcing assumptions: "At an aggregate level the top five countries in the index are Mexico, Turkey, the Philippines, India and Russia. Russia aside, these four are key beneficiaries of the current and expected reorientation of supply chains, a lot of investment is going into them."

He adds: "Reports suggest that a majority of CEOs are now looking to embed greater resilience at the expense of short-term profitability. This reorientation is really only just beginning at scale, but it will accelerate."

Simon advises supply chain leaders to understand the specific risks involved with each decision: "When we talk about reducing reliance on more risky locations, who is your plus-one? When we talk friend-shoring, who is your friend?" It's emphasised that understanding and strategically responding to the inherent risks in each sourcing decision will be crucial for future success.

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