Maintaining Security of Supply Becoming Increasingly Strategic Issue

Declining raw material reserves, fluctuating energy prices challenging manufacturers with existential risks, BrainNet study finds

Bonn, Germany — July 6, 2007 — Guaranteeing security of supply is becoming a strategic issue for a growing number of businesses as declining reserves of raw materials combined with fluctuating prices on the energy and raw materials markets are confronting the manufacturing industry in particular with existential risks, according to a new study from supply chain management consulting firm BrainNet.

In the study, "Risk Management Reloaded — A Procurement Perspective," BrainNet writes that the acute risk facing security of supply is a multi-faceted phenomenon.

"In extreme cases, growing uncertainty about supplies of raw materials — especially on the metal markets — and the extreme volatility of energy and raw material prices are resulting in lost output and could even endanger the essence of a company," said Dr. Lars Immerthal, head of the Risk Management Practice at BrainNet and co-author of the study.

Direct and Indirect Risks

According to the study, raw material price risks associated with the highest probability risks to security of supply can be direct or indirect. A company can be directly confronted with insufficient availability of the raw materials, components or semi-finished products it needs.

Security of supply can also be endangered when suppliers are unable to fulfill their contractual obligations because of material shortages or price hikes on the raw material and energy markets. The BrainNet study shows that one in five suppliers is unable to sustain contractually agreed prices because of the situation on the raw material and energy markets.

Businesses are increasingly aware of the serious implications of supply-related risks, according to the report. The overwhelming majority of companies surveyed in the multi-industry study identified raw material and energy price risks as the risk with by far the greatest probability of occurring and also high damage potential. Companies in industries that depend heavily on raw materials, such as the automotive and chemical industries, take an even graver view of these risks than the average for all sectors.

Underestimating the Risks

The study also revealed, however, that businesses do not take adequate consideration of the relationship between different risk types. Geopolitical risks, for example, are grossly underestimated. Politically motivated production shortages, mine strikes, regional instability and the growing demand for raw materials in emerging economies could all result in massive supply and price fluctuations, or aggravate fluctuations that already exist, BrainNet warned.

The consulting firm believes that this study and a range of other reports serve to demonstrate the need for immediate action with respect to ensuring security of supply. The authors of the "World Economic Forum Global Risk Report 2007," for example, consider interruptions in the supply of energy and raw materials a key global risk with an increasing likelihood of occurrence.

Sven Marlinghaus, a partner at BrainNet, called for a fundamental rethinking of management approaches to risk. "The still widespread practice of focusing risk management systems on observation and control of suppliers, and passing on risks to upstream partners in the value-added chain, has no future," Marlinghaus said. "Nowadays, businesses that want to survive must integrate their suppliers in a working partnership and take an unobstructed view of the diversity and interdependencies of risk factors that could endanger security of supply."