How Fragile Is Your Sourcing Country?

Market Intelligence

How Fragile Is Your Sourcing Country?

In a period of increasing geopolitical volatility, sourcing professionals must continuously reassess country risk, especially for weak and failing states. In my role as chief supply chain officer for a leading global brand, I was extraordinarily fortunate to have begun my career as an analyst in geopolitical affairs. That experience allowed me, for instance, to decide not to permit sourcing of products from Bangladesh in 2010, years before the disasters at Tazreen and Rana Plaza. However, one cannot expect all supply chain and sourcing professionals to be experts in geopolitical risk. Therefore, I am always looking for useful tools that can help teams to assess better country risk.

An excellent source for early warning of such risks is the Fragile States Index (FSI). The FSI is "an annual ranking of 178 nations based on their levels of stability and the pressures they face." Created by the Fund for Peace and published since 2005 by the magazine Foreign Policy, the FSI evaluates thousands of digitally available articles and reports, then scores countries along 12 indicators of risk under the groupings of social, economic, and political/military:

Social Indicators

1. Demographic pressures (DP)

2. Refugees and Internally Displaced Persons (REF)

3. Group grievances (GG)

4. Human flight and brain drain (HF)

Economic Indicators

1. Uneven economic development (UED)

2. Poverty and economic decline (ECO)

Political and Military Indicators

1. State legitimacy (SL)

2. Public Services (PS)

3. Human rights and rule of law (HR)

4. Security apparatus (SEC)

5. Factionalized elites (FE)

6. External intervention (EXT)

These indicators can provide sourcing professionals with useful insights and early warning on particular areas of risk. Take the example of Bangladesh. Prior to the terrorist attack in Dhaka on July 1, 2016 that killed 20 people, the report placed Bangladesh in the highest risk category (Alert), ranking it the 35th most fragile state (out of 178). The chart below shows the country's 2016 risk score for each category.

Bangladesh

Bangladesh scored the greatest risk in the area of Fractionalized Elites (9.6/10), what the Wall Street Journal described as a "long-toxic political atmosphere" where the two competing parties focus energy on blaming each other for terrorist actions. With twelve years of reports, the Index provides important insights on how these indicators are trending. In the example of fractionalized elites in Bangladesh, specialists have been warning of the risks posed by the decades-long struggle for power between the Awami League and the Bangladesh National Party. As recently as June 9, 2016, a month before the terrorist attack on Dhaka, the journal Foreign Affairs published an article on precisely the "The Rise of Extremism in Bangladesh." With the trend data that the FSI website makes available, one can see that the problem has remained severe, even worsening in recent years.

One can also directly compare risks between alternatively sourcing countries, such as for apparel in Asia. We would see that Cambodia scored only slightly better than Bangladesh (46th), also suffering from fractionalized elites.

In contrast, Vietnam ranked as the 106th most fragile state, suggesting far greater stability. Country risk assessments are complex, and each company must weigh its particular situation. But tools like the Fragile States Index can make that job easier and more objective.

(John Lund is former Disney CSCO and Thought Leader)