Daily Archives: January 2, 2013

Risk – The More Things Change, The More They Stay the Same IV – Economic

In our last post, we discussed the top geopolitical risks facing your Supply Management organization that were chronicled in the World Economic Forum‘s 7th annual Global Risks report. Chronicling dozens of risk divided into five categories, this report did a tremendous job of covering the types of risk that an average Supply Management organization needs to prepare for. Today, SI is going to continue its coverage of the report by discussing the top risks from an economic perspective.

From an economic perspective, there are four major risks. These two major risks are exactly the same as last year:

Extreme Energy & Agricultural Price Volatility

Today’s organizations are ultimately dependent upon three things – people, raw materials, and the energy required to transform the raw materials into the product the organization will sell. If oil doubles in price, that could make the difference between being able to produce the goods in China and import them into the US for sale at a profit and having to import them into the US for sale at a loss (or risk losing the entire inventory). And food prices in certain categories have been approaching, and reaching, all-time highs ever since reserves hit all time lows since World War Two last year.

Fiscal Crisis

The fiscal crisis can lead to many things – currency volatility, a credit crunch, and overall infrastructure fragility. Weakening currencies can cause costs to skyrocket. A credit crunch can severely restrict cash flow and make it almost impossible for an organization to temporarily borrow the cash it needs to secure the inventory required to produce the goods it plans to sell to create revenue and, eventually, generate profit. And infrastructure fragility, which weakens every time there is insufficient cash to invest in necessary maintenance, can result in transportation lanes, power plants, and basic utilities becoming unavailable overnight. The ramifications of a fiscal crisis can reach far and wide.

These two risks have increased in severity since last year:

Chronic Fiscal Imbalances

Government debt obligations are rising out of control around the world. The recent government debt-crisis in Greece, which followed the bankruptcy of Iceland in 2008, could be just the beginning. With the US at its fiscal cliff, the UK increasing public sector and private sector debt at an alarming rate (while net assets are falling), and general government debt in Japan projected to reach 245% of GDP in 2013, this risk is getting extreme across the developed world.

Severe Income Disparity

The rich are getting richer and the poor are getting poorer, and this is true in the developed world and the emerging world. The recent occupy movements have brought to light how the top 1% receive almost 25% of the income in the U.S., reaching a high not seen since 1928 (just before the Great Depression). The gap between the rich and the poor is rising rapidly in China, where approximately 10% of the population live below the global poverty line (which is really, really low). And this trend is continuing around the world. This is scary as many revolutions throughout history have been based on the economic inequality between the rich and the poor.