Egypt is in turmoil. After Tunisia, now Egypt is rocked by a popular  uprising, and the outcome of the so far peaceful protests is still  uncertain. With the country more less not running at all for seven days straight, they are now starting to run out of...everything. The repercussions could be even worse than what we have seen so far, and there is even a chance, albeit unlikely, that the Suez Canal may close. That would be a serious blow to global supply chains.

 

Such political risks are not often debated in the supply chain management literature, but every firm with a supply chain that sources globally or operates  internationally is exposed to political risks that may be very different  from what they are used to domestically, where political risks often  limit themselves to de-regulations and re-regulations of business  sectors, tax cuts or tax hikes or sudden environmental measures or  security enforcements following major events or changes in government.  On the international scene such and  perhaps even worse changes can come  abruptly and without warning, not because they cannot be foreseen, but  because the firm usually lacks the tools and the knowledge it needs to  anticipate and react coherently to political risks. Recently I reviewed Political Risk, a book by Robert McKellar that deals exclusively with political risk and how businesses can prepare for and manage political risk.

 

Closing the Suez Canal is such a political risk, but it is not unprecedented, and closing the Suez Canal is nothing new. In fact, the Suez Canal was closed during 1967 - 1975, following the Six day War:

On 5 June 1967, at the beginning of the Six Day War, Egypt closed the  Suez Canal. The closure was sudden and unexpected – fifteen cargo ships  known as "The Yellow Fleet"' were trapped inside during the closure. At  the end of the war, the Egyptian and Israeli armies were stationed on  either side of the canal and the prospects for reopening were very  uncertain. The canal remained closed until the end of a second conflict –  the Yom Kippur War – and subsequent peace negotiations, eight years  later.

This lead to a considerable drop in trade between countries that now faced a near doubling of the distance between them, as described by James Feyrer, Professor of Economics at Dartmouth College writes in his essay on Lessons for trade and the trade-income link:

For these countries, the closure caused an average fall in trade of over 20%  with a three to four year adjustment period. Trade between these pairs  recovered completely after the canal reopened eight years later with a  similar adjustment period. A 10% decrease in ocean distance results in a  5% increase in trade.

Two years ago, when attacks by pirates had became more than a few incidents in the Gulf of Aden, the BBC ran a short story on the impact on European supply chains if shipping companies should decide to take the longer route around Africa to avoid pirate attacks and what that would mean to the average consumer. A sudden closing of the Suez Canal now would perhaps have a similar effect. North Sea Oil has already risen to $100/barrel in fear of such a closure, the BBC reports. And the Egypt unrest is already threatening Egypts status as rising outsourcing star, according to cio.com.

 

If there is a major supply chain disruption in the near future, Egypt will be part of it, for sure. Reuters is already reporting that cargo disruptions are choking Egyptian ports. What's next?

My personal blog on supply chain risk (not this blog) does not go unnoticed in the book publishing world, and from time to time I am approached by publishers and authors who would like me to review or even endorse their book, and I have become aware of - or rather made aware of - many books on risk and supply chain management that I didn't know existed. I take such review requests as a compliment for my writing style, and those of you who follow my personal blog will know that I do not shy away from criticism where criticism is due, and conversely, I also give praise where praise is due.

 

Currently I am working on the "Gower Short Guide to Business Risk Series", a collection of small books that deal with all sorts of business risks, so far covering topics such as

 

- procurement risk,

- reputation risk,

- political risk,

- fraud risk,

- ethical risk,

- customs risk,

 

and with more topics on the bedding, including

 

- operational risk,

- compliance risk,

- kidnap and ransom risk,

- corruption  risk,

- equality risk, and

- how to facilitate risk management,

 

there is more than enough to work on. Nonetheless, while working on this, I keep asking myself, is there really this much risk or is it just scaremongering? And how does all of this this relate to supply chain management?

 

Well, in todays globalized and outsourced business world supply chains are increasingly getting longer, more complex and more difficult to manage, and the manging side is located further and further away from the postential source of problems. Consequently, businesses are less and less in control of risk sources, but more and more in control (or perhaps not) of risk impacts or consequences, and I don't think that risk will ever run out of fashion.

I find risk a fascinating subject to work with and to blog about, from the highly academic writings on how to define risk, to the more hands-on practical handbooks on how to manage risk, although I do prefer the latter over the former.

 

One of my my most recent acquaintences in risk is David Simchi-Levi's book "Operations Rules". This book is about the principles, frameworks and processes that enable  the aligning of a company’s specific customer value proposition with its  operations strategy. Now, that sounds very supply chain and operations management only, but lo and behold, it is one of the very few books on supply chain mangement that features an extensive chapter on risk mangement. It is perhaps not fair to judge the importance of a chapter by its  length, but fact is that the chapter on risk mitigation is 30 pages,  while most other chapters are 15-17 pages, and it is not because this  chapter is full of figures. It is, but so are the other chapters, too.  To me this is a clear indication that Simchi-Levi sees risk mitigation  as an integral part of operations and supply chain management.

 

The   book is built around 33 rules that cover all possible aspects of   supply  chain operations and management, and that are placed throughout   the  eleven chapters of the book, hence the title. Simchi-Levi is a true well of knowledge as far as supply chain    management is concerned, and it shows. Not only are his rules based on a  plethora of examples and anecdotes of firms that succeed or failed in  their risk management, the examples themselves have a broad scope, in  geography, in impact and in industry. Simchi-Levi has  done his homework with this one. There is hardly a point made that is  not followed by an example, e.g. CEMEX seeing risk management as a core competence or the very different strategies of Nokia and Ericsson in handling the Philips plant fire.

 

In conclusion, I think there's hardly a business decision that is not wrought with risk, one way or the other, and the sooner risk management becomes integrated with supply chain mangement, the better.

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