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Japan and Guatemala have joined the list of top 10 nations posing the greatest threat to U.S. companies' supply chains but for very different reasons, according to an index compiled by insurance broker Aon Corp. and the consulting firm Oxford Analytica.

While the frequency and severity of earthquakes affecting Japan have not necessarily increased in the past five years, the island nation is exporting more than it was in the past, says Sam Wilkin, senior consultant with Oxford Analytica. As a result, more trade is at stake should calamity befall it.

Dropping out of the top 10 index were the Philippines and Indonesia.

The three nations heading up the list are China, Venezuela and Mexico, with China taking the No. 1 spot in both 2006 and 2000.

Snapping at their heels, however, are India and Brazil, which are playing a bigger part in the supply chains of U.S. corporations.

Both nations moved into the top five in 2006, up from the top 10 in 2000. Taking the No. 7 spot in 2006 is Nigeria, up from the No. 10 spot in 2000. That's because Nigeria is a major source of oil, Wilkin says.

Metrics used to evaluate a nation's risk to U.S. corporate supply chains included natural disasters, political instability, arbitrary regulatory actions, labor unrest and infrastructure failures. Scores were also based on how much a country factors into U.S. supply chains, and the 2006 scores were compared with those from 2000.

Bryan Squibb, managing director of Aon Trade Credit, says commercial insurance buyers sometimes underestimate their exposures to supply-chain risks.

He cites one risk manager with a Florida-based high-tech company, for example, who spent more capital insuring the bricks and mortar of a plant when the raw materials used to make its products were coming from countries where the risks were much greater than the exposures to the plant and property.

Recent studies also show that companies' share prices decline by about 10 percent on average following announcements of supply-chain disruptions, says Squibb.

Risks in the supply chain reach beyond the manufacturing sector and into the service sector, says Roger S. Schwartz, senior vice president, Aon Trade Credit. Financial services firms with offshore back-office operations, call centers, claims centers and phone banks cut their labor costs but at the same time increase exposures to their supply chain.

The supply-chain risk index was released in January with Aon's Political & Economic Risk Map 2006, a compilation of political and economic hot spots affecting more than 200 countries.

A total of 23 countries were "upgraded," or deemed more dangerous places in which to do business compared with the prior year. A total of 14 were "downgraded," or deemed less dangerous places compared with the prior year.

The map, published annually, serves as a guide for risk managers to explore nations in which their employers are looking to do business.

March 1, 2006

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