By Stephen DeAngelis
Every day seems to bring with it a new headline about growing political tensions. Geopolitical concerns motivated Les Williams and Andres Franzetti, Co-founders of Risk Cooperative, to ask, “How will current tensions across the globe affect the supply chain?”[1] As they scan the geopolitical horizon, they see warning signs everywhere and they insist that “mitigating these business risks is a critical element for all markets.” They add, “Geopolitical risks … can severely disrupt the highly interconnected global economy. There is much more work needed to diversify and reinforce the global supply chain. … Proactive risk management must become part of every operation’s business framework. From using insourcing and supplier diversification to insurance and other risk transfer solutions, both firms and governments need to leverage every tool available to build resiliency.”
Resiliency and Geopolitical Risk
What constitutes a geopolitical risk? The risks run the gamut from trade wars to actual wars. A survey conducted in the United Kingdom by the Institute of Directors (IoD), a 120-year-old British political organization, found that the larger a company is the more likely it is to be adversely affected by geopolitical tensions. The IoD survey found, “A majority of companies have been unscathed by these international affairs with 58.4% of importers saying their supply chains have been unaffected by recent geopolitical tensions.”[2] The survey also found that the larger your business the more likely it is to be affected by geopolitical risks. Survey results showed, “53% of large companies (250+ employees) said they have been forced to respond to these pressures compared to just 31% of SMEs (small and medium-sized enterprises).”
Supply chain expert Madhav Durbha, like Williams and Franzetti, believes that all companies should take a closer look at how geopolitical risks could affect their supply chains, even if they haven’t experienced a direct disruption due to such risks. He explains there are numerous “disruptive forces with knock-on effects across the global supply chains.”[3] Like Williams and Franzetti, he also believes there are steps companies can take to mitigate ill-effects related to geopolitical risks. He goes on to suggest five such steps. They are:
1) Ensure the rules and assumptions that guide your supply chain decisions are up to date: Durbha explains, “One of the major assumptions supply chain planners make is about lead times between supply sourcing and receiving locations.” Obviously, political unrest and employee strikes can result in shutdowns or delays. Keeping abreast of current affairs can help planners make the right adjustments. Durbha adds, “Likewise, you may have made assumptions about supply being limitless for certain raw materials that have traditionally been available in abundance. You will need to reassess this assumption, consider supply constraints, and accordingly plan this constrained allocation to decide how you prioritize customer commitments.”
2) Adjust supply chain design more frequently than ever: Tensions between the West and China have many companies and countries pursuing a “de-risk” strategy that involves supply chain diversification. Durbha notes, “Organizations need to revisit their supply chain design and dynamically course correct. Switching to alternate sources of supply or modes of transportation should be considered as appropriate, and such alternates should be activated on a short notice. … Organizations need to get far more dynamic about designing their supply chains and adjust the routes to market.”
3) Prepare and disseminate business continuity playbooks across functions: Continuity of operations is the endgame when disruptions occur. The pandemic proved that many organizations lacked adequate continuity of operations plans. Durbha explains, “With radical shifts in demand, organizations need to be far more prepared with a range of possible scenarios. These scenarios should be able to take alternate views of demand signals and align them with the increasingly constrained supply and capacity sources. This means organizations should develop business continuity playbooks that prepare them for a variety of demand scenarios and also offer the ability to activate the most probable scenario as the decision time nears. The nature of the disruptions being faced at the moment require significant cross-functional collaboration and alignment.” Cognitive technology solutions, like the Enterra Global Insights and Decision Superiority System™ (EGIDS™), can help companies explore numerous scenarios at computer speed to enhance decision-making.
4) Create a Baseline for your Cost-to-Serve. Then Optimize: When situations change, business-as-usual is generally not an option. Durbha insists that companies need to be ready to advise customers about cost changes as soon as possible so that no one is blindsided. He explains, “As input costs rise, organizations need to take a rigorous approach with their Cost-to-Serve modeling, factoring in a variety of fixed and variable costs along with the input costs. This helps them understand what additional costs they might incur while meeting customer expectations, and then make the right decisions as they seek to find offset opportunities.”
5) Be dynamic in creating and executing sourcing events: As noted above, many companies are now pursuing a de-risk rather than de-couple strategy with regards to China. There may be other geopolitical situations that require a similar approach. Durbha writes, “As traditional routes and sources of supply fail, companies need to be far more nimble in creating sourcing events and lock in alternate sources of supply and modes of transportation. Such alternates should be based on the gaps in capabilities identified while redesigning the supply chain.”
Concluding Thoughts
Dan Luttner, managing partner at Plantensive, notes, “Geopolitical interruption is not a new risk to supply chains.”[4] In fact, supply chains have been disrupted by geopolitical events since the beginning of recorded history. Luttner notes, however, that supply chain geopolitical risks and opportunities took center stage at the height of globalization. He explains, “Starting around the 1990s, U.S.-led globalization ushered in a new era of commerce. Our political, economic and social goals were furthered by fragmenting supply chains across vast distances, capitalizing on access to raw materials, energy and inexpensive labor. Most developed economies followed suit, establishing new industrial booms across eastern Europe, South Asia and the Indo-Pacific regions. This, of course, presents tremendous opportunity but also risk.”
Like Durbha, Luttner suggests that scenario planning should play a vital role in a company’s risk management process. He explains, “Today’s hyper-globalization of supply chains coupled with unprecedented volatility has highlighted a new critical area for scrutiny by strategic business leaders: how to use scenario planning to build supply chain resilience.” Although many companies are looking at near-shoring or reshoring manufacturing to mitigate some of these risks, Luttner understands that globalized supply chains are not going away. Since that is the case, he insists, “Supply chain practitioners have never been in a more valuable position to play a critical role in enterprise decisions.” To create the most value from their position, planners must be aware of geopolitical risks that could directly, or indirectly, affect supply chain operations.
Footnotes
[1] Les Williams and Andres Franzetti, “As Global Tensions Continue to Rise, How Will Supply Chains Fare?” Risk & Insurance, 21 April 2022.
[2] Staff, “Geopolitical Tensions Forcing 35% of Importers to Reexamine Supply Chains,” SupplyChainBrain, 11 August 2023.
[3] Madhav Durbha, “5 Steps to Address the Rising Geopolitical Risks to Your Supply Chain,” Logistics Viewpoints, 7 April 2022.
[4] Dan Luttner, “Geopolitical Interruptions and the Opportunity for Supply Chain Planning,” Supply & Demand Chain Executive, 11 August 2023.
