When companies consider new opportunities and assess supply chain risk, it’s crucial to understand how geopolitical events can impact their markets and business.
The Global Risks Report 2021 by the World Economic Forum placed social cohesion erosion, interstate relations fracture, involuntary migration, digital power concentration, resource geopolitization, and geophysical disasters as some of the highest impact and nearest term global risks, all capped by the heightened risk of failing to take climate action.
The COVID-19 pandemic further highlighted many of these underlying weaknesses across geopolitical relations and social and economic infrastructures.
And “responses to the pandemic have caused new domestic and geopolitical tensions that threaten stability. […] If geopolitical tensions persist, middle powers will struggle to facilitate a global recovery-at a time when international coordination is essential-and reinforce resilience against future crises.”
What does this mean for the supply chain?
As we start looking ahead towards rebuilding our post-pandemic world, understanding where (and why) these breakdowns occurred, can help leaders and businesses not only address future global risk, but better assess and mitigate those risks to the supply chain.
Understanding geopolitical risks to the supply chain
Geopolitical events, both large and small, can affect the supply chain. Of course, events with some of the highest impact include wars, revolutions, and major political conflicts. However, even small, local events that don’t hit front page news outlets can impact your supply chain-yet they can be difficult to discover.
For example, extreme weather or local political events (even for a short time) can disrupt operations and have a ripple effect down the supply chain. Recently, high temperatures in the Guangdong province of China have caused significant disruption to both local and global supply chains.
Several cities asked local industries to cut power usage causing factories to suspend operations for hours, and sometimes even days, to reduce strain on the region’s power system. This is combined with already lower production levels due to the recent surge in the cost of raw materials, such as steel, aluminum, glass, and paper, in addition to a late rainy season in the Yunnan province that resulted in 11% less hydropower production. This has led businesses, like one local Dongguan-based electric products company, to look to alternative suppliers outside the region to fulfill demand.
These relatively smaller but significant disruptions highlight the need for deeper visibility into supply chains and geopolitical risks so businesses can identify and respond to issues with greater speed.
Of course, this is only one example of many types of geopolitical risk. Protests, riots, and civil unrest-all amplified by climate change and growing limitations of raw materials-can all have an impact on local manufacturing, production, employment, and ultimately the ability for companies to deliver on promises.
The potential impact of geopolitical risks
Geopolitical risks have numerous potential consequences, from price fluctuations to reputational damage. Understanding how these risks can impact your business and extended supply chain is crucial to building a robust risk mitigation strategy.
Price fluctuations
Short-term and long-term supply disruptions can cause big swings in pricing. Recent lumber shortages have highlighted how volatile supply chains can be in response to geopolitical events like the pandemic.
As a result of COVID-19, states and cities across the U.S. issued stay-at-home orders and millions of businesses pivoted to work-from-home operations. This evolution in work and home life resulted in an unprecedented shift in demographics as people moved out of urban areas in large numbers and started purchasing homes in the suburbs. Additionally, current homeowners stuck at home for months began buying more lumber to complete home renovations-driving up unsustainable demand for lumber, leading to supply shortages and sky-high prices.
Significant price fluctuations through the supply chain can force businesses to make tough decisions including whether or not to switch suppliers, raise their own prices in response or take the hit to the bottom line.
Supply disruption
When production has to stop due to civil unrest, geopolitical friction, or bad weather, this causes a disruption to your supply. Even short-term disruptions to supply can cause delays across the entire business and can lead to other adverse impacts such as reputational damage.
For example, being unable to deliver product due to disruption or delay, or decreased quality or consistency due to last-minute alternative suppliers can severely hurt your brand. And those damages are hard to recover from.
Need for alternative suppliers
Geopolitical risk often sheds light on the need to diversify the supplier base and ensure alternative suppliers are put in place. Unfortunately by the time that need is identified, it’s often too late to avoid the worst impacts.
That’s why it’s important to diversify the supply chain before there’s a crisis. Having at least one alternative supplier in a different location allows you to pivot as needed and helps insulate the business against potential disruptions.
Political and legal risk
If your suppliers are directly involved in geopolitical problems, such as violating child labor laws, that puts your company at risk politically and legally.
In addition to navigating legal responsibility and culpability in geopolitical affairs, having ties to political, legal, or human rights violations can destroy your brand reputation-threatening valuable business partnerships and relationships, and potentially leading to consumer distrust and decreased revenue.
Getting ahead of geopolitical risk
Considering the significant and often devastating impact geopolitical events can have on a business and the supply chain, it’s crucial to be proactive in mitigating the risks.
Recognize the signs
While geopolitical problems can arise seemingly quickly and unexpectedly, there are often early signs that go undetected. But recognizing these signs isn’t always easy.
Although geopolitical issues may be reported on, they often don’t make front-page news. And if you are reading about it on the front page, then it’s probably already too late to take meaningful action. Additionally, your suppliers aren’t likely to reach out to you first, especially during a geopolitical issue that is quickly amplified.
That’s why it’s important to look for additional warning signs that can spell trouble down the road:
- Loss of supplier communication
- Factory location shutdowns or changes
- Financial indications
- Personnel changes
- Local news reporting
These are all indications that disruption could be heading your way, but it’s challenging and time-consuming to find that information manually.
Take advantage of technology solutions that proactively monitor for geopolitical risk indicators so you can preemptively mitigate risk instead of reacting when it’s too late.
Diversify early
Relying on a single supply channel (or even multiple suppliers centralized in one location or region) heightens your risk in the event of a geopolitical disruption. Find alternative suppliers before it’s too late.
Diversifying your supply chain spreads the risks across multiple suppliers and locations, minimizing the impact of an adverse event and reducing the likelihood that a single event will disrupt your entire pipeline.
Develop contingency plans
When geopolitical events happen, time is often the most valuable asset. The longer your business takes to respond, the costlier the impact. Having contingency plans and protocols in place ahead of time can help speed up response time and accelerate mitigation strategies that can save time and money, and ultimately prevent disruption.
Work with your suppliers and business partners to establish clear lines of communication, coordinate plans, and set expectations to streamline your risk mitigation efforts.