When procurement departments think about risk, a common mistake is to only think about risk in terms of internal threats, such as cyber risk or workforce risk, and forget about external risks. Even when we think about supplier risk we often focus on their financial viability and let other factors like geography fall to the wayside. When thinking about external risks to supply, there are three areas we recommend considering: geopolitical risks, natural disasters, and financial market risks.
You can’t start a conversation in today’s day and age without touching on politics. And while it may not be recommended for dinner party conversation, one area where it shouldn’t be ignored is when you’re anticipating supply chain risk. Changing political dynamics, trade wars and even elections can greatly impact supply chains, especially when they involve international players.
Taxes are an example of geopolitical risk that can have significant adverse effects on a supply chain’s profitability. Tax law is very complex and while some companies may be able to find loopholes to dodge taxes, many smaller suppliers can be significantly hurt by complex tax rules. Especially relevant to supply chains are tariffs, which are a tax on imports or exports between two sovereign countries that are imposed to protect the domestic industry. However, if one of your largest suppliers is an international company and there are new tariffs imposed on their country by yours, the price of whatever goods they supply you with could rise significantly. Staying apprised to current political issues, changing diplomatic relations and active trade wars will be very beneficial in reducing risk in your supply chain.
Another factor in geopolitical risk is civil disturbances. This could include anything from a riot (like we recently saw in Hong Kong) to war, coups, revolutions or acts of terrorism. These types of disturbances can threaten worker safety and also cause major supply chain disruption that could result in both operational and financial damage. Staying apprised to current political issues, changing diplomatic relations and active trade wars will be very beneficial in reducing risk in your supply chain.
Natural disasters are hugely unpredictable. Anything from hurricanes, tornadoes, floods, and epidemics can cause major disruption to companies and their supply chain. The impact on supply chains that major natural disasters have is what is often not covered by the media. This could include anything from flight cancellations, shutting down of roads or highways, or major shipping ports being closed.
To use Coronavirus as an example, currently, planes are evacuating foreign citizens out of China, and international business travel into China has been almost completely stopped. Major tech companies like Google and Facebook have reportedly asked U.S. employees who have recently returned from China to work at home for now and British Airways has canceled flights to China. The biggest global manufacturer of iPhones, Foxconn, which is based in Taiwan, experienced its biggest share price fall in almost 20 years. To say that Coronavirus will have a significant impact on global supply chains for the foreseeable future is an understatement. But how can supply chains prepare for events like this?
One of the best approaches to derisking your supply chain from natural disasters is to geographically diversify your supplier base. It is also imperative that supply chain leaders identify potential risks to the supply chain and have plans for how you will respond to interruptions caused by natural disasters.
Natural disasters and changes in the political economy have a great impact on financial markets. The global trade war or uncertainty over Brexit don’t just impact the price of goods in your supply chain, they are also driving factors in the health of financial markets.
Changes in market health can have lasting effects on an organization’s reputation, ability to remain compliant and even exposure to new customers. And since we live in an age where a tweet can impact stock prices, preparing for market risk is an important part of protecting your supply chain. In the twitter era, information is more readily available to a large range of people and can quickly go viral. So this means that your reputation and the reputation of suppliers are much more important.
We’ve seen in the past how changes in financial markets and interest rates affect business decision-making. An example of this was during the recent 2008 recession when businesses stopped borrowing for investments and worked to utilize existing resources wherever possible. Consumers also make decisions that impact market prices, so partnering with fully vetted suppliers who follow the same best practices as your organization is an important part of insulating your supply chain from market risk.
As with any supply chain risk, the more informed you are about areas of weakness and what is going on in your business the better you can make strategic decisions to grow. Investing in solutions that provide data on global, external supply chain disruptions will benefit you in the long term. Using digital supply chain management platforms that analyze your data in real-time will also prevent slow responses to external threats. While supply chain disruptions are inevitable, the long-term impact on your organization doesn’t have to be.