Global Supply Chains and the associated risks?

Global Supply Chains are facing the brunt of high risks from Geo-Politics, Environment/Natural Disasters, and Financial Health of sovereign, banks & businesses.

Geopolitical Risks are most often associated with the political environments of a region, as specific regulations, changes in governmental structures, or the outbreak of armed conflict can alter policies and influence normal business operations as in the case of Ukraine -Russia War. One of the most concerning aspects of Geopolitical Risks is that they can either spread or have implications beyond the areas initially impacted.

Environmental risks, include Black Swan events like the Covid-19 Pandemic and natural disasters such as extreme weather, droughts, and earthquakes.

Financial risks relate to a company’s solvency, ability to pay debts, and ultimately its resiliency. In addition to being more at-risk of impending bankruptcy, companies with poor Financial Health, are more likely to be late and/or default on their deliverables. Companies will face larger debts and slowed dividend growth –corporate debt coming due in 2023 which could entice a “perfect macroeconomic storm”

The risks that global companies encounter across multiple geographies vary dramatically. In the United States, “more than 40% of businesses never reopen after a disaster, and for those that do, only 29% were still operating after two years. These companies that do not recover have both customers and suppliers who are impacted by their closure. Such disasters, regrettably, are inevitable.

For example, in 2017, Hurricanes Harvey, Irma and Maria were responsible for three of the top five global supply chain disruptions and resulted in North America becoming the geographic region most damaged by natural disasters. The industry perhaps most affected by these events was the auto industry, although the industry had no significant headquarters in the impacted regions. Plants, suppliers, and dealers sustained considerable damage, which affected global distribution.

Understanding financial risk is another fundamental element that contributes to a firm’s short-term and long-term success. While events like the Financial Crisis of 2008 provide infamous examples of systemic business breakdowns, seemingly one-off bankruptcies can have significant impacts across businesses and industries as well. According to the Journal of Systems Science and Systems Engineering, “Chain reaction bankruptcy is regarded as common phenomenon.

Companies need to be aware that their suppliers can go out of business due to the breakdown of another company’s Financial Health. One such example is Hanjin Shipping, a South Korean company that used to be one of the world’s top ten container carriers. In 2016, the firm suffered a financial breakdown, which led to inventory being stuck at sea. The company ultimately filed for bankruptcy, resulting in millions of dollars of loss and an estimated increase of ₩440.7 billion per year in expenses to South Korean exporters.

Financial Health, Natural Disasters, and Geopolitical Risk can have long-lasting ramifications, and the risk can quickly spread through organizations.

Companies do include Geopolitical Risk, Environmental, and financial risk analysis in their examinations when selecting suppliers, but few actively keep tracking the suppliers’ conditions after onboarding. Nor do they check the whole supply chain network, from first to end tier. 

Companies can now accurately predict the real-time impacts that disasters, geopolitical shifts, and security threats have on the financial sustainability and resiliency of their suppliers. The faster a company gathers and analyses information, the faster it can tackle problems and prevent its customers from being affected.

As supply chain disruptions persist, localization and resilience will be two critical characteristics of the supply chain of the future. While financial resilience becomes more critical than ever, companies must reconsider their business and supply chain models. Effectively utilizing geopolitical information and understanding internal and external Financial Health conditions is indispensable to building resilience in the supply chain. Given the interconnectivity of these two metrics, conducting parallel analyses can dangerously mislead decision making. Companies must embrace the idea of correlating geopolitical and financial data. A company that has invested in monitoring and screens for correlation will find itself having a better understanding of the origins and snowball effects of risk, and it is better prepared when disasters happen.

Another effective strategy is localization of supply chains in the countries and communities of operation. This requires significant change management, persistence and patience, but companies that sustainably localize their supply chain can enjoy not only the benefits of better performance, but also those of improved quality, delivery and service.

An operations-led local content program features a strong understanding of the global, regional and local business, as well as knowledge of how to interact with and influence operational leadership and technical subject matter experts. To be effective, stakeholders from the operations, leadership and supply chain functions must be involved. By creating a logical, competitive and realistic plan with the “on-the-ground” operations team, companies can build impactful, sustainable local content  initiatives that lead to improved results and positive reputational impact.