Regional and World Conflict: Another Supply Chain Threat

Earlier in the month, Line 56 had a fascinating op/ed that examined the potential for terrorism and other types of conflict to disrupt the Indian supply chain. Following the Mumbai train bombings, the article comes at a critical time to ask questions about the economic risks of global sourcing and outsourcing, given the potential that violence and armed conflict could disrupt such activities. In the article, the editors refer to the "terrorism tax" suggested by James Harrigan and Phippe Martin. According to the piece, this tax "can be levied on a city by terrorists who strike recurrently ... [as a result it brings] higher insurance premiums, security spending, worker churn, transportation costs, and other spending (both direct and indirect) arising because of terrorism.The tax has two effects. Over time, it shrinks a city, as some of its denizens go elsewhere; and it raises the total costs of doing business in that city. India's entire IT/BPO industry, which is worth tens of billions of dollars, is motivated by the relative cheapness of doing business in India. When terrorism disrupts this dynamic and forces India to raise prices, internally and externally, margins will be sacrificed and some business will go elsewhere."

India aside, given the escalating violence in the Middle East and the fine line -- if any -- between state sponsored terrorism and traditional armed confrontation in the region, it would seem we might be all be faced with a new type of terrorism tax given the strong potential for rising oil prices. This is because it appears to be in Iran's best economic and military interest to exert force to raise oil prices through directly escalating violence in the region. And as it becomes clear that the conflict is between Israel and Iran (not Syria, Lebanon, and the Palestinians), the potential for even greater oil price increases and a sustained conflict becomes even more likely.

But for Western companies, this type of price risk pales in comparison to the risk organizations face when critical parts of their supply chains are located in regions in which they have limited control over such as China or India (at least in the Middle East, we have significant military force to protect Western business interests). For example, if an act of terrorism occurs in the US, business owners can appeal to the states and Federal government for relief and support if needed (the same is true in Europe). And in almost all cases, owners and investors can lobby politicians to change laws and create additional security measures over the long haul. But if a terrorist or military activity disrupts a global supply chain where the West has limited military and economic capabilities to rapidly influence situations, the same organization has limited or no recourse. If a shipment is late, if a supplier is nationalized to support a conflict (or gives preference to its defense customers), or if a specific terrorist activity brings a regional supply chain to a stand still, there's not much that can be done, at least within a reasonable time frame to mitigate or manage the consequences of a disruption.

When I started talking about supply risk at Spend Matters over a year ago, organized armed conflict and terrorism seemed much less likely. Sure, we still had the same fanatics running Iran and North Korea, but the world stage seemed a different place, and carrots at least had the guise of working as well as sticks. But today, the potential for supply chain disruptions from violence seems that much greater. And it looks unlikely that things are going to settle down anytime soon.

Jason Busch

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