Zoom in on Geopolitical Risk
10/23/2024
Geopolitical supply chain risk covers conflicts and political issues and actions across the world that affect regions and borders, economic issues (around the likes of regulations, commodities, natural resources and trade), military risks (around foreign policy and escalating conflict) and social risks (around environment, health outbreaks and safety). The most high-profile risk events come from wars and revolutions, but even the less obvious ones, such as social unrest, political demonstrations and activism, can cause serious consequences for businesses and have major knock-on effects for customers. The current trend towards higher protectionism and ‘trade wars’ has an impact on tariffs and other barriers to global trade and its supply chains.
What causes geopolitical risk
This type of risk is a result of the current state of the world. For example, the World Economic Forum’s (WEF) 2024 report states that “interstate armed conflict (#5) is a new entrant to the top 10 risk rankings this year. Specific flashpoints could absorb focus and split the resources of major powers over the next two years, degrading global security and destabilizing the global financial system and supply chains.”
Another aspect of geopolitical risk mentioned by the WEF is that “misinformation and disinformation and societal polarization are seen by GRPS respondents to be the most strongly connected risks in the network, with the largest potential to amplify each other.”
There have always been global geo-political events and crises, but the difference today is the degree to which organizations (and countries) are interdependent and how events can impact global supply chains in ways that would have been much less complex and far-reaching 50 years ago.
How geopolitical risk affects your business
Clearly, geopolitical risk types have some overlap with other risks in terms of consequences, but there are some different aspects too.
- Interruption of supply: Geopolitical risk events often lead to short- or long-term supply interruption that carries consequential cost-related issues for buyers, especially when the risk even affects supplier’s premises or transportation routes. The disruption may also be caused by supplier issues further down the supply chain.
- Loss of short-term sales: Supply interruptions are inconvenient at best and business-threatening at worst, often leading to production shortfalls and even entire shut-downs, which ultimately drive a loss in sales and profit.
- Price volatility: Geopolitical events can have a major effect on supply and, therefore, prices for commodities and, in some cases, manufactured goods. This can ultimately affect profitability and should be on the minds of the businesses’ investors as well as their own senior executives.
- Finding new sources of supply: Securing alternative sources of supply from unaffected suppliers is time-consuming and not without risk. All buyers that have been affected will be looking for the same alternative sources, making the marketplace very crowded, and the need to verify, approve and onboard new suppliers quickly brings challenges for all parties. At the extreme, suppliers may operate at significantly reduced capacity for a considerable time or even disappear altogether. This can change the balance of power in the marketplace where the alternative and unaffected suppliers have more power to negotiate to the detriment of some buyers.
- Danger to staff: The buyer’s own staff (expatriate or local) as well as those of its key suppliers could find themselves in personal danger, especially in the face of terrorist attacks or war situations. This raises a different mitigation issue for businesses, such as the need to relocate or take other security measures.
- Political, reputational and legal risk: Being prosecuted for sanctions violations or seen to support human rights violations in an armed conflict or revolution situation can have serious consequences.
How to mitigate geopolitical risk
This is another risk type that is impossible for a business to avoid. But buying organizations have some level of choice over how much risk they are prepared to deal with. They could mitigate it by choosing not to outsource to or source goods and services from countries that are defined as having high levels of political instability, which would require constant monitoring.
To manage or mitigate these risks requires effective contingency plans. As always, having alternative sources of supply in places where risk is high is an obvious step. Keeping up to date on political situations as they arise globally, analyzing trends and understanding economic and social developments is another. But this knowledge is not always easy to find, which is why specialist solutions can help. Regardless, organizations that can develop this approach and obtain relevant information, risk alerts and data will be in a better position to manage risks.
As with other risk types, the importance of fast response cannot be overstated to avoid the potential consequences. Understanding the situation before the competition is a huge advantage for the buyer, allowing them to put alternatives in place, such as different transport options, stockpiling and securing alternative suppliers.
Conclusion
Geopolitical risks are widely varied and difficult to predict. Relevant, timely and effective data and analysis can increase the probability of the buyer doing something positive. Taking time to consider risk strategically upfront and developing contingency plans and risk mitigation actions is vital for buyers. They should consider the extent of the risk consequences across the whole supply chain, including logistical elements and critical sub-tier suppliers. When risk events occur, time is the critical factor in a market where the competition is scrambling to secure the same products and services. Obtaining the earliest and fastest possible notification or alert is paramount.
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SRM03/07/2023
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SRM03/07/2023