By Adebayo Adeleke
Companies that source from or produce for international markets must watch geopolitical issues closely because geopolitics has always impacted supply chains and global logistics. In recent years, especially since the pandemic, geopolitics have played an outsized role that will probably continue in the foreseeable future. Think of the Russia-Ukraine war, military coups in Africa, Israel-Hamas, and now a brewing Israel-Iran confrontation.
Since the end of the Cold War, the “global economy” has become synonymous with sprawling supply chains, including just-in-time manufacturing enabled by low-cost sourcing and sophisticated logistics. However, this model requires geopolitical stability and low barriers to trade. This article looks at how geopolitical tensions cause disruptions to the global supply chain and discusses strategies for companies to mitigate future geopolitical risks.
Managing supply chain risks has become a critical challenge for global companies in an era of increased geopolitical instability. According to PwC’s 25th Annual Global CEO Survey, 32 percent of executives view geopolitical conflict as a primary threat to business growth. Of course, conflicts escalate costs, complicate operations, and decrease the efficiency of supply chains.
For instance, the resultant sanctions of Russia-Ukraine, increased tariffs between countries like the US and China, and regulatory changes like import and export bans, among others, disrupt access to crucial inputs and markets. Political and military crises like coups in Africa or the attacks on ships in the Red Sea have also jeopardised key shipping routes, forcing companies to seek alternative paths. This increases logistical challenges and financial burdens as companies strive to adapt to new realities quickly.
“To do this, you must build confidence in your organisation’s ability to monitor, measure, and manage exposure to geopolitical events.”
When you consider what’s at stake, you’ll realise that crises can pose multiple challenges across operations and have an enormous effect on your bottom line. So, how can your company navigate these kinds of geopolitical supply chain risks? First, you need strategic agility to be able to offset disruptions and mitigate the impact on operations. To do this, you must build confidence in your organisation’s ability to monitor, measure, and manage exposure to geopolitical events. This helps you to be mindful of key supply routes, access points, and other aspects of your business that could make your company vulnerable to disputes.
Strategies for mitigating geopolitical risks
To confront the challenges posed by geopolitical instability, companies must develop the capability to monitor, measure, and manage exposure to geopolitical risks. Here are some strategies that businesses are adopting to safeguard their operations:
Using vertical integration: Companies like Apple are reducing dependence on external suppliers by acquiring control over multiple supply chain stages. This integration protects them against sudden market changes and supply chain disruptions. Although resource-intensive, this strategy also aids in extracting more value from the supply chain while mitigating the risks associated with external dependencies.
Consolidating value chains: Reducing the number of intermediaries can significantly enhance traceability and control over the supply chain. This is particularly useful in the agricultural sector, where numerous intermediaries complicate supply chain management. By streamlining suppliers, companies can improve oversight and reduce the risks associated with supplier misconduct.
Monitoring geopolitical developments: Staying informed about global geopolitical trends is crucial. This proactive approach enables companies to anticipate and prepare for potential disruptions. For example, the ongoing US-China trade tensions highlight the need for businesses to remain vigilant and responsive to international trade dynamics. Companies can implement contingency plans to minimise impact by identifying potential risks early.
While strategies like vertical integration, value chain consolidation, and geopolitical monitoring enhance supply chain resilience, they come with inherent trade-offs. For instance, maintaining large inventories as a buffer against supply chain disruptions can tie up capital and inflate storage costs. Similarly, diversifying suppliers and increasing inventory levels necessitate meticulously evaluating cost-benefit ratios to ensure that the financial burdens do not outweigh the benefits.
Developing strategic agility involves more than just responding to immediate threats; it requires a comprehensive approach to risk management. So as a business, you must define and monitor risk indicators, such as changes in international relations, protectionist sentiments, and the efficacy of global cooperation mechanisms.
Additionally, it is essential to identify and regularly assess risk exposure across the supply chain, taking into account the vulnerability of each node to disruption. As geopolitical tensions continue to shape global markets, the ability to manage supply chain risks becomes a pivotal factor in ensuring the long-term viability of businesses. Companies can navigate these turbulent times through strategic investment in risk management processes and a proactive approach to monitoring geopolitical developments. The ongoing challenge will be to balance resilience with efficiency, ensuring that operations remain robust yet flexible enough to adapt to an ever-changing geopolitical landscape.
