How to manage supply chain risk during geopolitical unrest
18 March, 2022
Even before the current turbulence, companies closely watched geopolitical issues when it came to moving parts and products around the world. In the PwC 25th Annual Global CEO Survey, 32% of executives cited geopolitical conflict as a top threat to growth, and 71% said it could inhibit their ability to sell products or services. Global or regional disruptions can create uncertain operating environments that result in higher costs, increased complexity and less efficiency in supply chains. Tariffs, sanctions and other measures can disrupt access to critical inputs, suppliers and markets and increase regulatory burdens. Political or military crises can affect key shipping channels and leave companies searching for alternate routes.
The latest conflict illustrates these issues at play. Ukraine and Russia are net exporters of agricultural goods such as wheat, corn and sunflower oil, and a prolonged conflict could lead to shortages and prompt importers to seek alternative suppliers. The US imports large amounts of metals, fertilizers and petroleum products from Russia, while Ukraine is a major producer of neon gas, a critical component for the semiconductor industry.
How can your company navigate these kinds of geopolitical supply chain risks? Strategic agility will be crucial. To offset further disruptions and mitigate the impact on global operations, you should be confident in your organization’s ability to monitor, measure and manage exposure to geopolitical events.
What’s at stake
Crises can pose multiple challenges across operations and have a material effect on your bottom line.
- Regional conflicts can constrain energy supply and disrupt major transportation routes, raising prices across the board. You should be mindful of key supply routes and access points that could make your company vulnerable to disputes.
- Some companies are beginning to regionalize supply chains to reduce exposure to global networks and hedge against geopolitical tensions. Regional blocs and smaller trade groups can promote cooperation among members, but they also can limit diversification options by increasing regulatory complexity and costs to do business across blocs.
- As companies regularly review their supply chain profiles, they may consider alternatives such as localizing, reshoring and other de-risking methods. Consider that 60% of the COOs in our latest PwC Pulse Survey told us that they’re considering changes in their companies’ footprints. But such moves can expose companies to new, sometimes costly challenges. These include potential losses in efficiency and scaling due to different talent pools and transportation options, as well as more stringent labor and environmental regulations or possibly less developed infrastructure and supporting industries.
What you should consider
I mentioned earlier that developing strategic agility in supply chains requires companies to monitor, measure and manage exposure to geopolitical events. Here’s how you can consider doing that.
- Watch geopolitical trends and events that have the potential to affect key supply locations and industries. Define and monitor risk indicators, including relationship changes between strategic rivals, protectionist sentiment and the effectiveness of global cooperation mechanisms. Consider building or contracting a dedicated geopolitical risk monitoring capability that includes analysis of future scenarios.
- Identify and regularly review risk exposure by mapping known supply chain nodes. This requires extensive research and diligence, and some suppliers may consider subnetworks and inputs to be confidential, making accounting more difficult. But your company should identify as many elements as possible that contribute to a chain with many suppliers around the world.
- Assess each node’s vulnerability to disruption, the likelihood and impact of an event occurring and your company’s capacity to absorb or mitigate each risk. Products that rely on geographically concentrated or single-source inputs are especially vulnerable to geopolitical shocks. You may not be able to account for every possibility, but grouping risks by type (military conflict or trade dispute, for instance) is one practical alternative.
- Plan to adapt business strategies and operations to changing global or regional conditions with little notice and incomplete information. Geopolitical events can surprise even the most seasoned professionals, making agility essential. Contingency planning could include securing redundant suppliers for key inputs and balancing inventory between efficient just-in-time and shock-resilient, just-in-case strategies.
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