How businesses can mitigate political risk in supply chains

According to Marsh’s latest Political Risk Report, continued geopolitical volatility and supply chain disruption has encouraged many governments to focus on national economic security at the expense of free trade and international alliances leading to fragmentation of the international system.

Companies that build supply chain resilience will develop a competitive advantage over peers, and be able to capitalise the ongoing disruption and global realignment.

Supply chain risk became a key topic of interest and concern for business leaders during the COVID-19 pandemic. While the pandemic acted as a trigger for supply chain disruption, there are other crucial factors — including soaring material prices, fluctuating exchange rates, increased shipping costs, and government intervention — that should inform an organisation’s approach to supply chain risk in both the short term and further beyond. Political risk, in particular, is an important factor to examine when assessing, monitoring, controlling, and transferring supply chain risk.

Complementing “just-in-time” with “just-in-case” for effective supply chain diversification

The Political Risk Report also highlighted diversification as an important strategy to reduce the impact of supply chain disruptions to businesses. To achieve diversification, companies are developing and implementing ‘just-in-case’ logistics and operations as a complement to ‘just-in-time’. Balancing ‘just-in-case’ and ‘just-in-time’ focuses on adding backup or redundancy capacity, in terms of production capacity, supply options, and inventory, to effectively build supply chain resilience.

In evaluating and planning their operations for efficiency and profitability (just-in-time) versus flexibility and resilience (just-in-case), companies need to realise the two approaches are not necessarily mutually exclusive. Additional capacity in strategic geographical locations can help drive accelerated business and revenue growth, and help companies enhance the customer experience and reach new markets.

3 steps companies can take to manage political risk impact in their supply chain

Step 1: Build a holistic picture through supply-value chain mapping

To understand where political risk may intersect with their supply chain, businesses need to develop a holistic picture of where their supply chain connects with their value chain. Typically, companies have a tendency to prioritise improving the resilience of ‘high-value’ portions of their supply-value chain as opposed to ‘low-value’ parts.

However, relatively ‘low-value’ aspects of supply chains failed during the pandemic and brought many operations to a halt. For instance, a North Asian manufacturer producing large, complex durable goods lost access to a part (produced by a Southeast Asian contract manufacturer) for a period of several weeks due to lockdowns. Although the part represented just 1% of the value of the finished good, its unavailability and the manufacturer’s lack of a contingency response resulted in a loss amounting to millions every week.

Step 2: Identify geopolitical scenarios

The next step to assess political risk exposure in supply chains is to identify the geopolitical scenarios that might drive supply chain interruption based on the supply-value chain mapping exercise conducted prior. Some questions to ask include:

Where are my suppliers and my supplier’s suppliers located?
Are those locations experiencing domestic political unrest or armed conflict?
Are my suppliers exposed to sanctions or regulatory controls on economic activity?
If the answer is “no” now, could the situation plausibly change in the near future?

Step 3: Formulate and test Business Continuity Plans (BCP)

Next, the combination of supply-value chain mapping and geopolitical scenario planning can provide actionable insights that support the initial formulation of Business Continuity Plans (BCP) to mitigate the impact of political risk-induced supply chain disruption. This analysis is also useful for updating existing BCPs to ensure that relevant political risks are considered as part of the Periodic Risk Assessment for the Business Continuity Management (BCM) System. Business Impact Analyses can then be conducted for critical business functions, such as critical suppliers, to identify the requirements to design and implement supply chain BCPs.

Finally, training and exercising provide companies with the opportunity to validate that their BCP is fit-for-purpose, and is necessary to develop the competency and proficiency needed to operationalise the BCP. A good way to begin to test your supply chain resilience is to run either a table-top or live BCM exercise using a political risk scenario that challenges the business to resolve the loss of one or more critical suppliers. The exercise will enhance teamwork when implementing the BCP to mitigate losses arising from political risk threat- and incident-driven supply chain disruption.