As technology and business advance, growing ever closer together, customers and suppliers are gaining an unprecedented access to foreign markets they were never able to reach before. Companies are finding themselves competing, and managing activities on an increasingly global scale, facing unexpected challenges and wholesale disruptions that just weren’t a concern a decade or two ago.
The supply chain in particular is an oft under appreciated function that is particularly exposed to economic upheaval, changing customer demand and other risk factors both internally and externally. Considering the importance of a smoothly functioning supply chain to a company’s continued operation, it is becoming more and more important for managers to be able to identify, quantify and mitigate the many risks they face. Indeed, a recently concluded Chartered Institute of Procurement and Supply (CIPS) study shows that global supply chain risk is currently at its highest point since 2013, with economic and environmental instability apparent in regions across the globe.
Here are some of the main key factors affecting the global supply chain currently.
Economic Risks
These vulnerabilities reflect a diverse set of global challenges facing companies. The effects of economic slowdown and political upheaval are particularly impactful on the supply chain. As currency fluctuations, instability in demand and prices, changing labor costs and inflationary pressures make it impossible for firms to accurately plan their investment in foreign markets.
For many companies, this means they must instead opt for a shorter and simpler supply chain. If outside procurement is necessary, companies must keep close communications with suppliers to ensure they are flexible enough to monitor, and quickly react to changes in the market.
Environmental Risk
These risks can be both internal and external. Natural disasters and other extreme weather conditions comprise the bulk of external environmental risks companies will face. Earthquakes, flooding, winter storms and tornadoes can close off airports, docks and roads making delaying the shipment of goods and making it impossible to arrange travel and communication in and out of supplying countries.
Internal risks can arise from improper health and safety and goods management procedures. These can cause fires, spills, chemical leaks and other environmental hazards that result in the shutdown of storage or shipping facilities.
While weather conditions may be impossible to account for, reaction times and recovery plans can be developed that establish a list of guidelines and expectations for your supplier in the case of these sorts of disruptions. It is important that good communication systems are in place, and that contracts make reference to possible delays due to environmental factors
Political Risk
Terrorism, government policy changes, systematic corruption and energy crises. These are just some of the geopolitical issues facing firms that operate in the international marketplace. If a country pulls out of a mutually beneficial trade deal or starts to pursue protectionist policies it can severely affect the terms of your international dealings. While the possibility of expensive shipments being commandeered, or a delivery channel being closed due to security threats is also a very real possibility.
It is important that companies are aware of the political trends in the country they are receiving supply from. Technology can be used to develop an overall picture of possible risks, while certain insurance policies will cover companies against the threat of embargoes or cancelled licenses. It may be necessary to establish an on-ground presence through an IOR or EOR to ensure the delivery of goods at agreed prices.
Supplier Risk
Trusting a vital part of your business operations to an outside party means you are vulnerable to issues such as inaccurate or delayed shipment, erratic communications, unresponsive and inflexible operations and even the threat of a supplier going out of business. It is important for firms to conduct due diligence and screening before selecting suppliers and to carry out periodic assessments to ensure there are no changes in compliance or delivery of goods. It is important that companies work with suppliers to establish an awareness of areas of potential risk, so that both firms can take steps to mitigate them.
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