Geo-Political Risk

Today’s guest post is from Nick Ford, Director of Customer Service & Delivery, EMEA, Xchanging (which also owns MM4 and Spikes Cavell and which has built up a fairly extensive S2P suite over the past couple of years).

The news is dominated by geopolitical events from around the world — the spread of Ebola, the conflict in Syria, the unrest in Ferguson, ISIS and just about anything that happens in North Korea. Most people will read a few articles, watch the evening news, form an opinion, feel mad, feel glad, feel nothing. Some people will take action. They will be driven to help where they can by donating their voice, their time or their money. Then there are the people who have to leave their emotions, their political affiliations and their prejudices at the door and when disaster strikes, they have to think about business.

As procurement spreads across more and more geographical boundaries, organisations are being exposed to more and more geopolitical risk. In order to ensure the safety of their company, CPOs and Procurement Directors must proactively consider the implications of these events on the running of their businesses. They need to take into account where they are doing business, where their suppliers are doing business and where their manufacturers are located. What is the volatility of that location? What is the political stability, the currency stability and the stability of the work force within that location? How does that affect your business? Some more progressive organisations are taking this further down the supply chain and looking at where their suppliers’ suppliers are doing business.

How–to Measure Geopolitical Risk

Historically, supplier risk has ignored location factors and has instead been focused almost entirely on financial performance. This made risk a very binary exercise but the deeper and broader you go into operational risk the less it becomes about numbers and absolute answers. To truly understand a supplier’s risk profile, you must undergo stress testing and what–if scenario planning. What if war broke out in a region in which you operate? What if, suddenly, a fire broke out in a supplier’s factory and destroyed everything? Where would you transfer that work to, and quickly? What impact would that have on your lead times or your payments? What impact would that have on your customer contracts? You could come up with any number of scenarios and run them through your supply chain operating model to see what impact they could potentially have on your delivery to your customers. Once you understand what impact these events could have, you can start to defend against them.

How Geopolitical Risk Has Changed

Due to technology and access to the internet, the world is becoming a much smaller place. World news is immediate. You’re able to monitor events and changes automatically. Organisations now have an abundance of information available to them. There’s always been political unrest and risk in certain regions but now there is a far better understanding as to what’s changing on a daily basis which allows CPOs to begin to proactively safeguard against them.

The Cost of Geopolitical Risk

Reducing geopolitical risk is about supply chain analysis, disaster recovery, your ability to move to a different supply chain supply environment and how quickly you can do that should a situation arise. The other aspect of geopolitical risk to consider is the cost. From a risk perspective, in the short-term, it costs more to work with a supplier out of China than it does to buy from someone down the road. In most companies, there’s not enough emphasis placed on the increased organisational risks that occur when working with some of these low-cost suppliers. The harm done to the business should something go wrong could be irreparable. The Ebola outbreak, for instance, could have a huge negative impact on Western organisations if they are no longer allowed to import from affected countries or if new trade restrictions, regulations, or possible quarantines are implemented. When selecting suppliers, procurement teams need to take a total cost of ownership approach.

The Cost of Managing Geopolitical Risk

A total cost of ownership approach looks beyond the direct price and takes into account all of the indirect costs of using a supplier, risk and risk management included. For example, based on your risk profiling, you may want to use a double supply scenario to cover areas where you think the geographical or political risks are high. Organisations currently importing from Ebola affected sub-Saharan African may take this approach. That of course, will add to the cost of the good or service. It’s the procurement team’s job then to convince the board that although it may cost a little more, at the end of the day, it lowers the risk profile of the organisation

Supplier risks haven’t changed in the past 10 years — as far as I know there’s always been risk of war, disease or disaster — but the increase of global supply chains have left companies more exposed. Thankfully, there has also been an increase of available information to help prepare and defend against these risks. Strategic CPOs and Procurement Directors know that the best offence is a strong defence and are thus making risk management and disaster recovery a priority — even if it costs a bit more. You get what you pay for.