There will always be a need to comply with local laws and regulations. Always. So let’s get to it.

Expounding the Pounding

Regulations abound (especially in Europe), and the products/services you sell and buy need to conform to all of them. These regulations relate to the materials, production methods, human resources, carbon and waste production, storage and transport, packaging, and even labelling.

And the severity of non-compliance can be severe. For each violation, your punishment for violations can range from fines to seizure to criminal charges! Even for the most innocuous aspect of product management: labelling. If the labels are incomplete, you can be fined. If the labels are not in the required language, your products can be seized and held indefinitely or destroyed. And if the labels are intentionally inaccurate, because you are trying to skirt regulatory requirements by not reformulating your production to exclude banned materials or meet the maximums for potentially dangerous materials, you can be criminally charged.

Moreover, regulations and requirements can be different in every single country you source from, ship through, and ship to and your organization needs to be aware of all of them so a “gotcha” doesn’t put your organization in a difficult situation without supply but with regulators breathing down your neck and threatening large fines, product destruction, and/or criminal charges.

Reducing the Risk

There’s no easy, or even, complete answer here, but what you need to build is:

Compliance 360.

You need a solution that

1. tracks all of the relevant human resources, health & safety, production/(hazardous) material utilization, carbon/GHG production, packaging, labelling, and transport regulations for each country you build in, ship through, and sell in that can also
2. match that regulation to each product/component/material you buy so that you can ensure that your supplier, carrier, or risk management department is aware of, and conforms to, the regulations as appropriate

This is much easier said than done. This requires

1. providers who track the appropriate regulations in each country and how they translate into specific requirements that companies need to meet
2. the capability to merge all of this regulatory insight into a common framework
   (often through a specialized platform)
3. the capability to match these regulatory requirements to specific products … and this requires a system that maintains complete harmonized product (and product related) information from design and manufacturing through packaging and labelling to transport and storage along with countries of production/transport/sales to match to the regulations. Guess what? Unless you’ve harmonized all of this data into a common, integrated data model for multi-level planning (as you would if you integrated direct sourcing with supply chain and logistics, as per the series the doctor and Bob Ferrari did on why Direct Sourcing needs to be integrated with Supply Chain, summarized in Part 7), your chances of matching requirements to products are quite low. Not good!

This is one of the most extensive, and most involved risks, because there can be dozens to hundreds of requirements you need to adhere to in each region in which you do business, depending on the product (line) in question, but it is one you need to get a good grip on or supply assurance is going to become significantly harder as time goes on.

Supply will never be assured. You have to be ready for that! Let’s again begin by expounding the pounding and then give a few tips on reducing the risks.

Expounding the Pounding

In some ways, this is one of the key risks contributing to the rising cost/spend pressure risk that we discussed in our last article, because even if an organization doesn’t see it, their tier 1 (and tier 2) suppliers will!

However, it is definitely its own category as there might be a surplus of supply, but current constraints make it inaccessible. For example, in the rare earths category in particular, the majority of global supply might be from one or two countries. If those countries become inaccessible due to a sanction, border closing due to a war or geopolitical unrest, or a logistics (cost) nightmare, then you effectively have a shortage even if there are theoretically stockpiles in a warehouse waiting for someone.

Plus, you don’t just have constraints around production, you have them around logistics (how many pallets can fit in the truck, how many pallets in the container, how many containers you can have on the ship, etc.), intermediate storage, export and import (as there are quotas and limits and passing those can be costly), and so on. All of these constraints can impact your supply and cause chaos.

Reducing the Risk

The two generic answer(s) here are the same as two of the answers to the risk of rising costs in our last post. You need to ensure that you always have

1. Alternate Supply Sources Always Active
2. Alternative Product/Component/Material Pre-Defined

That’s it. If supply is not available from supplier A, you need to have a supplier B on retainer (low minimum contract) ready to go. If there is all of a sudden no significant source for a material (due to a disaster, border closing, or trade route interruption), then you need to have an alternate design that can use an alternate material and switch production.

This risk is as old as Procurement itself. Demand drives prices. Always has, always will. But let’s start by expounding the pounding before we give you a few tips to deal with it.

Expounding the Pounding

Costs rise. Continually. The average rate of inflation in the United States over the past hundred years is approximately 3.2%. That means that something that cost $1 in 1914 would cost approximately $33 today. Costs go up. However, costs are not static. During pandemics, wars, natural disasters, and market crashes where there are huge drops in supply and surges in demand, or vice-versa, the average rate of inflation can quintuple or more (with a recorded rate of 23.7% in June 1920). The same happened to shipping costs during the pandemic. Three thousand dollar shipping contains shot up to thirty thousand, a factor of ten.

However, it’s not just inflation, and surges, that are the issue. It’s also consumer demand. If consumer demand shrinks as costs rise, and the company, and its suppliers, are unable to reach and maintain the optimal economy of scale, costs will rise even more. (Every company has its own optimal output level where it can operate at maximum efficiency and maximize outputs relative to inputs. If output is too low, and resources are not being used at capacity during regular operating intervals, the cost per unit of product is higher than it should be. Similarly, if that peak is surpassed, then overtime will need to be added, additional equipment and lines, which can’t be kept producing at optimal levels, will need to be added and so on.)

And, of course, it is available supply. If the product requires a renewable commodity or raw material where there are limited harvests or limited mining capacity, there just won’t be the supply to meet a rapid demand surge. This will cause prices to surge even more (as sellers sell only to the highest bidders as the balance of power shifts fully to them).

Due to the rapid rise in global market uncertainty around product and material availability and cost — due in part to an increase in natural disasters and extreme weather, wars, geopolitics and trade wars — managing this balance between consumer demand, market supply, cost, and inflation is a tough equation.

Reducing the Risk

There’s no easy or truly global solution here. Every category, and product, is different. Every supply and demand market is different. Every country has its own trade rules, economic plans, and sanctions. And all of this can change overnight. A mine collapse or factory fire. A rapid drop in demand due to recession. A new sanction or 145% tariff. And so on.

However, if we break it down, there are three main risks:

A) Unexpected Supply Unavailability

Due to a natural or man-made disaster, your (primary) source gets cut off.

B) Unexpected Drop in Consumer Demand

Due to a new external market condition (recession and/or massive layoffs, more popular competing product, brand backlash, etc.), consumer demand suddenly drops.

C) Unexpected rapid cost increase due to natural or man-made events.

A pandemic, droughts in Panama, or terrorists (in the Red Sea) slow down or cut off shipping routes and escalate costs. Or a mine collapse shoots up raw material costs.

For each of these risks, there is a primary solution:

A) Dual/Tri-Sourcing

It’s critical to always have an alternate source of supply in an alternate geography that can be scaled up rapidly if the primary source of supply becomes unavailable. Don’t do 80/20 or even 70/30 splits if the product, part, or material is critical. Do 60/40 and make sure both suppliers could handle at least 50% additional capacity before awarding. (That way you are still fine if the 40% supplier becomes unavailable as you should be able to scrape by long enough to find an emergency replacement supplier, even if the cost increases moderately. Most importantly, if the 40% supplier is willing to do some OT, you would still be fine for a short interval as long as you were willing to pay some OT related costs – and there’s no way that would be the case with a supplier getting less than 40% of the award.) Better yet, for (very) large categories, do 40/30/30 splits (possibly by giving majority per regions if your organization is global). In this situation, one supplier becoming unavailable wouldn’t be a serious problem as you’d be fine if the other suppliers could supply an extra 50% to 60%.

B) Flexible / Discount-Based Contracts

Never assuming continually increasing demand. Hope for it, but look at past averages, rises, and falls, and typical drops in demand from an unexpected, negative, market impact, and negotiate contracts for a range, with cost reductions (and not discounts) when thresholds are reached. In other words, once you know the expected worst case to expected best case range, ask for quotes for at least 3 tiers, the minimum, the expected, and the best case range and negotiate a contract with price breaks when certain demands are reached. (Suppliers will love to offer rebates when you hit a tier, but don’t fall for that because you’ll never realize them because the onus will be on you to prove that you’ve purchased the required quantity. Even if you have the best e-Procurement system on the planet and capture every order, as well as returns and show any refunds were accounted for, and can document it all, you still might not get the rebate. The supplier could claim hardship or, if the amount is significant enough, file for bankruptcy protection and restructuring. And even if they have the money, if you can’t assemble and provide the necessary documentation before the contract expires, forget about the rebate after the contract expires.) As long as you ensure every order, invoice, and goods receipt, flows through your e-Procurement system, you can ensure that as soon as the first discount tier is reached that you issue the PO for the lower amount. (And then your system will refuse to auto-approve it if the invoice doesn’t reduce the unit cost appropriately).

This way, you’re paying more than you’d like if you hit the worst case, but you’re not paying a huge penalty when you don’t hit the contracts and the suppliers come after you for damages.

C.i) Alternative Source Ramp-Up

If the price skyrocketed due to a supply issue with a specific region or supply base, you switch to the alternate supply in another region until the issue passes or you identify a new secondary (or tertiary) supplier for the product or component or material.

C.ii) Alternative Product/Component/Material

If the price skyrocketed due to a drop in supply, pushing all the power to the suppliers, then you switch to alternative products/components/materials. This is difficult because you need to have alternate designs ready to go for custom-made products and have previously identified alternatives for standard/off-the-shelf products which, while more costly or less desirable at the time, are now the most cost effective or most desirable products/components/materials due to the change in market dynamics by a material/component/product unavailability.

Unfortunately, while these solutions all sound simple, they are different for every category, product, material, organization, and geography. Risk management and supply assurance (as summarized the doctor‘s and Bob Ferrari’s Direct Sourcing MUST be Supply Chain Aware and Vice Versa series, summarized in Part 7) become as important as cost, and in some locales, carbon management when sourcing. The (expected) worst case has to be considered at all times and key events need to result in multiple, but balanced, awards.

And of course, when it comes to risk management, there will always be exceptions to the rule that you need to look out for.

Disasters are on the rise. Why? Well, as per our last installment on talent, we are going to be expounding the pounding and giving you tips on reducing the risk.

Expounding the Pounding

As climate change has intensified, the number of natural disasters has risen sharply. Between 1980 and 1999, we experienced roughly 4,200 disaster events. Between 2000 and 2019, we experienced roughly 7,300 for an increase of roughly 75%.

Many of these were quite significant. According to the NOAA National Centers for Environmental Information, between 1980 and 2024, the US alone sustained 403 weather and climate disasters where overall costs and damages exceeded $1 Billion dollars (when CPI was adjusted to 2024) (Source: NCEI). The total cost of these events for the US has exceeded $2.9 Trillion dollars and resulted in 16,941 deaths.

Moreover, while the overall average frequency of Billion dollar weather/climate disasters over the last 45 years is 9, the average over the last 5 years is 23! In other words, natural weather/climate disasters are coming harder and faster than ever before (and the pace is still increasing).

If we turn our attention to the United Nations Office for Disaster Risk Reduction and review their 2025 Global Assessment Report on Disaster Risk Reduction (GAR), they found that while the direct costs of disasters averaged $70 Billion to
$80 Billion a year between 1970 and 2000, between 2001 and 2020 the costs ballooned to between $180 and $200 Billion a year and that disaster costs now exceed $2.3 Trillion ANNUALLY. Let that sink in. The global cost of natural disasters is now so great that only seven (7) countries have a GDP that exceeds that cost. In other words, the cost of these disasters, of which we now experience almost 400 a year (as the Emergency Events Database recorded 393 natural hazard related disasters in 2024, see ReliefWeb) exceeds the GDP of Russia, Canada, and Italy!

You’re going to be impacted by a natural disaster in the very near future to some extent. In most first world countries where a survey has been done the results are consistent: Four (4) out of Five (5) corporations agree that natural and climate disasters hurt because they were impacted in the last 5 years. Moreover, with the rapid rise in disasters your chance of not being impacted by a natural or climate disaster in the next 5 years is trending down to 10%. In other words, your chance of being impacted is 90%. It’s beyond the point that you have any chance of being one of the lucky ones. As per a 2023 Forbes article based on an Allianz Global Corporate & Specialty (AGCS) report, natural catastrophes are the largest driver of corporate insurance losses in the US because luck can’t save you now!

And we haven’t even started to talk about man-made disasters due to bad design, bad construction, bad maintenance, or just bad negligence that can result in entire skyrises being lost, manufacturing districts going up in smoke, ports exploding, entire swaths of land becoming unavailable due to nuclear meltdowns, global pandemics due to bacterial and viral leaks from research labs, and so on.

Reducing the Risk

Insurance

Do not, we repeat, do not forego the insurance! You will need it. However, unless you can prove you are employing best practices across the board this could be expensive. So you also need to employ a number of other best practices to make the insurance companies happy. (Although their Ren & Stimpy days are over. No more happy, happy, joy, joy because gone are the days when they only take in and never pay out.)

Third Party Vetting

Think those third party risk management / third party compliance management (TPRM/TPCM) solutions are a nice-to-have that you can wait on? Think again. You need to vet every supplier, every carrier, and every partner involved in the delivery of your goods from the factory to the store (and every warehouse, port, and transfer point in between). You need to prove you did your best to ensure only legitimate actors were in your supply chain so that you have some recourse (with insurance) when the shipment gets damaged or disappears (and to make sure you can afford your insurance premiums).

Overall Risk Vetting in Source Selection

Before you select a supplier as your chosen source of supply, you need to understand the 360-degree risks which are not just the supplier risks of financial stability, compliance, quality, human rights, and so on, but the risks related to its geolocation(s). Are there tensions between the country you are operating in and the country the supplier is operating/producing in that could lead to sanctions? Is there unrest that could lead to border closings due to uprisings? Is the area prone to natural or climate disasters that have been increasing in frequency in recent years? Etc. If the overall risk is high, and there is another supplier of comparable (which could mean slightly higher) cost that is considerably less risky, then you should be choosing the alternate, slightly higher, cost supplier.

Shipment Tracking / T(I)MS

You need to be tracking all of your shipments, and, preferably, have a Transportation (Information) Management System (T(I)MS) that integrates with your carriers. At the very least, you need to know when a shipment reaches each stop and then sets out for the next stop in the chain and know where it should be at all time. If the cargo is very high value or the carrier is a common target of criminal organizations because of what they typically carry (and that includes items like cell phones, laptops, and gold bars), then you need to ensure that the shipment is tagged and the truck, container, etc. is sending real time cellular signals at all time, that the carrier is monitoring their systems 24/7/365, and if a shipment ever goes dark for more than a few minutes or too far off course, and the driver cannot be immediately reached, law enforcement is immediately engaged. Unless, of course, you can afford to have 40 Million disappear! (A 40 foot shipping container can hold 44,000 iPhones. High end i-Phones are all 1K (or more) a pop. Do the math.)