Five Top Issues Affecting Global Supply Chains
By Victoria Kickham
Originally published in TTI MarketEye
Brexit, terrorism, political turmoil top list of supply chain disruptions buyers should be most concerned about – and prepared for – in the months ahead.
A handful of issues and trends that could impact global supply chains are gaining momentum in 2018, most notably complications surrounding Brexit and the ongoing political turmoil in many parts of the world. A study released earlier this year by management consulting firm A.T. Kearney and analytics firm RapidRatings lists the top five issues most likely to disrupt global supply chains in the coming months and notes that most procurement organizations are not prepared to deal with them.
“Most organizations acknowledge that supply disruption will occur,” Carrie Ericson, vice president with A.T. Kearney Procurement and Analytic Solutions, and co-author of the study, said in announcing the findings. “Unfortunately, few have invested in the systems and programs needed to respond quickly and efficiently to increased geopolitical unrest and the unpredictability of natural disasters.”
The study also found that most procurement organizations expect to be given more responsibility for managing the widening net of potential supply chain disruptions: 78 percent of companies and 90 percent of procurement leaders surveyed said they expect their procurement organizations to be given more responsibility for managing risk over the next two years, the study showed.
The Top 5 Supply Chain Disruptions, as described by the survey authors, are:
- Difficult negotiations will raise the risk of a hard Brexit in early 2019. Brexit negotiations in 2017 were marked by false starts, massive complexities, and growing tensions. In 2018, Brexit negotiators will make some progress, but not enough to preclude a possible “hard Brexit” in March 2019 with the expiration deadline of Article 50, extending the uncertainty that businesses face. Financial market and foreign exchange volatility will grow throughout the year as investors hang on rumors and statements from the successive rounds of negotiations, and Brexit will continue to weigh on UK economic performance. More businesses with operations in the United Kingdom will prepare for the possibility of a “very hard Brexit” by hedging their operations financially and geographically, including moving their supply chains out of the United Kingdom. And as 2018 draws to a close, it will remain unclear if both sides will extend negotiation deadlines or if a “no deal” hard Brexit will come to pass in 2019.
- The threat from the Islamic State will spread beyond the Middle East. The self-proclaimed Islamic State has lost more than 90 percent of the territory that it held in Iraq and Syria since the height of its power in late 2014. This massive loss of territory will accelerate the spreading of its bases of operation in 2018. Three geographies stand out. The first is North Africa— especially Libya, where the Islamic State will continue to capitalize on longstanding political instability in the country to capture oil-producing territory to bolster its revenue streams. The second geography is sub-Saharan Africa, where several affiliate groups are already active— including in Nigeria and Kenya, two of the region’s leading economies. And the third key geography is Southeast Asia, which has a history of both conservative Islamism and militant groups. More than 1,000 Southeast Asians have joined the Islamic State in the Middle East. As these fighters are sent home in greater numbers, attacks in Southeast Asia are likely to grow in intensity and frequency, increasing the instability in one of the most vital regions of the world for global supply chain.
- Domestic politics in Germany and France will hamper EU progress. Countries collectively accounting for more than 60 percent of the EU’s GDP held national elections in 2017, and the outcomes of those contests are shaping the future of the EU. The EU will continue to rise in importance on the global stage as the United States persists in turning inward and European economic activity strengthens. But despite the continued economic recovery, EU leaders in France and Germany will be impeded from making substantial progress on EU reforms and continued integration because of domestic political dynamics.
- Catastrophic natural disasters will put even more uncertainty on supply markets. In 2017, 10 Atlantic storms in a row reached hurricane strength. Several other natural disasters, including earthquakes, floods, monsoons, and wildfires, also caused substantial damage in the past year. With less than a third of natural disaster-related economic losses insured, these disasters pose threats to not only supply chains, but the financial health of the companies they impact. The rate of natural disasters worldwide has more than quadrupled since 1970 to around 400 per year. These “once-in-1,000-year events” will likely continue in 2018.
- Chinese foreign investment will accelerate but will face growing resistance. Outbound foreign direct investment by Chinese investors has been growing rapidly in recent years. But in 2017, some of the country’s more active investors came under pressure from Beijing to scale back their foreign activities. Beijing still supports overseas investments related to the construction of projects in the One Belt One Road Initiative, those that align with the country’s strategic interests, and those that boost technological advances. At the same time, however, many governments around the world have become wary of the influx of Chinese investment in areas of strategic interest locally, including overlapping areas such as technology and vital infrastructure. The European Commission, for instance, has advanced a proposal for stricter review of foreign takeovers of EU-based companies on national security grounds. In the United States, the Committee on Foreign Investment in the United States (CFIUS) will take a tougher stance against Chinese investments that are deemed to threaten national security.
The study authors go on to explain that organizations must take a more comprehensive look at how they manage their supply chains in the view of these ongoing threats. This is especially true of the electronics industry, where global sourcing and selling on a large scale heightens the risk to parties throughout the supply channel. The study authors say many organizations are beginning to act on these problems by investing in management practices that link procurement, category and supplier management strategies. The best time to start planning for supply disruptions is during this investment period, they say, when information is fresh and managers are best able to develop both short- and long-term contingency plans. Once those plans are established, organizations must maintain access to timely data so that they can continue to manage risks appropriately. And because it’s impossible to plan for everything, organizations must prioritize the greatest risks to their supply chains and develop plans accordingly.
Failure to do so could add up to disastrous results.
“For most organizations, it is not a matter of if but when a supply disruption will occur. Although most acknowledge this fact, few have invested in the systems and programs needed to respond,” according to the study authors. “Luck will eventually run out. Supply managers who have prepared their organizations to quickly identify, diagnose, and resolve eventual disruptions will be in the best positions to weather the storms.