The
news is dominated by geopolitical events from around the world – the spread of
Ebola, the conflict in Syria, 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 or 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, organizations
are being exposed to more geopolitical risk. In order to ensure the safety of
their company, Chief Procurement Officers and Procurement Directors must proactively
consider the implications of these events on the smooth 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 organizations are
taking this even 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 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.
Organizations 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. But the truth is, 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 organizations 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. Organizations 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 organization.
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.
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Nick Ford is Managing Director, Global Procurement Outsourcing & Co-Sourcing, for
Xchanging. Xchanging is a global, publicly-held business process, procurement
and technology services provider. For more information, visit www.xchanging.com.
