Political Risk and Global Supply Chain Impact

Posted on February 16, 2011 by aviyer2010

An article in the Economist (Schumpeter, February 12, 2011, pg 75) describes the impact of political risk on the supply chain. It starts with the abrupt impact of the changes in Egypt on the company that controlled 67 % of steel production in Egypt and the consequent impact on a supply chain that used that steel. The article summarizes three approaches to manager risk (a) Diversify operations – with the example of Chrysler that made 50 % of the components for a car in Peru and thus escaped nationalization, (b) Develop deep local roots – with the example of Shell that trained most of Nigeria’s oil industry regulators or (c) Share risks with other firms, NGOs or government entities. Notice that (a) and (c) require the global supply chain to be more spread out and split amongst owners. Is such a spread out strategy the best way to manage the impact of political risk on a global supply chain ? Would a contained strategy that builds a supply chain with independent modules permit a better supply chain in response to unfolding risk ?

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10 Responses to Political Risk and Global Supply Chain Impact

deepakregu says:

August 25, 2015 at 1:51 am

Having a spread-out chain also brings in dependability on too many entities and hence makes the supply chain vulnerable to more number of forces. Hence a better way out is to have parallel contained supply chains with shared reserved capacity, which will cater to different portions of the demand and hence a local disruption will affect only one portion of the supply as the other links can proceed uninterrupted.

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Rajarshi Mukherjee says:

August 26, 2015 at 9:49 am

It is an interesting question. From my experience in my earlier organization (Schneider Electric), I feel that it is rather difficult for a multi-national organization to create a centralized business operations structure, built around a single country. The approach rather focuses on utilizing local decision making as a primary filter, followed by a global decision making in case things go wrong. For example, when US sanction in Iran heated up, Schneider Electric decided to sell-off their Iran factories to local shareholders who have a better knowledge and understanding of the local operations. Product-Country exclusivity poses a higher global supply chain risk as we have seen in the case of Fukushima disaster in Japan which affected the global electronics supply chain. Similarly it is a good idea to deep root the business operations for particular products in different countries which offers a competitive advantage, but at the same time, keep a wary foot to shift track in case the need arises. The strategy works well for unstable political scenarios as well.

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aniketgarg90 says:

August 27, 2015 at 12:06 pm

For a company operating at a global level it is imperative to diversify its risk. With unstable political conditions across the world , frequently happening natural calamities a company cannot depend on a single geographical location for all its supplies. For example during the Tsunami , companies such as Toyota , GM had to stop its global production because they were too much dependent on its OEM suppliers in Japan. Thus production across the globe suffered.
In this rapidly changing VUCA world a company must hedge its risk in order to be sustainable in the long term. There may be short term losses because of managing different sources of supply and the distribution network, but the long term benefits are many and companies are realizing it with time.

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Nikhil Sharma says:

August 27, 2015 at 3:56 pm

In my view, for a company that intends to enter a new market, options (a) and (c) are completely feasible and implementable. However, option (b) seems to be more of a long term ploy for a company to deploy. Isn’t collaboration with a local major a better option to achieve deep local roots?

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Rupesh Kumar says:

August 27, 2015 at 11:50 pm

A company operating at a global level need to diversify the risk for its global supply chain to be effective. It cannot be dependent on just one market as in case of any calamity in that market it will severely impact the business of the company. But with diversification comes another risk of exposing to different markets, increasing the vulnerability to the company. It has to handle the issues of all the markets. Options (a) and (c) mentioned above are good measures to manage the political risk of supply chain. I agree with Nikhil in his view that option (b) can be more long term solution as it deals with developing local competency which can be sustained for longer time

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Vivek Kaimal says:

August 28, 2015 at 10:52 am

I believe that for companies to enter new markets, it is much easier when firms have local partners, be it in supply chain or any other area. Oftentimes, markets and means of operation are much different in different countries and even if you are the best in the country you operate in, it becomes difficult to adapt to practices of a different country. In this case it becomes much easier if you have local partners who are in the know. However, once the company has developed roots in the country and it finds that the partners are not doing as well as it would like them to, it can consider setting up its own resources. Also, legal aspects come into play as many countries such as India mandate that you absolutely need a local partner when setting up a company in areas such as telecom and retail. So, having a local partner seems like a good option to me!

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Aayush Goyal says:

August 28, 2015 at 1:52 pm

In my opinion, hedging risk through diversifying operations and risk sharing mechanism seems best bet but very difficult to manage. Although it may not be cost competitive but the expected savings in case of disruptive circumstances would be huge. Taking the case of Toyota, it was crippled by the earthquake and tsunami in Japan. Although there are counter arguments in the way it recovered by bringing out the best in people during crisis situation. But according to me Lean manufacturing relies on the assumption that processes and conditions will stay the same throughout. Yet the very way of our worldwide economy makes implementing this troublesome. Calamities can stop creation for quite a long time. War and social battle put business as a second thought.

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Rohit Singh says:

August 28, 2015 at 6:52 pm

Options A & C are good and is practical and can hedge political risks. Option B is developmental and can take time but will be sustainable. Basically, in this VUCA world, diversifying risks is the standard and best way to do business.

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Shiv Kamat says:

August 28, 2015 at 11:51 pm

In my past work experience in automobile industry, there were instances in cases of single sourced component from a supplier that OEM ran into trouble whenever that supplier was unable to source the parts, hence OEM was forced into going for second source in case of critical components. Hence diversifying risk in supply chain is a must in today’s world tor remain competitive.

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Debajyoti Biswas says:

August 29, 2015 at 8:04 pm

Depending on single suppliers for any component is always a risk which needs to be taken care of by either developing multiple vendors/suppliers and investing in their capabilities (The Japanese way of growing together) Developing local roots is very essential for any new player to foray into the market.This enables the company to leverage the core competencies of existing local players and establish itself faster by focusing on its own. Having worked in Tata Motors Jamshedpur I have observed how proximity to suppliers have played a big role in terms of quality,relationship and delivery.

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