Dec 10, 2009

Does Geopolitics affect your Supply Chain?

 

Well.. what can I say?? We have the world leaders meeting at Copenhagen to discuss legislations that might make huge changes to the way we all operate our supply chains. It is a well recognized fact that we’re in a formative new “world economy” (not at the level oimagef governments) at the level of the common businesses. This means that more and more small and medium businesses need to know how to do business with their bigger counterparts. Now.. doing business across such a diverse environment is a challenge in itself. Imagine what is to happen if you throw in a major US economic collapse and a  100% rise in the price of oil – makes for a pretty heady business environment huh?!

 

This observation brings us to realize the role that Geopolitics plays in today’s networked business environment. More and more businesses are realizing this fact and are throwing this under the gamut of risk preparedness of the supply chain. But we need to realize that this falls under more than any Supply Chain Risk Manager will ever know. It ties into the physical and political needs of the particular region concerned. A lot of factors add up when gauging the preparedness of the supply chain to proactively adjust to occurrences like this. Let us look at the oil supply chain in Iraq to drive this point home.image

Just look at the chart to the left. Look at the US flags that line the region in the middle east. That’s all the countries in the middle east that have US bases. Now irrespective of how hard the US troops are trying to get out of the region, the fact of the matter is that politically, the region is highly unstable.

Now look at the chart right below it.

 

image

This chart gives the supply of oil (crude oil) that the US gets from all around the world. Around 45% of the oil supply comes from the Middle East and North Africa. Any potential instability in this region will certainly affect the supply of oil from these areas. What is the US doing to mitigate this risk? I’m sure there are experts who know and I’m equally sure that this is classified information. What I am trying to emphasize here is the fact that something as important as the supply of crude oil can be affected by the politics of the region. That leaves the rest of us that run our menial supply chains to literally bite the dust.

This realization must be dealt with on an “individual supply chain” basis. Economics experts from within the company need to get together with the Supply Chain Risk guys and figure out a long-term exit strategy (if you will) about how the company will balance its risk in case all suppliers from a single region are hit. This issue is indeed important – so much so.. I found an article on the ISM website regarding this. I’ll leave you with a few words from this article to think about.

Impacts of Geopolitics on the Supply Chain

A major issue facing organizations today is how to devise a global strategy that can withstand regional and global unrest, while ensuring continuity of supply. Until recently, supply chain strategies were based on a JIT operating environment. However, the current global recession revealed severe cracks in that operational philosophy. As credit markets dried up and manufacturing ceased, companies realized the lack of flexibility in their supply chains. To compound matters, Realuyo says consolidation in many industries is forcing companies to source raw materials and components from the same region.

This all contributes to what Realuyo refers to as the three dimensions that attribute to a threat's impact.

  • Space — Due to globalization, there is a lack of boundaries. Thus, if a country decides to be protectionist or quarantine its workforce during swine flu, there will be little impact unless other countries adopt the same measures.
  • Time — The marketplace is based on a 24/7 schedule and instant gratification. Rather than being in strategic planning mode, leaders are in response mode.
  • Depth — When there is a disruption, a solution may exist that solves the problem, but there are second-, third- and fourth-level effects that are not anticipated

    How are these dimensions affecting supply management professionals' global operations? Every region of the world has its own geopolitical challenges coupled with global threats that can occur anywhere. It's the responsibility of supply management professionals to acclimate themselves with the geopolitical influences in the regions where they operate. Rising tensions in a region can have an impact on commodity prices and the supply chain even if there's not a direct threat, says Townsend. Consider the volatile environment in Iran, for example. While the country has not attempted to close the Straits of Homuse, the unrest in the region spreads fear among oil producers and causes spikes in oil prices. "Supply management professionals must recognize that if there's a single, isolated incident, the effects on the supply chain may be temporary. However, if it's a larger-scale conflict within or among sovereign states, the impact could be longer-term," says Townsend. "There requires a good deal of understanding of geopolitics to ensure a comprehensive contingency plan that moves your goods to market."

    Source: ISM article

  • Dec 10, 2009

    Does Geopolitics affect your Supply Chain?

     

    Well.. what can I say?? We have the world leaders meeting at Copenhagen to discuss legislations that might make huge changes to the way we all operate our supply chains. It is a well recognized fact that we’re in a formative new “world economy” (not at the level oimagef governments) at the level of the common businesses. This means that more and more small and medium businesses need to know how to do business with their bigger counterparts. Now.. doing business across such a diverse environment is a challenge in itself. Imagine what is to happen if you throw in a major US economic collapse and a  100% rise in the price of oil – makes for a pretty heady business environment huh?!

     

    This observation brings us to realize the role that Geopolitics plays in today’s networked business environment. More and more businesses are realizing this fact and are throwing this under the gamut of risk preparedness of the supply chain. But we need to realize that this falls under more than any Supply Chain Risk Manager will ever know. It ties into the physical and political needs of the particular region concerned. A lot of factors add up when gauging the preparedness of the supply chain to proactively adjust to occurrences like this. Let us look at the oil supply chain in Iraq to drive this point home.image

    Just look at the chart to the left. Look at the US flags that line the region in the middle east. That’s all the countries in the middle east that have US bases. Now irrespective of how hard the US troops are trying to get out of the region, the fact of the matter is that politically, the region is highly unstable.

    Now look at the chart right below it.

     

    image

    This chart gives the supply of oil (crude oil) that the US gets from all around the world. Around 45% of the oil supply comes from the Middle East and North Africa. Any potential instability in this region will certainly affect the supply of oil from these areas. What is the US doing to mitigate this risk? I’m sure there are experts who know and I’m equally sure that this is classified information. What I am trying to emphasize here is the fact that something as important as the supply of crude oil can be affected by the politics of the region. That leaves the rest of us that run our menial supply chains to literally bite the dust.

    This realization must be dealt with on an “individual supply chain” basis. Economics experts from within the company need to get together with the Supply Chain Risk guys and figure out a long-term exit strategy (if you will) about how the company will balance its risk in case all suppliers from a single region are hit. This issue is indeed important – so much so.. I found an article on the ISM website regarding this. I’ll leave you with a few words from this article to think about.

    Impacts of Geopolitics on the Supply Chain

    A major issue facing organizations today is how to devise a global strategy that can withstand regional and global unrest, while ensuring continuity of supply. Until recently, supply chain strategies were based on a JIT operating environment. However, the current global recession revealed severe cracks in that operational philosophy. As credit markets dried up and manufacturing ceased, companies realized the lack of flexibility in their supply chains. To compound matters, Realuyo says consolidation in many industries is forcing companies to source raw materials and components from the same region.

    This all contributes to what Realuyo refers to as the three dimensions that attribute to a threat's impact.

  • Space — Due to globalization, there is a lack of boundaries. Thus, if a country decides to be protectionist or quarantine its workforce during swine flu, there will be little impact unless other countries adopt the same measures.
  • Time — The marketplace is based on a 24/7 schedule and instant gratification. Rather than being in strategic planning mode, leaders are in response mode.
  • Depth — When there is a disruption, a solution may exist that solves the problem, but there are second-, third- and fourth-level effects that are not anticipated

    How are these dimensions affecting supply management professionals' global operations? Every region of the world has its own geopolitical challenges coupled with global threats that can occur anywhere. It's the responsibility of supply management professionals to acclimate themselves with the geopolitical influences in the regions where they operate. Rising tensions in a region can have an impact on commodity prices and the supply chain even if there's not a direct threat, says Townsend. Consider the volatile environment in Iran, for example. While the country has not attempted to close the Straits of Homuse, the unrest in the region spreads fear among oil producers and causes spikes in oil prices. "Supply management professionals must recognize that if there's a single, isolated incident, the effects on the supply chain may be temporary. However, if it's a larger-scale conflict within or among sovereign states, the impact could be longer-term," says Townsend. "There requires a good deal of understanding of geopolitics to ensure a comprehensive contingency plan that moves your goods to market."

    Source: ISM article