Operational and Geopolitical Risk Amid ‘Slowbalization’

In recent years, supply chains have experienced unprecedented disruptions and face an increasing number of risks. These risks have many sources — known and unknown, controllable and uncontrollable.

For many global firms, accumulation of these risks has been amplified by the structural realignment of supply chains in this era of “slowbalization,” a period of slowing international economic exchanges and a shift from rapid globalization and toward more localized or regionalized economic activities. Executives and supply chain professionals, in turn, must adapt with faster cycles of risk planning, stress testing, mitigating and responding to disruptions — while they are restructuring operations and supply bases in an environment of higher inflation and interest rates.

Three decades of rapid, global gross domestic product growth has been largely driven by consolidating industry supply chains in stable, low-cost supply chain ecosystems, many in China and Asia. The result? At many companies, supply chain resilience, sustainability and end-to-end visibility have become more urgent than ever.

Reducing uncertainty and exposure to risks is a key objective for most organizations. However, supply managers charged with managing or mitigating risks often lack the ability to fully and accurately assess or measure them, let alone activate countermeasures to mitigate them.

Risks, Unknowns and Controllability

From an operational standpoint, managing known-unknown and controllable risks in the supply chain is a daily activity. The traditional supply chain toolbox — for example, diversifying suppliers, maintaining buffer inventories, automating non-value-added processes and supplier relationship management — is still effective in risk management.

Geopolitical risks, however, tend toward the unknown-unknown and uncontrollable variety of risks that are highly unpredictable and can have devastating results. And for affected industries and businesses, many geopolitical disruptions, like recent events in Ukraine and the Middle East, are impossible to plan for and costly to respond to.

CAPS Research, the Tempe, Arizona- based organization in strategic partnership with Institute for Supply Management^® (ISM^®) and Arizona State University (ASU), commissioned a project to investigate how global firms assess, manage and justify their strategies to mitigate operational and geopolitical risks. A team of researchers from ASU interviewed senior executives in procurement, supply management and related supply chain functions (for example, transportation and operations) and surveyed 54 CAPS Research member organizations.

The study found that measurement and assessment of supply chain risks are difficult because of uncertainty. An important aspect of risk assessment is identification of a specific risk. The magnitude of a specific risk depends on its impact, which might be measurable financially or operationally. Assessment of a recent disruption can be used to help assess the potential impacts of future risks.

Both traditional risk-planning reviews and advanced technologies, alone or in combination, are highly useful tools for executives. They include:

• Ongoing PPRR (plan, prepare, respond and recover) reviews and processes integrated and digitized into the business cycle
• Scenario analysis and planning
• Statistical models and simulations 
• Supply chain and risk mapping.

Assessing and Measuring Risks

Ongoing risk planning helps executives identify and quantify specific risks to their operations, global footprint and supply chain ecosystems. The lack of end-to-end visibility, particularly in upstream tiers of global supply chains, exposes companies to a potential catastrophe. A risk we cannot see is a risk we cannot mitigate.

Supply chain technologies have improved rapidly in recent years and become essential for early identification of potential risks. One such solution: modular supply chain control towers that are integrated into the planning, purchasing, logistics and operating processes of the firm. Core functionality includes: 

• Centralized dashboards. A customizable dashboard that displays key metrics, KPIs, and critical supply chain events.
• Data integration. A function to collect and integrate data from various internal and external sources, including Internet of Things (IoT) devices, weather data and traffic information.
• Alerting systems. A system that employs automated alerts to notify managers of potential disruptions or issues in the supply chain.
• Scenario modeling. A function for modeling different scenarios to predict outcomes and plan for contingencies. 

Therefore, a matching analysis is required to plan for and address risky events in supply chains. Strategies for managing and assessing risks need to be based on risk types and likely impacts. Mitigation strategies could be reactive, proactive or both.

Risks with high potential impacts will likely require both proactive and reactive mitigation strategies. Because the impact is typically not known until after a disruption, executives need to utilize both quantitative and qualitative metrics to justify investments in contingency plans and proactive strategies to build a more responsive and resilient supply chain.

ArtemisDianac/iStock/Getty Images Plus