Geopolitics is the new word
The nature of international trade is that we often do not know where components of an item are made. It can mean that the most recent invoice containing increased prices, sent from a US based supplier to a US based customer, is the first signal that components in the purchased item are made in China and other countries.
Should you know where the components or ingredients in a purchased item originate? Typically, an item that meets the buyer’s requirements has been purchased without knowing about the item’s supply chains. Understanding the complexity of global supply chains continues to be a challenge for supply chain professionals, but recently an additional factor has emerged – that of geopolitics.
Dictionary definitions of geopolitics consider it to be ‘the study of how factors such as geography and economy influence politics and the foreign policy of a state’. The firm Geopolitical Futures takes a more holistic view of geopolitics and its relationship to supply chains.
It uses geography to understand the imperatives (what can/must be done) and constraints (what cannot be done) concerning how a nation state and its parts can exist. Then add the components of a nation state: the Economy (including supply chains), Politics, Military, Technology, Demography and Culture and the extent to which these components interact. Finally consider the influence of surrounding countries and communities, based on their geography, power and constraints.
While politics will change, geography does not. It is a major influence in the development of a country’s supply chains for domestic and international markets. So, as current events are showing, supply chains are geopolitical in their global structure.
Geopolitics includes the use of tariffs and non-tariff actions i.e. import restrictions, additional import compliance and customs inspection delays, as weapons in a country’s international diplomacy. These actions are designed to place pressure on another country, knowing that country will impose similar actions in retaliation.
It then becomes a situation of which country can tolerate the most pain. The World Trade Organisation (WTO) reports that at government level, to influence the supply chains of countries, import restrictive actions across the G20 major trading countries have risen 3.5 times between 2012 and 2018.
The extent to which the pain can be tolerated is dependent on whether alternative suppliers and supply chains are available or can be quickly established by buying organisations. This might be achieved for low added value products, but as the added value increases, so does the capabilities required of suppliers and supply chains. If low cost is also a criteria of the buyer, then the options are further limited concerning countries with the required capability and capacity.
Examples of government action to open new supply chains is the recent trade facilitation agreement (after 20 years of negotiation) between the EU and Mercosur, the South American trade pact. Also, continuing meetings between trade ministers of Asia Pacific countries to reach a trade facilitation agreement by the end of 2019. The Regional Comprehensive Economic Partnership (RCEP) is an ASEAN initiative for a regional trade area; including the ten ASEAN members and the countries of the Asia Pacific region which have existing trade agreements with ASEAN – Australia, China, India, Japan, the Republic of Korea and New Zealand.
So, the structure of international supply chains is inherently political. It is not sufficient for organisations to implement sophisticated supply chain systems and processes while remaining naive about the geopolitical security of their supply chains. Because relations between nations can (and do) change, supply chain professionals need to broaden their scope of understanding to include geopolitics.
Influences on supply chains
Supply Chain professionals are well aware that it is becoming increasingly complex to balance the demands of stakeholders when acquiring and moving inbound items and outbound products and services in full, on time and at the lowest total cost. The need for understanding geopolitics and its influence on international trade is but one of the factors which currently (or in the near future) influence supply chains:
- Climate crisis and its potential effects on organisations, suppliers and customers
- Environmental issues, including natural disasters and their actual and expected effects on supply chains
- Transport modes and distance is a growing source of greenhouse emissions that will require increasing attention
- Re-purposing of items (i.e. using the prefix ‘re’ as in re-use), which could lead to operating in a ‘circular economy’
- Business alignment:
- Customer requirements (e.g. omni-channel distribution and many product variants) can conflict with internal objectives (e.g. lean) and supplier capabilities
- Business decisions to reduce working capital, consolidate the supply base and outsource operations reduce the time and inventory ‘buffers’ that enable reaction to unplanned changes
- Product proliferation and Reduction in product life-cycle add to Vulnerability:
- Product Proliferation: An increase in the variety of finished products offered is likely to increase the number of input items and suppliers
- Reduction in Product Life-Cycles: Can result in increased purchasing costs and potential product (and material) write-offs/write-downs. Items which are sourced globally can impact lead times and inventory requirements
Taken together, these influences provide Uncertainty for a business. Uncertainty incorporates the elements of complexity, variability (and volatility) and constraints. Reducing Uncertainty is to classify and measure the elements as risks to the business, then structure a program to address the highest risks.
To address the identified risks, building relationships and influencing decisions in an interconnected web of stakeholders will be increasingly important. This can allow Supply Chain Directors (also called Chief Supply Chain Officers or CSCO) and their team of Procurement, Planning and Logistics professionals to develop their organisation’s supply chains as a source of competitive advantage.