Supply chain geopolitical risk is the possibility that your supply chain is disrupted by global political, cultural, or socioeconomic events. Revolution, war, trade regulation, and tariff conflicts increase costs and reduce supply chain efficiency.
The dramatic impact of geopolitical events for enterprises and their procurement is shown by PwC’s 25th Annual Global CEO Survey. Nearly one-third of executives (32%) cite geopolitical conflict as a top threat to growth, and 71% said it could inhibit their ability to sell products or services.
Following the Russian invasion of Ukraine in February 2022, countries around the world responded with sanctions, blacklists, and boycotts, all of which severely impact global supply chains. In many cases, it is no longer possible to source from Ukrainian business partners. At the same time, many goods and materials that were purchased from Russian companies have been sanctioned. Critical exports from the two countries include commodities such as oil and natural gas, metals, grain, uranium and neon gas, or components, for example, lasers or wiring harnesses.
Prices on global markets have risen, some dramatically, accompanied by supply shortages. Such factors push up production costs, or can lead to production shortfalls. Skyrocketing energy costs across all industries also drive inflation. In turn, recession and economic downturn cause shifts in buying decisions and customer needs, which put existing business plans at risk.
High geopolitical tensions often interrupt transport routes, choke trading points, and result in disasters at business sites or force majeure. Insolvencies increase drastically, and cyberattacks amplify the vulnerability of supply chains. That is why good supply chain risk management includes cutting your exposure to geopolitical risk. By diversifying your supply chain, developing emergency plans, and putting proactive measures in place, you mitigate the impact of geopolitical events.
1. Geopolitical Risks Vary Widely
Wars and revolutions are extreme examples of geopolitical risk. However, less violent and slower-acting trends can also affect your supply chain—for example, an increase of protectionism and tariffs, as in the US-China-Taiwan trade conflict.
2. It's Not Impossible To Predict Geopolitical Risk
It can be hard to predict geopolitical risk. However, it is possible—certain indicators can give you early warnings. If you are not trying to monitor these, then you have a big hole in your supply chain risk management strategy.
3. Impact Analysis Is Essential
It is good practice to monitor locations or regions so you stay on top of geopolitical situations as they arise. However, it is even more critical to understand the impact of such events on your supply chain. Make sure you know what is going on—and what it means to your specific business.
