The Impact of Political Instability on Global Sourcing

The Impact of Political Instability on Global Sourcing

Political instability is an enormous threat to the success of companies operating in the global supply chain arena. Organizations with global sourcing needs must understand the potential negative impact political instability can have on productivity, quality, and relationships and create strategies to mitigate risk.

Political instability represents bottom line threats to global supply chains. These threats need to be carefully examined and mitigated through risk assessment and contingency planning.

Notable facts every supply chain-involved organization should be aware of:

  • Eastern Europe and Southeast Asia are two areas where global sourcing is expected to expand the most.
  • Political risks have increased dramatically since 2014 in the BRICS countries (Brazil, Russia, India, China and South Africa).
  • In a recent study by APQC, 63% of respondents acknowledged that their suppliers are located in areas of the world experiencing political turmoil.
  • Countries with weak political stability are more likely to experience decision-making by government officials that negatively impacts businesses.

Political Instability and the Impact on Global Supply Chains

Political instability is the propensity for regime or government change, political upheaval, or violence in society, or instability and uncertainty in government policy, such as regulatory, tax, property, or human rights law. Any political shift involving one or more of the aforementioned triggers has the potential to cause concern at a local level as well as create major global supply chain turmoil.

Political instability can affect global supply chains with varying degrees of damage to organizations and the economy. The shift to leaner, more efficient, last-minute global sourcing strategies means delivery delays and re-routed resources when political unrest occurs. Organizations must proactively prepare for adverse conditions around the world.

For example, recent political events in North Africa, the Middle East and Ukraine threaten global supply chains and cause concern among organizations that have any portion of their supply chain in those areas. Other recent developments reflecting the varying effects of political instability include:

  • Companies with operations or suppliers in Crimea, Ukraine, have reevaluated their current circumstances and, in some cases, initialized emergency plans due to strong political unrest.
  • Nestlé with 4,500 employees and three factories in Ukraine on alert.
  • Astras, a Swiss logistics provider in Ukraine, reported a 20% employee turnover rate recently.
  • Government assistance to farmers in Ukraine has nearly disappeared.
  • Although there are 620 German companies in Ukraine that employ more than 300,000, Deutsche Post has stopped package delivery to that area.

Clearly, continued unrest in Ukraine poses a global sourcing threat that senior leaders must take seriously. Organizations also need to consider supplier relationships two or three levels deep. If any of those partners have ties to the unstable region, a reverberation can be felt at every link in the chain. The complexity and trickle-down effect of this issue can make it difficult to address, but its impact is undeniable.

Reducing Political Volatility in the Global Supply Chain

It’s important to understand operations and partnerships before deploying proven strategies. Being mindful of how an organization’s supply chain operates and understanding the true flow of raw, unfinished and finished materials and components is critical in today's fast-paced, global supply network. Prioritizing strategic partnerships will better position a company when it’s faced with a politically volatile situation.

The first step to reducing risk to the global supply chain is understanding the nature of the political risk. Conversations with local government leaders, as well as, influential non-government organizations can yield valuable insight. It is important to separate rhetoric from true problems that will adversely affect the supply chain. After an initial probing conversation with local sources, an organization can determine if there is a credible threat to its global sourcing strategy. Depending on the specific political scenario, there are different ways to mitigate risk:

  • Engage local, regional, and national policymakers to impact regulatory change.
  • Train employees and enforce strong codes of conduct to prepare for and reduce the potential effect of political volatility.
  • Educate employees on what to do if they are faced with an unstable situation.
  • Establish positive local relationships. Local outreach and social responsibility help align an organization's image with the local community and establishes a positive rapport. Being seen in a positive light by residents and the community assists with transparency and decision-making.

Although issues related to the health and vibrancy of an organization’s global supply chain are complex, a strong contingency and emergency plan can help mitigate the effects of threats. There are several principle-based tips that can help organizations reduce risks linked to their global sourcing strategy:

  • Think strategically. A lean, holistic and integrated supply chain strategy is a must in today's global environment. Senior leaders need to be mindful of the global lens when developing policy and strategy.
  • Broaden the scope. A supply chain strategy should include near-sourcing partnerships that may come with greater costs and lower risks with more global suppliers that reward with lower costs.
  • Balance the strategy. Incurring supply chain risk and exposing an organization to regions with potential political instability is a business choice that senior leaders are forced to make.

Typically, lower supply chain costs come with greater risks, and adverse relationships can result. The challenge is to create a global sourcing strategy that aligns with organizational goals and embraces these calculated risks, but also adjusts periodically.

Designing a plan that anticipates threats will aid an organization’s survival, as political unrest around the world continues to threaten global sourcing strategy. Strong supplier partnerships and relationships with local government and non-government entities are extremely helpful if political volatility occurs. Creating a balanced strategy that mixes global, low-cost suppliers with near-sourced suppliers also helps mitigate risk. Performing due diligence and being abreast of current global events related to political change prior to sourcing strategy design helps protect organizations from the potential of a devastatingly negative impact. In the end, political instability is a very serious threat to global sourcing that organizations must address in a way that considers today and well into the future.

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