How Political Risks Affect our Supply Chains
The figures of large insurance companies confirm: Political risks have increased in the last few years!
According to the Marsh-Maplecroft Political Risk Map 2014, 17 of the 197 countries have experienced a significant increase in their level of dynamic political risk since 2010. This was the year prior to the Arab Spring, and also saw the risk of political violence increase in 63% of the countries in the Middle East and North Africa.
Aon’s 2014 political risk world map shows increased risk evaluations for the BRICS countries (Brazil, Russia, India, China, South Africa). According to this map, political risks are much more likely in these five emerging countries, where a large percentage of global goods and raw materials are produced. The risks comprise political force, political influence and government payment defaults.
We asked ourselves what impact political risks have on the global supply chains and consequently affect globally networked activities. The conflict in Crimea is certainly the most recent political crisis that has concerned us these last months. As a result, we have compiled some interesting information and facts:
- The main trade partners of Ukraine are Russia (32%), China (9%) and Germany (8%, approx. $8 billion)
- There are 620 German companies in Ukraine (+/- 900 including subsidiaries)
- The two main trade partners of Russia are China (24%, approx. $103 billion) and Germany (19%, approx. $80 billion)
- There are 6200 German companies with 300,000 employees in Russia
Example companies which are affected by the conflict:
- Astras, a Swiss logistic provider that specializes in eastern Europe logistics reports 20% lower turnover and extreme volatility in exchange rates
- Deutsche Post stopped letter and package deliveries to Crimea
- Nestlé has 4500 employees and 3 factories in Ukraine of which 1 is under high risk as it is located in east Ukraine
- Almost no more credits to farmers, turnover slightly decreased for Syngenta
- Insulating glass manufacturer Glas Tösch has experienced a drop in orders at its plant on the Crimean peninsula of 50% since the start of the crisis, according to a company spokesman
Companies with production sites in Crimea are busy with preparation or even execution of emergency plans for all departments including procurement. We talked with a company that has a production plant in the Ukraine. They told us some weeks ago that they were moving goods out of the factory, relocating production machines to western Ukraine and checking whether suppliers are still able to ship.
These examples alone show that the risks resulting from political unrest and affecting our supply chains are many and varied: they impact on production, transport routes, material supply, availability of raw materials, and are the root of extreme currency fluctuations.
In many cases direct suppliers are considered in risk analysis in the first instance. Accordingly, procurement may be in big trouble – but is also facing a huge challenge: the importance of transparency in supplier networks and the entire supply chain has increased dramatically – vision and information are key. Besides the information about direct suppliers (strategic suppliers, bottleneck suppliers, LCC suppliers), the supplier base should therefore also be scrutinized and 2nd to n-tier suppliers in multi-tier supply chains identified to recognize risk dependencies. In order to create complete transparency across the supply chain, supplier locations should be included in risk analysis as well, as should key logistics hubs, transport network hubs and transport routes.
A complete understanding of the supply chain means that procurement can position itself as a strategic player in mitigating companies’ risk exposure, and protecting revenue and image to gain reputation and influence.