Politics is at the centre of the modern supply chain. Globalisation has made countries around the world more connected than ever before, and political legislation or decisions in one nation can have radical effects on supply chain logistics in another.
In late 2023, President Biden signed an Executive Order that restricted the exportation of semiconductors to countries like China. The motive behind this movement was to attempt to restrict China’s access to the technology it needs to accelerate AI research. One government’s decisions then dramatically impact the supply and demand structures of the semiconductor industry, causing a rippling effect that spans from raw material procurement to end product delivery.
Companies within the supply chain must understand the nature of these political risks and identify strategies to manage them. Especially in politically turbulent times, a supply chain risk could lead to a major disruption without much notice, making advanced preparation and proactive planning vital for supply chain integrity and business continuity.
Exploring the Political Landscape: Impact of Political Tensions on Supply Chains
Political tension is directly linked to modern supply chains. With so much of effective supply chain operations being closely tied to regulatory compliance and local labour rulings, any change or disruption to local politics will affect the flow of goods through the supply chain.
In a survey conducted by the American Productivity & Quality Centre, a total of 63% of respondents stated that their suppliers were located in an area with a high risk for political turmoil. Certain regions are known for political volatility, with Southeast Asia, parts of Europe, and select countries in Latin America often experiencing political unrest.
When political tensions escalate or major regulatory changes arise, there can be a number of impacts on the supply chain:
- Cost increases – During periods of political unrest, major suppliers can become unavailable, leading to a shortage of specific materials or products across an entire sector. Taiwan, for example, accounts for nearly 18% of all semiconductor production. If this country were to fall into political unrest, this could lead to the average cost of semiconductors skyrocketing for businesses. Without strategic planning ahead of time, this can create major cost increases and reduce profit margins.
- Operational delays – Political tensions and governmental decisions can create trade delays and interrupt manufacturing cycles. When your business primarily deals with raw materials or products from certain regions that are impacted by these political changes, your entire upstream supply chain could suffer. With delays come higher costs and reputational damages, as you are unable to deliver your final product to customers in a timely manner.
- Manufacturing hub transitions – In the event of significant political tension or even in the name of diversification, businesses may seek to move their manufacturing hub outside of certain countries. Over recent years, a strategy known as “China Plus One” has emerged, relating to the fact that while the majority of manufacturing occurs in China, many companies will have another, smaller hub in a different country in order to evade any potential disruptions that political unrest in China could cause. Vietnam is a popular choice for this secondary manufacturing hub, with manufactured exports in this country going from 20% of the country’s GDP to over 90% in 2020.
Source: Manufactured exports, manufacturing value-added, and foreign direct investment (FDI) in Vietnam as a share of GDP from 1997 to 2021.
Political tension increased by 40% from 2020 to 2023, making taking proactive steps to secure a company’s supply chain against these disruptions more important than ever before.
Best Practices for Managing Supply Chain Risks Due to Political Tensions
While political tensions can emerge at any time and intensify overnight, there are typically identifiable factors that happen in the weeks and months leading up to these events. With that in mind, businesses can monitor their suppliers to identify potential political unrest, using this visibility to give them time to find replacements or turn to other structures to supply their business.
When attempting to decrease political risk in a company’s supply chain, there are three important steps to take.
Conduct a Comprehensive Risk Assessment
The most important step that organisations must take when managing supply chain risks due to political tensions is to understand the political context in which all of their suppliers exist. Every supplier, logistics company, and distribution centre exists in relation to the political authorities in their country and the regulations they put forward.
A proactive step to gain visibility into the stability of your supply chain is to conduct a comprehensive risk assessment. A great place to start here is to leverage a risk assessment tool. AI-driven systematic analysis tools, like Prewave, can collect vast quantities of data on your suppliers, their activities, the country they are in, and other factors like economic, labour, and environmental situations that may impact their ability to deliver.
Prewave can rapidly analyse the geopolitical status of a nation, delivering a highly personalised risk assessment rating for each of your individual suppliers. This insight will then allow you to identify which suppliers pose the largest risk to your business and which are currently more stable.
Armed with this information, you can then begin to take other proactive steps to secure your supply chain, reduce risk, and forge a path to supply chain continuity.
Diversify Your Partnerships
Entire regions can become politically unstable in a matter of weeks. Instead of expecting your business to be able to adapt in time to these new conflicts, a more proactive approach is to diversify your partnerships across the globe.
After conducting a risk assessment, your organisation will have a fairly clear understanding of the level of risk associated with certain partners. To provide your business with more stability, seek to construct trade links with other partners. This approach removes any one single point of failure in your supply chain.
Without a diverse range of suppliers, one small disruption could be catastrophic for the continuity of your supply chain. On the contrary, a diverse range of suppliers means that there are always options you can turn to when you need to replace a disrupted source or meet rising demand.
Commenting on the ability to improve supply chain resilience with diversity, a paper from the International Journal of Operations & Production states that diversification of suppliers can be a highly effective way of building a stable supply chain.
Where possible, businesses should seek to diversify suppliers as globally as possible. A diverse base of suppliers will ensure that a business always has an accessible way to keep produce flowing, despite any political unrest that may arise.
Strengthen Your Local Partnerships
Over time, your business will build up relationships with your repeat suppliers, some of which could be years in the making. When looking to build a strong and stable supply chain, you must search for methods of strengthening these relationships where possible.
Engaging with local suppliers, governments, and organisations will allow you to permeate into the operations centre of that location. With repeated engagement, you can build up a name for your company as a reliable choice in the sector. Additionally, connecting with local organisations in an area provides you with precise insight into the current conditions of that location.
Where possible, look to mitigate risk by engaging with stakeholders, and prioritising the construction of long-lasting relationships that benefit all parties involved.
Leveraging Technology and Information
Political unrest will, most likely, always be a concern that businesses have to contend with. In our globalised era, it’s vital that companies plan ahead for potential disruptions and utilise effective supply chain strategies to ensure their operational flow is not impacted.
One of the most powerful solutions that businesses can turn to when looking to manage political risks is technology. When organisations leverage modern technological solutions, they can better understand their supply chain, enhance visibility, improve supply links, and build a resilient system.
Let’s explore some of the technology that is currently available for supply chain businesses.
Real-Time Data Analytics
Real-time data analytics are vital for the effective monitoring of something as volatile as political unrest. Circumstances can evolve and shift over extraordinarily short periods of time, making real-time visibility key for effective management of the supply chain.
Organisations can turn to tools like Prewave to gain complete insight into their supply chain. By leveraging artificial intelligence, Prewave systems can compute millions of distinct data points at once, creating a real-time stream of data that sheds light on a supplier’s current risk profile. With high-volume data processing, AI tools can extract information from the news and other sources to better understand political risk in certain countries.
By utilising real-time data analytics, businesses can better understand political risks before they fully emerge, giving them more time to enable proactive adjustments to enhance their supply chain positioning.
Blockchain Applications
Blockchain technology provides supply chain businesses with a secure, accessible, and immutable digital ledger. Within this system, companies can record the movement of products, information about production, and even real-time updates relating to the flow of resources through their supply chain.
Once data has been logged into the blockchain, it can never be altered. This permanent record provides an enhanced level of transparency in supply chains, as all the involved parties can browse the record and monitor the movement of products and raw materials.
Prewave offers direct integration with blockchain systems, allowing your business to enhance its decision-making process and achieve a higher level of supply chain resilience. Visibility into the supply chain is essential to its success, making the integration of blockchain technology one of the most effective changes a business can make when creating a stable supply chain.
Artificial Intelligence Scenario Planning
In the modern supply chain, artificial intelligence is useful for much more than just real-time data processing and analysis. Another use case of AI, especially in regard to managing political tension in the supply chain, is for predictive analytics and scenario planning.
Scenario planning is where a business simulates potential future events, allowing them to develop a precise contingency plan for that exact circumstance. AI tools are able to process vast quantities of data to predict the most probable events. Using this insight, businesses are able to better prepare for future situations, meaning they are always ready when disruptions occur.
As suggested by the Harvard Business Review, traditional approaches to scenario planning may overlook the influence of external factors or be based on uncertain predictions. On the contrary, when using an AI tool, businesses can generate highly personalised scenarios.
Prewave, for example, allows businesses to create advanced scenario planning simulations and craft response plans to various political scenarios that could impact an organisation. This level of insight ensures that businesses will never encounter a political disruption that they are unprepared for, streamlining threat responses and decreasing action times after a disruption.
Towards Proactive Supply Chain Management
Businesses that want to ensure their continuity and supply chain stability must turn towards effective, proactive supply chain management techniques. Especially in the context of political instability, it is becoming increasingly important that organisations prepare for disruptions related to political disruptions.
By leveraging technology to enhance visibility over the supply chain, businesses can then identify suppliers or links that have a high-risk profile. Diversifying supply chain links can proactively protect a business from any major disruption, streamlining its operations and allowing it to continue to deliver products even during times of high political tension.
Prewave offers a comprehensive system to monitor, manage, and gain full visibility into your supply chain. With 360-degree supplier analysis, your business can leverage Prewave to better understand the social, economic, political, and environmental circumstances that your suppliers exist within.
Adopting Prewave into your strategic toolkit will allow you to maintain business continuity in the face of political uncertainties, with our advanced supply chain management system giving you the support you need.
