What do global politics and the supply chain have in common? They’re both about as resilient as a Fabergé egg.
Geopolitical tension is nothing new; it’s been woven into history for centuries, but its impact has grown over the last century.
The past few years have been difficult for the supply chain, thanks to rising tensions between the U.S. and China, a global pandemic that temporarily shut down the world’s economy, and the ongoing war in Ukraine.
Aside from the obvious problems these events bring, it’s also forced countries to adapt to new situations.
The European Union is expediting its move away from fossil fuels after banning imports from Russia. Meanwhile, grain shipments from Ukraine are more sporadic as supply routes have become increasingly dangerous. And the world is still recovering from months without manufacturing and shipping, further compounding issues.
As a result, companies and countries must find new ways to get the materials and products they need. Whether it’s relying on other countries for trade, finding alternatives for hard-to-find materials, or bringing manufacturing home, there’s a new push for reliable supply chains, as opposed to cheap ones.
You may ask yourself, “Well, how did I get here?”
The answer is complex.
In November 1989, when the Berlin Wall fell and the Cold War ended, it introduced the world to a new age of globalization. Manufacturers quickly took advantage of low-cost production in other countries, namely China.
The arrangement was a boon for both sides, as lower production costs overseas led to lower prices on products sold in the U.S. Meanwhile, manufacturing countries also benefitted, as the influx of jobs dramatically decreased the number of people living under the International Poverty Line.
According to Our World in Data, the International Poverty Line is $2.15 daily. From 1990 until 2019, the number of people globally living below the poverty line fell from nearly 2 billion to about 648 million. Although globalization wasn’t the sole reason for the drop, it did play a role in the process.
Of course, globalization hasn’t been perfect. Exploitation is a real problem alongside weak regulations, and the U.S. has lost hundreds of thousands of manufacturing jobs. It’s also created a very fragile supply chain.
Globalization has brought the world closer together but applies pressure when geopolitical risks rise.
Following Russia’s invasion of Ukraine, the supply chain was disrupted for much of the world as traditional rail and air routes were disrupted. Companies have had to maneuver around Russian airspace, creating longer routes and higher fuel and shipping costs.
On top of that, materials like neon and grain are facing longer shipping times and availability issues because of the ongoing conflict. Neon is used to help make semiconductors used in computers, cars, and other electronics, while grain, including corn, barley, and wheat, is in many foods and drinks. Other products, like Russian hardwoods, have been taken off the market, resulting in a mad dash to purchase what supply base is left.
Before the invasion of Ukraine, there was COVID, which knocked out critical global supply chains for months.
China manufactures products for thousands of companies but shut down several times due to zero-tolerance policies aimed at limiting the virus’ spread. Companies faced material shortages, and there were disconnects between suppliers, manufacturers, and distributors. Ultimately, that left shelves bare.
Supply chain resilience became an issue as the world reopened and manufacturing returned. Unfortunately, you can’t flip a switch and immediately begin making goods at 100% efficiency – manufacturers need time to ramp up production. Manufacturing hit several bumps, resulting in high demand and little supply.
Three years on, some goods are still in short supply.
The United States is no stranger to global trade discussions, but simmering trade disputes with China can create short-term and long-term problems for the supply chain.
The countries have been involved in tit-for-tat tariffs on imported goods since 2018, leading to nearly three-fourths of a trillion dollars in Chinese and American tariffs. Though meetings have taken place, there still isn’t a resolution.
We don’t often see it from our vantage points, but there’s a lot of give and take with other nations to secure goods and trading partners.
When countries butt heads, it can create a ripple effect spanning far beyond the countries involved.
Raw materials and finished goods become harder to get ahold of or cut off entirely. Conflicts with other nations can also mess with the availability of raw materials or country-specific goods.
Less production also means less market supply. This could be due to slower manufacturing times, less efficient trade routes slowing movement, fewer imports resulting in a smaller supply base, or a complete shutdown due to conflicts or trade disputes.
It shouldn’t come as a surprise, but costs will rise when there’s less product available.
Every supply chain hiccup tacks on added costs for the next person in line. Tariffs and war, for example, can reduce the amount of product available, jacking up prices for end users, distributors, manufacturers, and sourcing companies.
Price changes don’t always have to increase, though. For example, when President Biden eased restrictions on solar panels from Southeast Asia, despite an alleged connection to China, solar panel prices dropped because of the larger supply. Despite an ongoing trade dispute with China, solar companies in the U.S. now have a far better short-term economic outlook.
International conflicts come in all shapes and sizes. However, spotting potential problems can stabilize supply chain resilience.
This isn’t to say you should watch the news 24/7, but keeping a finger on the pulse of news organizations and industry publications can show you what’s happening with your industry’s major players and predict possible supply, pricing, or deliverability issues.
Everyone along the supply chain must be on the same page. Each organization should be aware of what’s happening, whether it’s manufacturers struggling to source raw materials, distributors waiting for shipments to arrive, or another unforeseen issue.
Let’s face it; if someone in the supply chain is having trouble, you’ll experience it too. Keeping every step of the chain informed helps make the entire system more resilient.
If the companies you work with are publicly traded, you can find shareholder reports and presentations available for review online. These presentations are a fantastic way of learning how those companies are performing and can alert you to possible operational changes.
Shareholders need to be aware of changes in the company that could impact their investments, so you can expect them to address geopolitical issues that prevent them from achieving specific goals.
If the company isn’t publicly traded, it’s more difficult, but not impossible, to find operational information. Look for clues that the company is either well positioned (hiring more employees, taking on larger contracts) or struggling (shutting down facilities, laying off workers, or cutting back on production). These subtle clues can help you decide whether to lean into or back away from certain partners in your supply chain.
Companies have several tools at their disposal to address supply chain issues caused by geopolitical tensions, including:
Find other companies that produce the same or similar raw materials or parts. The first step is figuring out how much you’re willing to pay and how long you can wait for similar materials. Once you’ve been able to nail down those numbers, find suppliers fitting those requirements.
Remember, if you’re doing this, chances are good others in your industry are, too.
Move vertically. Vertical integration allows companies to control more steps in the supply chain, reducing their reliance on other companies for critical steps in the production process. It makes the supply chain more resilient because the company relies less on outside vendors, suppliers, and other contractors.
Despite the additional control, vertical integration is expensive and takes years to execute, aligning people across the manufacturing process. It can also compromise quality if the company expands too quickly.
Nearshore operations. Unlike offshoring, which sends jobs to other parts of the world, nearshoring brings those jobs closer to home, specifically to countries like Canada and Mexico. Moving operations closer to home reduces supply chain disruptions and shortens the distance products have to ship.
Nearshoring has become popular in several industries, including automobiles, medical equipment, and consumer goods. Many of the world’s largest auto manufacturers, including Ford, GM, Honda, Nissan, Toyota, and VW, have plants in Mexico, alongside medical companies like Hill-Rom and Medtronic and companies making TVs, appliances, and aerospace components.
As trade talks heat up with China, other companies will likely look into nearshoring to avoid issues associated with tariffs and supply chain concerns.
Don’t wait for something to happen before acting – have a plan and be ready long before problems occur. This way, you avoid costly delays and desperate searches for materials or products to fulfill orders.
Consider how much price volatility your company can safely assume and ensure you have the capital and assets available to absorb price fluctuations. Prices are decided by many factors and can change quickly, so be ready to adjust as necessary.
And don’t forget, no company works alone. Constantly communicate with partners throughout your supply chain to keep information flowing. You’re all in the same situation, so it’s better to overcommunicate than under-communicate.
That’s it! Keep a vigilant eye on your surroundings and react quickly when geopolitical concerns jeopardize your supply chain, and you’ll weather the storm.