Addressing Supply Chain Challenges Amid Rising Geopolitical Tensions

By Russ Banham

Risk Management magazine

Although the supply and demand imbalance that unraveled the global supply chain at the outset of the pandemic has moderated, emerging geopolitical tensions are creating new challenges and spurring organizations to increase their investments in supply chain risk management.

“During the pandemic, there was a rapid reversal from no demand to a lot of demand, creating difficult supply, logistics and capacity issues to keep up,” said Michael Zuraw, senior director of global enterprise risk management at semiconductor manufacturer Onsemi. “Today, the economy appears to be headed for a soft landing, but making strategic sourcing and distribution decisions is still challenged by uncertainty, largely because of geopolitics.”

For example, long-standing containership routes in the Black Sea have been disrupted by the war in Ukraine. Other major containership routes connecting Asia and Europe have been similarly disrupted by drone and missile attacks launched by Yemen’s Iran-backed Houthi rebels against Israeli and U.S. vessels in the Red Sea and Gulf of Aden. “Containerships that normally travel through the Suez Canal are being rerouted to the Cape of Good Hope in southern Africa, a more circuitous, time-consuming and costly route,” Zuraw said.

Other factors like climate change and infrastructure resilience are also complicating the supply chain risk landscape. For example, since June 2023, a historic drought has reduced Panama Canal water levels and forced officials to decrease the number of ships entering the waterway. In March, a container ship collision that resulted in the collapse of Baltimore’s Francis Scott Key Bridge caused major delays in automobile, coal and machinery shipment through one of the East Coast’s busiest ports.

These conditions have contributed to increased concern about supply chain risks. In a 2023 survey of chief procurement officers by Deloitte, more than 70% of respondents said their company’s supply chain risk had increased “somewhat” or “significantly” over the prior 12 months, yet only 26% could predict risks “to a large extent” or “completely.”

“No longer is supply chain risk management an issue of predicting demand or looking back at trends,” said Dan Lever, partner at global law firm Clyde & Co. “It is imperative to understand the interactions and relationships of countries and potential conflicts.”

To strengthen their global supply chains, companies have employed various tactics, including onshoring and nearshoring manufacturing, rethinking and revising supplier networks, and enhancing supplier transparency and oversight. For many organizations, these strategies have helped to create a more structured, dedicated and resource-backed supply chain management process that companies hope will better position them to weather future crises.

Onshoring and Nearshoring 

Two pieces of bipartisan legislation—the federal JOBS Act and CHIPS and Science Act—have encouraged startups to manufacture domestically and companies manufacturing abroad to return production to the United States. For example, CHIPS offers nearly $50 billion in direct federal funding and additional tax credits to bolster American semiconductor manufacturing. Since President Biden signed the act into law in August 2022, U.S. companies have pledged to spend more than $166 billion on U.S.-based semiconductor and electronics manufacturing.

In addition to creating jobs, such investments aim to reduce dependence on overseas suppliers for semiconductors, a component used in thousands of products like computers, video games, televisions, smartphones, appliances and medical equipment. The federal funding and tax benefits are an inducement to shorten supply chains, particularly those disrupted by the current trade war with China. “Higher tariffs are compelling U.S. companies across different industry sectors to flee China and onshore or reshore production domestically,” said economist Robert Hartwig, a clinical associate professor of finance at the University of South Carolina.  

Novelis, a producer of flat-rolled aluminum products for the global automotive, aerospace and construction markets, is among the companies onshoring domestically. “Rising demand and sky-high freight costs spurred our decision to reduce dependence on Asia-based suppliers,” said Novelis CFO Dev Ahuja. “We’re now onshoring two new major capital-intensive projects this year: a $2.5 billion low-carbon aluminum recycling and rolling plant in Alabama and a $365 million recycling plant in Kentucky.”

Nearshoring in Mexico is an increasingly popular strategy for U.S. companies. According to Knut Alicke, partner and leader of the manufacturing and supply chain practice at management consultancy McKinsey & Co., nearshoring efforts have created $50 billion in additional manufacturing capacity in the country in the past year.

Vertical Integration

To ensure a more reliable supply to meet production timetables, several larger companies are acquiring their overseas and domestic suppliers. According to data compiled by market intelligence platform Climate Tech VC for Reuters, major automakers like General Motors and Stellantis and housewares giant IKEA are among the companies that have been focusing on vertical integration to reduce the risk of supply chain disruptions. Altogether, the companies have invested more than $4 billion in acquiring suppliers across the renewable energy, metals, chemicals, mining, agricultural products and other supply sectors.

“In our stores, we have about 9,500 products, each with a set of one or more suppliers behind them,” said Robert Zhang, RIMS board member and Asia-Pacific regional risk and compliance manager for IKEA Supply. “To maintain proper business continuity in a world of constant change, supply chain resilience is a critical factor.” IKEA’s business model comprises the design and manufacturing of all its furniture products, from sourcing to design, production, warehousing and logistics. “Whereas many other large retail stores choose to offer products from multiple brands, here we are very much vertically integrated,” he said.

This integration allows IKEA to create a more efficient purchasing and supply process and conduct real-time tracking and scenario-planning, which would otherwise be difficult to implement across multiple suppliers and various systems throughout the value chain. “We treasure long-term partnerships with our suppliers and always try to emphasize the importance of building strong resilience in the supply chain,” Zhang said.

Vertical integration is not always a panacea, however. “Once suppliers are integrated into the acquiring organization, the need arises for visibility into the cross-border financial transactions between the entities,” said Jim Tilk, director of intercompany solutions marketing at software firm BlackLine. Intercompany financial transactions generate different currency, tax and accounting implications, which can affect the organization’s cash management priorities. Organizations will also need to determine how to record downstream transactions originating from the parent company and directed to a subsidiary, upstream transactions originating from the subsidiary and directed to the parent company, and lateral transactions between two subsidiaries.

Dedicated Supply Chain Oversight

As a malfunctioning supply chain poses existential risks to a company’s economic viability, C-suites and boards are increasingly concerned about supply chain resilience. “That is a notable difference from a decade ago, when supply chain management was largely relegated to the procurement and logistics organizations,” Hartwig said.

To strengthen their supply chain risk management, many companies are reconfiguring their supply chain function into a more strategic enterprise. This approach, led by a high-ranking executive that is sometimes part of a supply chain oversight group, integrates functional silos like procurement, logistics, IT, and inventory planning and management and utilizes data across tiers of suppliers to discern all areas of risk. “This advanced supply chain management requires end-to-end enterprise risk management led by someone who sees beyond procurement and has more of a strategic view,” Alicke said.

This approach also ties into regulatory trends and emerging requirements around supply chain transparency and reporting. “Increasing supply chain visibility is crucial to ensure ethical and sustainable practices and processes,” said Wil Knibloe, managing principal, supply chain, at consulting and technology firm Crowe LLP. “Companies are being held accountable in Europe and several U.S. states to disclose their policies and processes ensuring ethical sourcing. The supply chain head will be entrusted with this reporting obligation.” 

As more companies put risk management front and center to strengthen the supply chain, the uncertainty will decrease but likely never disappear. “There is no strategy that will make supply chain risks go away.” Zuraw said. “But companies that manage them through an enterprise risk management lens will have a better chance of thriving through the uncertainty.” 

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