Risks of a Global Supply Chain

Risks of a Global Supply Chain

The advent of globalisation has brought many issues to the fore. In economic terms, globalisation refers primarily to the ways in which “economic and industrial institutions interact in various locations throughout the world, with primacy given to no specific geographic location.”

For businesses, border restrictions are no longer a hindrance as they can sell products and provide services anywhere in the world. Globalisation also allows for purchases across nations where materials are required from one country to another.

The ease with which this has been able to take place is due to the development of information and communication technologies (ICTs). In what is known as ‘informational’, the process by which “information technologies, such as the Internet, world-wide web (WWW), and other communication technologies have transformed economic and social relations to such an extent that economic (and socio-cultural) barriers are minimised.”

Coupled with the growth of ICTs is the development of more efficient and speedier transportation systems as well as reduced costs of travel and transportation. Thus, it is, in essence these factors as a whole that have led businesses to adopt global supply chains.

However, for local and global supply chains there are both advantages and disadvantages.

Local Supply Chains

Local supply chains benefit from knowing the realities of the country they operate in and so are better able to negotiate the dynamics of the politics, economics, and markets and mitigate risks. By knowing the language and the language of the business they have access to local experts and face fewer communication problems. This is underlined by intercultural communication within businesses as there is already a strong relationship in place due to the sharing of a common language.

Economically, local supply chains do not have to face trade barriers as impediments as well as changes within business laws in another country. Also, transfer prices are all in the same local currency and there are no differences in taxes or duties. Given the use of a single currency there is no scope of facing the challenges of fluctuating exchange rates and related transfer prices.

However, the disadvantages are that they may not always be able to provide the cheapest resources or materials and face barriers of distance and geography. Thus, by having access to a global pool makes it easier to source better, affordable, or quality products and services from a larger market.

 

Global Supply Chains

Likewise, global supply chains face specific advantages and disadvantages as well as some critical risks.

First, they can source raw materials and components from wherever is cheapest or most conducive globally, and thus, become more competitive in the worldwide market place. In this regard, it is evident that the manufacturing sector was a first mover in taking advantage of this phenomenon.

However, global supply chains are vulnerable to disruptions and risks. Disruptions can have significant impact on the performance, profitability and fortunes of a business.

For example, in 2000, the large network and telecommunications company, Ericsson, lost more than 400 million euros when a fire broke out at a factory where Philips produced semi-conductors that were also used for Ericsson phones. Similarly, Apple lost many customer orders after an earthquake hit Taiwan in 1999.

In terms of risks there are two types: environmental and organisational.

Environmental Risks

These include natural disasters, hurricanes, earthquakes, tsunamis, etc. For example, the Kobe earthquake in Japan in 1994 impacted, amongst others, a California-based sound-card maker Kelly Micro Systems, causing a shortage of components, which resulted in disruptions in production and loss of revenue.

The Florida hurricane in 2004 caused huge shipping failures in the state impacting companies in Asia and triggered large losses.

In 2016, climate change resulted in the damage of coffee crops that Starbucks was heavily dependent on causing much disruption in both production and sale.

Given these issues, the transport and logistics parts of the supply chain are most vulnerable to natural disasters as ships, planes, and road links can easily be disrupted.

More recently, environmental risk also includes terrorism. Thus, deteriorating political relations between countries or political instability, change of regimes, etc., can also interfere with the free flow of goods and trade between countries and cause supply chain disruptions.

For example, Deutsche Post stopped delivering to Ukraine in 2016 due to political instability in the region. This impacted 620 German companies in the Ukraine.

 

In Turkey, the attempted coup in 2016 exemplified how vulnerable global supply chains can be to political upheaval. Without a stable government, supply chains will always experience problems at borders and check-posts.

Environmental risk also includes market risks. Shortage of skilled manpower in labour markets such as a lack of truck drivers or transport staff striking over wages can heavily impact the supply chain.

As supply chains become more globalised the number of link parties involved not only increases but the geographical distances between the primary company and the links makes it difficult to control and coordinate. Also, it becomes difficult to ensure compliance to norms, standards, and practices across geographical distances as well as across organisational boundaries.

Finally, there is a greater chance of theft, fraud, pilferage and other such risks within global supply chains given the larger number of players involved and the relative opacity of each step by the other.

Organisational Risks

These include risks within the boundaries of the organisation or supply chain such as the uncertainties of labor, of technology dependence, infrastructure dependence, and the integrity of the link parties in the supply chain. For example, the grid blackout on August 14, 2003, in the northeast region of the United States that significantly affected performance, is a prime example of this.

Further, if any link party or vendor becomes bankrupt or closes down, this would adversely affect the entire supply chain. There are also interactions and relationships between the organisation and the supply chain. Dissatisfaction over relations and interactions could result in less than optimal performance, lack of cooperation, or even conflict that could adversely impact supply chain performance.

Between local and global supply chains the risks are fairly similar. However, global supply chains tend to experience a higher degree of risk due to the numerous links between the wide network of parties and firms involved.

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