A report from the Atlantic Council and Zurich Insurance Group concludes that a worldwide backlash against free trade and globalization is posing new risks for supply chains. It also examines a variety of other geopolitical trends that could have a significant impact on economic growth and the movement of goods around the world. In this conversation, excerpted from an episode of The SupplyChainBrain Podcast, we speak with Nick Wildgoose, global supply chain product leader with Zurich. He offers advice on what companies should be doing to buffer themselves against three critical areas of risk.
Q: How was this new report conducted?
Wildgoose: The report looks at three significant scenarios for the world, and the very real risks that companies face today. The first is protectionism, coming from a number of geographies around the world. The second is the energy crisis. As we know, there’s a significant amount of conflict in the Middle East, which is a major energy producer. And the third, which tends to be forgotten, is water and food scarcity. It is closely connected to geopolitical concerns, because water shortages in certain geographies around the world are in turn driving political tensions.
Q: What were your sources of information?
Wildgoose: The work was led by the Atlantic Council and the Frederick S. Pardee Center for International Futures [at the University of Denver], working alongside Zurich individuals. We were capturing data using an open-source tool. There were three major areas of analysis that we used: historical data, base case analysis and some alternative scenario development. We looked at 186 countries in 12 core systems.
Q: Start with the rise of protectionism. Does the report reveal a widespread backlash against free trade? And if so, what form is that taking?
Wildgoose: We certainly see some pushback, in terms of societal disturbances in certain economies around the world. It’s no secret that a number of elections back in 2016 produced interesting results, such as Brexit, which one could argue reflects a concern [over free trade]. There are parts of society that feel that they’re missing out on globalization. And there’s an equally strong group that thinks globalization has been a great success for the world, and is generating profitability.
In our model, a resurgence of globalism appears to produce a much more positive picture, both for the economy as a whole and the middle class. But you’ve also got to look at the impact on those in extreme poverty. Overall, it’s a benefit, but it’s a political as much as an economic challenge to see how those benefits will be shared among the various socioeconomic groups.
Q: It seems ironic that while we’re an increasingly interconnected world, the trend is becoming less reflected in our trade policies.
Wildgoose: Or is in danger of being reflected in our trade policies. According to the report, with the exception of a small downturn post the financial crisis, the world has largely been on a growth path. It has kind of stabilized; in 2015-16, we were roughly back to 2008 levels. And there are still big advocates of free trade. I was talking just the other day with a representative of one of the major global logistics companies. He believes that globalization is going to move ahead, because it makes so much sense for the world. Particularly when you look at certain key raw materials are only available in certain parts of the world. Where are you going to get your titanium from, or rare earth metals, which are pretty much only available from China?
Q: Moving on to the energy crisis resulting from conflict in the Middle East, how might that pose a particular threat to global supply chains?
Wildgoose: We’re seeing a heightened level of tension in the Middle East. It isn’t just one political crisis. There is a series of instabilities in a number of geographies, including between two of the largest oil producers, Saudi Arabia and Iran.
The good news for the U.S. and the world is that we are moving into renewables. The report looks at how accelerating their development can mitigate an energy crisis resulting from a disastrous situation in the Middle East. It can also help to mitigate the impact of climate change.
Q: We’re not quite there yet, though. As you say, rising oil prices still have a big impact on transportation costs. And you paint a worst-case scenario in which 23 million more people would be living in extreme poverty. That sounds like a pretty serious direct impact.
Wildgoose: Absolutely. There’s also a link to the middle class, where 93 million people could be impacted by a constrained energy environment. Global economists have learned from the oil crisis of the 1970s. But this is still a significant issue, not just for the Middle East, but for the whole world.
Q: Let’s talk about water and food scarcity. Start with water: you raise the possibility of too little water, in the form of drought, and too much of it, in the form of flooding. They are twin risks, aren’t they?
Wildgoose: Indeed they are. We describe the impact of too little water on the growing of food in key geographies around the world, although the problem has recently been alleviated somewhat by heavy rains. California in particular has been challenged over the last few years by drought. Reduced levels of food production can create geopolitical challenges, and that in turn impacts people in extreme poverty as well as the middle class.
Q: In the case of too much water, we’ve seen in recent years the impact of severe flooding in Thailand, and the tsunami in Japan. That becomes just as much of a risk as drought.
Wildgoose: Although earthquakes are seen as dramatic events, flooding is by far the greater risk to communities. It’s the largest cause of economic loss. The Thailand floods bring out perfectly the interconnectedness of risk in a manufacturing environment. Many companies experienced a 40-percent reduction in hard disk manufacturing. And because you often get industrial clusters in certain countries, that reduction impacted the entire PC marketplace and supplies of microchips. It had financial ramifications across the globe. It was one of the tipping points that led to a drive for better supply-chain resilience.
Q: You link food scarcity and shortages directly to the availability of water. You say that global water withdrawals are forecasted to increase by 14 percent above current levels. As you see it, that’s the main cause of potential food shortages.
Wildgoose: Yes, and there’s a link there with the origins of the Syrian crisis. Drought in the northern area of Syria has arguably contributed to political instability in that country. I’m afraid that water shortages in key geographies are going to lead to other political tensions as we move forward.
Q: Another study conducted by Zurich, in cooperation with the Business Continuity Institute, outlines the factors that are causing disruptions within supply chains around the world. Talk about some of those.
Wildgoose: The scary number is that 70 percent of the companies responding to that survey have talked about suffering significant supply-chain disruptions. More than 500 corporations responded to the survey. In the eight years that we’ve been conducting it, the figure has consistently been around 70 percent. I would have been worried if it was above 20 percent — and I was astonished by the actual level the first time the report came out. It peaked in 2011, at 85 percent.
Q: What are the causes of those disruptions?
Wildgoose: Not only are there geopolitical events and acts of terrorism to consider, but nowadays cybersecurity and information technology are near the top of the list. Without the flow of information that goes alongside the movement of goods and services, you don’t have a working supply chain. In a massive warehouse today, without I.T. systems there’s no way you can pick the goods. No human knows where they are.
Within many organizations today, resilience issues aren’t always focused on the direct supplier. They can be occurring in the next tier down, the Tier 2s and 3s, causing problems in this interconnected world. It should make you reflect on how the most critical suppliers, and most profitable products, are impacting the entire supply chain.
Q: When you talk about technology, is the problem more one of a lack of sophistication, or attacks in the form of cyber terrorism and hacking?
Wildgoose: It’s a combination of the two. Over the last eight years, cyber attacks have come up the charts, from very low in the rankings to number three. But I.T. outages are also a problem. For example, there was an ERP [enterprise resource planning] system implementation that went wrong with a toy manufacturer during the Christmas season. It resulted in production downtime lasting three to four months. The company’s results were down by 50 percent from analyst expectations. So technology issues are coming from both directions.
Q: What are some good risk-management strategies and aspects of contingency planning that businesses can undertake right now, to minimize the impact of these disruptions on their global supply chains?
Wildgoose: The first point is to understand where your value is. One of the key things for any business is delivering to your customer on time. Companies often ask me, “Where do we start? We’ve got thousands of suppliers.” I tell them that the simple place to start is to determine your most profitable product or service, and the suppliers that you depend upon for it. That makes it a more manageable task.
Having mapped out your critical Tier 1 suppliers, you should start to look at those in Tier 2. Where are they located in the world? And which suppliers do they depend upon? Again, as in the case of rare earth metals that are required in so many electronics products, it’s good to know that quite a number of them come from China. You need to know how your suppliers are securing sources in their particular part of the manufacturing process.
I talked to some companies that were affected by the Japan tsunami during that weekend of 2011. On Monday morning, those who had been proactive could answer the question about how they were impacted. They knew where their Japanese suppliers were and what they provided, and were in contact with them over the weekend. As a result, they were able to buy up inventory or start making contingency plans. Whereas those who were less prepared were still struggling to answer that question early in the following week.
Q: In some cases, though, they discovered that all their suppliers of a particular material were in the same area. So I would think the next step after mapping your supply chain would be to achieve a degree of geographical diversity, in order to be less affected by a disaster in any particular part of the world.
Wildgoose: Yes, and this takes time. It’s too late to do it in an optimal way once disaster has struck. In the case of the floods in Thailand, there was a general capacity challenge. You should be thinking in advance about where you can develop other sources. You want to build in agility, as well as some buffer stock. That may be a dirty word to some, but inventory has its value in the supply chain. Sometimes you can be too lean. Closing down industrial production for a day or two can be extremely costly. And if you let your customers down, winning them back can take years, particularly if your competitor is in a better position than you to supply them.
Q: So you need to be aware of what’s going on in the world, figure out what your supply chain looks like in relation to that, then take steps to mitigate that risk.
Wildgoose: It’s nice to know that some things are moving in the right direction to help with this. Technology, as much as it can be a challenge when it goes wrong, is giving us the capability to mitigate risk. We at Zurich are looking at this actively, whereby you can bring in multiple risk factors and geographies, and use the various new techniques that are coming along — machine learning and so on — to help scale up supply-chain resilience.
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