Preparing for the Uncertain

Geopolitical risks on the rise

In recent years, top management teams have been increasingly aware of the complex and unpredictable nature of the interactions among businesses, economies, and societies.¹ Humanitarian crises, such as the COVID-19 pandemic as well as incidents in key maritime transportation routes, such as the Suez Canal, have generated significant disruptions across geopolitics, economics, trade, energy, and financial markets. Moreover, conflicts in various countries are strongly affecting business reputations, markets, supply chains, and employees — leading, for example, to high prices for raw materials and shipping, along with unstable supply chains.

The frequency and impact of geopolitical risks have notably increased in recent years. In a Porsche Consulting survey² in collaboration with the German Federal Association of Materials Management, Purchasing and Logistics e. V. (BME) from the first quarter of 2024, supply chain decision-makers from over one hundred mostly industrial companies within the DACH region (Germany (D), Austria (A), and Switzerland (CH)) were asked which risks were assessed the highest in the company as affecting the ability to deliver goods. The survey identified that geopolitical developments represent the highest rated potential risk at 72 percent. In comparison, potential risks from cyberattacks were rated as relatively low, at just 35 percent—which once again draws attention to the current relevance of this topic.

In addition to this survey, various other sources highlight the trend of rising geopolitical tensions and their repercussions on global industries. The among economists well-established GPR index (geopolitical risk index), for example, increased in the last ten years by more than 40 percent.³ This is partly due to the current war between Russia and Ukraine as well as the ongoing military conflict in the Middle East.

Furthermore, the geopolitical risk indicator of the U.S. investment company BlackRock, which tracks market attention to geopolitical risks, has shown significant increases since 2019.⁴ Overall, the frequency and severity of geopolitical risks have escalated, convincing companies to adopt more robust risk management and resilience strategies. This trend is expected to continue, making geopolitical risk a critical factor for businesses worldwide. Consequently, resilience — the capacity to thrive in change — has become a priority for many business leaders.

Nevertheless, companies frequently lose focus on resilience once crises subside. Few organizations have systematically documented their lessons learned and integrated resilience into their operational frameworks. The reason for this is simply that many organizations have a narrow view of resilience and focus primarily on maintaining short-term operational continuity in times of crisis.¹

It is therefore not surprising that an inadequate resilience strategy can lead to enormous losses. This is proved by losses due to geopolitical disruptions such as at a world-renowned company in the consumer electronics industry with an estimated loss of more than US$10 billion. Various retail companies report assessed losses of approximately US$500 million due to geopolitical disruptions. Some companies in the aerospace industry have suffered annual financial losses of more than US$7 billion due to geopolitical consequences.

But why are the losses due to geopolitical risks so high? Simply because geopolitical risks affect the entire company and its numerous departments. This includes:

• Procurement, due to delivery and logistics risks 
• Manufacturing and production, due to international locations and geographical interdependencies
• Finance, due to sanction risks, loss of goods manufactured (LOGM), or trapped cash
• Research and development, due to its strong influence by the geopolitical race for technological leadership
• Human resource management, due to the importance of protecting employees and the corporate culture, even in high-risk areas
• Sales departments, due to the dependency of political and legislative decisions with regard to restrictions and sanctions in terms of domestically produced goods and utilized spare parts

More than just troubleshooting

Resilient supply chains enable companies to avoid crisis-related costs by preemptively addressing potential disruptions. For instance, by having alternative sourcing strategies and buffer stocks in place, companies can avoid the expenses associated with emergency task forces and expedited shipping, which are often not considered in total cost of ownership (TCO) calculations. This proactive approach can prevent significant financial losses during crises. In fact, half of the survey participants reported that they could have saved substantial amounts on crisis management costs through better resilience planning.

Supply shortages triggered by the war in Ukraine, for example, plus the recent COVID-19 pandemic have both demonstrated that more resilient companies achieve superior outcomes, including faster recovery from crises, significantly less downtime, better financial performance with maintained revenue, and a more stable supply chain without notable disruption to production or distribution. This was also proved by the previously mentioned survey, according to which most of the organizations are most likely to agree with the statement that resilient supply chains ensure delivery reliability and followed by the statement that they increase overall corporate profitability as well.

A resilient supply chain not only mitigates risks and prevents financial losses during crises. The transparency gained and measures taken can lead to significant cost savings, increased market share, and enhanced agility in responding to sudden demand spikes. According to the previously mentioned survey, 50 percent of participants indicated that they could have avoided half or more of the costs associated with "task force" activities during crises by means of a resilient supply chain.

Advantages during stable times as well

All these facts emphasize that true resilience is more comprehensive and includes, among other things, a company's ability to absorb stress, restore crucial functions, and then thrive again under new conditions. This clearly indicates that resilience extends beyond operational concerns and represents a strategic advantage, enabling companies to exploit opportunities while competitors remain surprised and unprepared.

Besides cost avoidance and efficiency gains, a resilient supply chain also positions companies to seize market opportunities during disruptions. Companies with robust supply chains can continue to meet customer demands when competitors face shortages or delays. This ability to maintain operations not only preserves customer satisfaction but also allows companies to capture market share from less prepared competitors. The recent survey from Porsche Consulting and the BME highlighted that 30 percent of participants were able to generate additional sales during crises by leveraging their resilient supply chains.

Beyond advantages during crisis, a resilient supply chain enhances cost structure optimization during stable periods. By maintaining transparency and continuously improving supply chain processes, companies can identify inefficiencies, streamline operations, and make strategic make-or-buy decisions along the supply chain. According to the survey, 61 percent of participants utilized the transparency gained from their resilient supply chains to optimize costs. This continuous improvement of one’s own supply chain structure leads to better resource allocation on an n-tier basis, reduced waste, and overall cost efficiency.

Moreover, a resilient supply chain fosters strategic flexibility and agility. Companies can respond more swiftly to sudden changes in demand, whether due to market trends or unexpected events. This agility not only helps in maintaining operational continuity but also allows companies to capitalize on new opportunities faster than their competitors. The ability to adapt quickly and effectively to changing conditions is a significant competitive advantage in today's dynamic market environment.

Reducing risk exposure in three phases

Initially, organizations should start by setting up a comprehensive strategy that also aims to respond to, resist, and recover from potential supply chain disruptions as quickly as possible. Three major phases are essential when it comes to building resilience: insights, measures, and implementations. The first phase is all about gaining essential insights by conducting a holistic risk analysis and clearly assessing the potential risk scenarios that can be identified. This includes the associated probabilities of occurrence and possible trigger points that influence and amplify those potential risks. Risk factors such as global footprints, sanctions, regulations, international supply security, political stability, pandemics, logistics, labor costs, and financial stability are assessed for relevant regions of all supply chains. To focus on the “right” risks, it is recommended to align the supply chain along the relevant tier levels of critical components that can be somehow influenced.

Generally, risk scenarios can be classified in certain impact clusters showing impact either financially only, short-term production disruptions, or long-term shutdowns. These are crucial steps to fully understand and map the possible effects and the extent of the risks in the context of the company. At this stage, the risk scenarios need to be evaluated to which extent they can be mitigated before the mitigation measures will be finally determined.

The second phase is dedicated to developing crucial mitigation measures for these risk scenarios and to evaluating the business impact of the solution approaches, as well as the benefits of these measures. Finally, organizations must consolidate all measures in a precise implementation plan that enables the organization to activate these measures as quickly as possible when required.

General mitigation measures include, for example, expanding material sourcing options, alternative logistics routes, and additional buffer stocks. Other examples are fostering modular production systems, establishing flexible supplier contracts, and using adaptable, agile logistics solutions. As mentioned above, geopolitical risks extend to a variety of business areas, as do the associated mitigation measures. A close eye should be kept on critical components with impact and benefit on the business model. In this regard, the effectiveness for reducing possible effects on the production and sales at risk is calculated. This finding is based on the business model, customer segmentation, and the supply chain through all relevant tier levels.

Finally, effective implementation planning is conducted in the third phase, emphasizing that executing selected measures is crucial for increasing resilience. It is important to recognize that both the risks and the mitigation measures must be reviewed on a regular basis, ideally by staff with dedicated responsibilities. This function needs to define clear guidelines for the regular reviews to simplify strategic decisions, such as reassigning supplier contracts or implementing relevant investments. Moreover, practices such as interdisciplinary training of employees, decentralizing decision-making, and maintaining strategic stocks also contribute to enhance agility.

Conclusion and call to action

The rising frequency and impact of geopolitical risks present a formidable challenge to businesses worldwide. The data underscore the critical need for companies to prioritize resilience not merely as a crisis response but as an integral component of their strategic framework. The Porsche Consulting and BME survey reveals that geopolitical developments are the foremost risk to supply chains, far exceeding other potential threats. This insight, coupled with the substantial financial losses documented across industries, reinforces the imperative for robust risk management and resilience strategies.

A resilient supply chain offers numerous benefits, including the ability to absorb disruptions, maintain operational continuity, and seize market opportunities. Companies that proactively build resilience into their operations can achieve a faster recovery, superior financial performance, and a stable supply chain even amid global crises. Potential cost savings and market advantages further illustrate the tangible benefits of resilience.

To effectively manage geopolitical risks and bolster supply chain resilience, companies must adopt a comprehensive strategy encompassing insight, planning, measures, and implementation. This involves conducting thorough cross-functional risk analyses, developing mitigation measures, and ensuring agile execution. By continuously monitoring and adjusting these strategies, businesses can better navigate the complexities of the global market.

Following these steps, companies can not only mitigate the adverse effects of geopolitical disruptions but also leverage resilience as a competitive advantage, ensuring long-term success and stability in an increasingly volatile global landscape.