Download the full 2018 annual report here
The authors of the World Economic Forum’s 2019 Global Risks Report pose the question, “Is the world sleepwalking into a crisis”, at the beginning of their sobering description of an economic and political climate in which “global risks are intensifying [while] the collective will to tackle them appears to be lacking.” Of utmost concern, according to the report, are the “geopolitical and geo-economic tensions” that are creating turmoil and uncertainty in trade and investment relations between countries.
This will be no surprise to supply chain management professionals who are grappling with tremendous uncertainty about the future of trade relations between China and the United States and between Great Britain and the European Union.
Along with these top-tier trade conflicts, other major changes in trade relationships are evolving quickly, including NAFTA 2.0 between the United States, Canada and Mexico; the EU-Japan trade agreement that came into force in February 2019; the UK’s bilateral negotiations with the U.S., Japan and other countries; and Trans-Pacific Partnership (TPP) 2.0, in which Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam—but not the United States—agreed to reduce tariff and non-tariff barriers across a trading bloc of nearly 500 million people.
As the WEF report authors sum up, what is going on is nothing less than a wholesale reconfiguration of “the relations of deeply integrated countries.” The situation “is fraught with potential risks.” And all these reconfigurations are arising, not coincidentally, at a time of economic instability, when global companies are experiencing ongoing operational challenges that have curtailed growth plans and negatively impacted margins.
Supply chain professionals are on the front lines of managing global trade risks for their companies. It’s their task to ensure that the impacts of disruptions, even at Tier 2 or Tier 3 suppliers, are mitigated at the least cost possible. They must predict how increases in tariff costs and delays at newly closed borders will impact production lines and distribution schedules and develop alternate sourcing plans.
As our team has been recommending for many years, one of the most important strategies that supply chain professionals can use to manage these highly fluid situations is scenario planning and preparation.
Leading companies create models for the worst that could happen to evaluate all the way down through the multi-tier supply chain.
For example, ask yourself these questions when considering Brexit impacts: Does your U.S.-based supplier have a supplier in the UK? How many times do the parts coming from that UK sub-supplier cross borders where tariffs will be imposed? How long will trucks carrying your supplies have to wait at the newly controlled UK border checkpoints? What alternate sites does this supplier have outside the UK? What will it cost and how long will it take to qualify alternative suppliers?
Chris Clearfield and András Tilcsik, two contributors to the WEF report, call this kind of planning exercise a “pre-mortem.” Imagine, they recommend, that six months from now, your Plan A has failed. “[Work] backward to come up with reasons for the failure and ideas for what could have been done to prevent it.”
The message is clear. Plan first. Don’t wait.
I would recommend developing a comprehensive understanding of the new approaches that are now available. Artificial Intelligence (AI) and data science advances, their advantages, disadvantages, costs and complications can have a profound impact to supply chain professionals in 2019 and beyond. This is the kind of proactive thinking required of supply chain professionals that are truly awake to the challenges and opportunities in the current economic and political climate.
I hope in reading this report, you don’t wait for the next crisis. Be proactive. Understand your supply chain from top to bottom and plan ahead for the worst-case scenarios.