As organizations increase their operations abroad, their supply chain risk also increases. A risk in doing business abroad is the reality that overseas supply chains are increasingly vulnerable to political uncertainties. According to a study reviewed by Zurich® Insurance, supply chain disruptions can cause an average 25 percent reduction in share price over two years. Can your company afford that risk? Other studies show that the stronger a company’s risk management practices, the more robust its growth. Those companies with “emerging risk practices” were less profitable, according to Zurich®. According to the American Quality and Productivity Center in a recent survey of 196 companies, 77 percent of the respondents experienced at least one supply chain glitch in the previous two years. And given companies’ tendency toward lean manufacturing, a chink in the supply chain can drastically hurt production and profits almost immediately.
The current political unrest in Eastern Europe is just one example of how these disruptions can impact US businesses. Citing current geopolitical concerns, a November 7, 2014, article in the New York Times termed doing business in Russia as “entirely unpredictable.” Exxon Mobile, Visa and McDonalds are just a few of the companies that have faced prohibitions there. Just last week, the government of Argentina accused Proctor and Gamble of tax fraud and suspended its operation there, according to a variety of news sources. As we saw in 2010 with the Arab Spring impacting Tunisia, Egypt and Bahrain, to name only a few, we know that a major shift in governance can occur almost without warning.
The most common political risk perils to consider are confiscation, expropriation and naturalization, war, strikes, riots, and civil commotion. In addition, there are also economic political risks to consider, including the unfair calling of bonds, contract frustration, and the inability to export money out of the country, or currency inconvertibility.
So how should a company uncover political risk exposures in their supply chain? Senior leadership needs to probe carefully on all primary and secondary supply chain sources with a specific focus on political risk perils. The easiest way to identify risk exposures is to come up with a Red-Amber-Green (RAG) system based on financial materiality. For instance, a “red” risk has a financial impact of $10M, while a “green” risk is thought to be under $1M. Then all in between would be “amber.”
Only through a thorough evaluation of supply chain vulnerabilities and management of the hazards involved can an organization evaluate how they are prepared for increased political tensions or civil unrest.
There is a sophisticated and robust political risk marketplace where a company can look to structure coverage that would impact their delivery of goods. Political risk insurance is highly specialized and if you feel you would like to gain a better understanding of supply chain vulnerabilities or political risk issues we would be happy to help. The ALS Group provides many clients with guidance on risks and exposures that come with doing business globally.
About the Author
Albert Sica is the Managing Principal with The ALS Group. You can read more about Al or contact him here.
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