The O-Ring in Your Supply Chain

Whether political perils arise far afield or close to home, the consequences for your supply chain can be catastrophic. Here's how finance executives can manage the risk.

Could a labor dispute on U.S. shores be considered a “political risk” — and a threat to supply chains in the United States? Surely political risk is the province of Asia, or the Middle East, or Latin America, the consequence of civil unrest that threatens the inflow of raw materials to stateside production lines.

But the West Coast port shutdown of 2002 had some of the earmarks of supply-chain political risk. It did, after all, involve politics of a sort: By invoking the Taft-Hartley Act, President Bush took flak and garnered praise for forcing workers to return to their jobs. And the shutdown certainly threatened companies’ ability to fill their production pipelines with raw materials.

During the 10-day lockout of dockworkers at Pacific Coast ports, 200 ships were reportedly stranded. The effect, according to The Economist (a sister publication of CFO.com) was that “manufacturers were missing parts, retailers could not plan their Christmas shelves and farmers could not sell food to Asia.” At least five auto plants had to close up shop — their just-in-time supply chains were running on empty.

Can such disruptions be prevented? Experts in managing political risk believe that planning for contingencies along the entire supply chain — whether far afield or close to home — can at least mitigate the losses associated with these supply breakdowns. For instance, had companies affected by the port shutdown plotted out alternative supply routes — say, through the East Coast or the Canadian border — at least some parts of their operations might have stayed up and running, according to Gene Long, president of UPS Consulting.

Planning for alternative transportation — Why not air cargo? asks Long — might have also helped. But supply chains that are more geographically complex and more time-sensitive bring another demand. Senior executives need to think harder, say risk experts, about how to minimize the effects of arbitrary government actions, trade wars, military conflicts, and other aspects of political risk.

Sitting on Too Much Risk

For their part, many CFOs acknowledge that their companies can’t respond quickly to problems with overseas suppliers. In a September 2003 survey conducted by CFO Research Services and funded by UPS Consulting, just 32 percent of 247 top financial executives said their companies were able to make major changes to their supply chains when such moves were needed. Fully 38 percent said their corporations were sitting on “too much unmanaged supplier risk.”

One reason all that risk has gone unmitigated may be that until recently, insurers have focused on protecting companies that don’t get paid for their exports rather than on companies that don’t receive their imports. That said, underwriters do seem to be paying more attention to coverage that addresses import problems.

Another reason is that companies themselves have focused on increasing the benefits of their supply chains rather than on controlling the risks. After all, just-in-time and build-to-order systems are designed to raise efficiency and lower the costs of carrying inventory. But thinking only about the advantages can have a downside. “If you haven’t considered what can make your supply chain break,” says Long, “you haven’t done the whole job.”

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