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.

Not that it’s easy to scope out global trouble spots; even for the experts, determining country risk is something of a crapshoot. Take Brazil, which — by at least one measurement — is about 10 percent less risky for foreign investment than a year ago, when the election of a Leftist president spawned anxieties. (See “Country Risk,” at the end of this article.) Although Brazil has recently “behaved well,” says Keith Dunford, worldwide political-risk underwriting manager for Chubb and Sons, “we’re always wary” of the country because trade barriers could be erected at any time. China, on the other hand, looms too large in the U.S. trade picture for trade wars to arise, says Dunford — disputing what he sees as the conventional wisdom about the country.

Moreover, to manage day-to-day risks, a company shouldn’t merely analyze the political situation in its suppliers’ home countries, say insurance brokers; the company should extend that assessment to the supplier’s own foreign political risks. For instance, if a U.S. automaker relies on a Latin American manufacturer for auto parts, says Long, it should be alert to the supplier’s vulnerability to disruptions in its fuel imports.

Another concern, especially since September 11, is that the logos of prominent U.S. companies abroad amount to incitements to violence, according to some insurance underwriters and brokers. “If your company is associated with the U.S., your risk goes up significantly” compared with “XYZ Widget Co.,” says Ken Horne, a managing director in the political risk insurance practice of Marsh. By that reasoning, foreign-based subsidiaries that supply raw materials to companies headquartered here would do well to fly the company flag low, if at all.

A weak dollar, though it makes domestic goods less pricey than imports, adds another note of uncertainty for U.S.-based supply chains, says Michel Léonard, the chief economist of political-risk insurance broker Aon Trade Credit. “Any drastic instability that alters costs in your supply chain” — for example, the notion that the dollar might fall precipitously — is “obviously not positive,” he notes.

Indeed, the mix of terrorism and an unsteady dollar could pack a heady wallop. The weakness of the dollar makes it more susceptible to devaluations as a result of terrorism against U.S. domestic and foreign interests, according to Léonard. Continuing terrorist attacks on U.S. interests, he reasons, would lead to even greater increases in military spending, to be followed by rising deficits and whopping currency downgrades. Those events, in turn, could create economic instabilities abroad that might disrupt shipments to U.S. companies.

As for more-objective measurements, Aon broker Bryan Squibb suggests that executives use a metric like value-at-risk to calculate the impact that a given hazard in a given country might produce on a company’s finances over a specific period of time. Aon’s Léonard notes, however, that such analyses are a better fit for “number-driven exposures” like a stock market crash than for a political risk like terrorism.

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