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As businesses becomes before and more aligned to a completely global mode of operations, many organisations representing a number of disparate industries, including manufacturing, service, public service, social enterprises, NGOs, pharmaceuticals, food service and construction firms now run their businesses using a network of global suppliers.
Operating a global supply chain has become a highly efficient means by which a company can boost profitability through streamlining production, reducing labour costs, minimizing the expense of equipment, cutting down on transportation and delivery costs and decreasing transit duration between suppliers, firms and customers (Bloom & Kotler 1975; Cook 2011; Edgell, Meister & Stamp 2008; Fisher 2011; Lloyd 1996; Porter 1985; Saxena 2010; Stauffer 2003).
For the purposes of this paper, a supply chain refers to a group of three or more units, organisations or persons directly concerned with providing, manufacturing or producing the upstream and downstream current of services, information, parts, products or funds from a resource to a client (Cook 2008; Edwards 2006; Kelley & Nagel 2007; Porter 1985).
The following paper will critically evaluate the strategic rationale for why organisations might choose to use global suppliers from these so-called high risk regions, particularly when there might be less risk in using local supply chains, as well as the impacts that natural phenomenon and political unrest might have upon these types of global logistics and supply chain management strategies.
The paper will also offer some strategies as to how to mitigate the impact of instability in the global supply chain.
Strategic Rationale
Part A of this paper discusses the strategic rationale as to why an organisation might choose to use a global supplier from a high risk region when less risk might be incurred using a supplier closer to home.
Logic would dictate that if the home region of a global supplier is undergoing political turmoil through a transition in government leadership, terrorist activity, or if it was recently hit with a major natural disaster such as an earthquake or tsunami, the firm may be best served to move and transfer its interests from a regional supplier to a supplier in a safer part of the world, one in which the government appears stable, no major protests are underway, and where the climate is not prone to hurricanes and the like.
Typically, the first and most logical strategic response to this question is based in cost. Specifically, how much does it cost to move, versus how much does it cost to stay?
The answer to this question will also depend on where the company is in terms of setting up its global supply chain, whether at the beginning of the process or well into it, what the function of the particular unit of the global supply chain in the overall upstream and downstream flow of the business is, the level of diversification that already exists within the global supply chain, and how long the company has based its operations in that particular region (Burke & Cooper 2008; Cross 2007; Griffin 2008; Giermanski & McGhee 2007; Glisson, Milton & Jones 2009).
Now that recent world events have illuminated the “inverse relationship between risk and efficiency [and] cast [it] in high relief, supply chain managers realize that they can no longer focus solely on cost reduction—any calculation of a supply chain’s return on investment must also take customer satisfaction into account” (Stauffer 2003, par. 4).
However, cost remains the main driver of business decisions, and where global supply chains are concerned, if a company has already invested millions in a regional supply chain, cost becomes the number one factor.
A company that has set up a global supplier in a region that was initially stable for many years and has become fractious over time must weigh the cost of moving its operations to a safe zone, and this weighing of costs must be applied to both short term and long term business goals.
Similarly, a company that that has set up a global supplier in a region that was recently hit by a natural disaster must weigh the costs of moving its operations as opposed to staying in the affected region and repairing the damaged infrastructure.
In global supply chains, it is the “integration of business processes, not individual functions, that creates value for customers and these processes reach beyond the boundaries of the firm” (Altay & Ramirez 2010, p. 59).
In this regard, even if the individual function – in this case, the unit of the global supply chain that has been threatened by terrorists or has been hit by a natural disaster – is temporarily out of commission or under threat, the company may decide that the unit fits too well into its overall integrated business model to change.
A number of the most successful firms in the world have been operating global supply chains for many years and as such have built up strong networks, strong relationships and strong financial incentives in the global regions where they operate elements of their supply chains.
As the leadership of any company can attest, networks, relationships and mutually enhancing financial incentives take years and years to build, and the idea of starting all over in a new region where the company will be one of many competitors bidding on the same parcel of land or negotiating with little or no personal leverage is simply too expensive a proposition to risk for many companies.
Also, strategically speaking, natural disasters tend to be short term problems.
While they do cause massive amounts of damage, they do not happen annually; thus, a company may decide that in the long term expenditure, it will be cheaper and more prudent to repair the damaged infrastructure and remain in the region rather than incur the enormous cost of moving operations and setting up operations in a new location.
Finally, labour costs continue to factor significantly into the strategic rationale applied when managing a global supply chain. Political unrest may be a small price to pay when faced with a jump in labour costs that will number into the millions for a globally integrated firm.
Other strategic factors that may prompt firms to remain in politically unstable regions or regions prone to natural disasters include the degree of skill manifested in the labour force, tax incentives, beneficial rates of currency exchange and the efficiency of transport infrastructure such as ports (Bloom & Kotler 1975; Cook 2011; Edgell, Meister & Stamp 2008; Fisher 2011; Lloyd 1996).
Risk management is the second element of the strategic rationale, and again, this equates to long term and short term business goals. As Stauffer (2003, par. 7) notes, risk can be seen as the sum of “frequency times consequence…a high-frequency/low-consequence event, such as the regular fluctuation of currency exchange rates [is] similar to a low-frequency/high-consequence event, such as the sinking of a cargo ship laden with critical parts”.
However, risk management varies widely from firm to firm, and also varies widely according to industry. An example is the recent earthquake in Japan.
As the well-established “epicenter of high-tech manufacturing,” when the earthquake hit it affected the high tech industry to a much greater degree than other industries, because the vast majority of the major high tech firms use suppliers in Japan as part of their global supply chain (Fisher 2011, par. 2).
In addition, depending upon the particular firm’s tolerance for risk, such “apparently similar risks can have vastly different qualitative effects” (Stauffer 2003, par. 7).
Risk tolerance and risk management will also depend largely on corporate culture, the liquidity of the company, its insurance strategies and capabilities and the type of industry. Most importantly, risk management can be best served by a highly diversified global supply chain (Jüttner & Maklan 2011).
One of the ways that companies incur greater risk is through amassing a large portion of its suppliers for one particular part or service in one region (Belzer & Swan 2011; Jüttner & Maklan 2011). The ensuing clustering effect of global suppliers all located in one geographic region “can have serious consequences in the event of a natural disaster or political unrest” (Stauffer 2003, par. 7).
Firms that operate global supply chains are well advised to diversify as much as possible. For example, rather than have one part sourced from one region, the firm can have it sourced from two or three regions in different parts of the world.
Cost savings can be tweaked via reduced labour costs, tax incentives and currency rates, and the main benefit to global firms is that the “supply chain can insulate [the company] against shortages and other unpredictable problems” such as natural disasters or terrorism (Fisher 2011. par. 3).
Finally, the third element of the strategic rationale is a question of trade-offs.
Trade-offs transcend the basic reduce cost at all cost model of global supply chain management. For example, if the trade-off to operating in a region where the labour costs are the lowest in the world means that the company undergoes regular bombings from terrorist groups, the savings in labour costs may be eaten up by the expense of
continually repairing or upgrading infrastructure, hiring additional security or implementing costly and complex firewalls and network security protocols. Trade off thinking goes along way toward adopting a strategic global supply chain policy that allows for flexibility, agility and the constant streamlining of processes while keeping costs reasonable and continuing to increase profitability.
Impacts of Natural Phenomena and Political Unrest
Part B of this paper discusses some of the impacts that natural phenomena such as tornadoes and tsunamis as well as political unrest might have upon these types of global logistics and supply chain management strategies. The aforementioned definition of global supply chain points to a key component of the successful global supply chain, namely, the “direct link between the companies in a supply chain” (Altay & Ramirez 2010, p. 59).
Numerous supply chain management studies indicate that one of the pivotal indicators of success in a global supply chain rests on the realization that a global supply chain represents an assembly of interdependent parties; therefore, coordination and management of the global supply chain must always be a strategic response to the problems that emanate from the inter-reliant units within the chain, and the chain must always be viewed from a holistic perspective (Altay & Ramirez 2010; Bakshi & Kleindorfer 2009; Claessens & Schmukler 2007; Perry 2007; Sarathy 2006).
As a cohesive, integrated business unit, direct threats to the supply chain will be felt all the way through it. Thus, it is incumbent upon those responsible for global supply chain management to understand their charges as interconnected entities rather than isolated processes, as this attitude will likely build resiliency within the supply chain and bolster its ability to weather threats from both natural and human disasters (Fisher 2011;
Jüttner & Maklan 2011; Sheffi 2001; Stauffer 2003; Suder 2006; Wechsler 2011).
The locations of these global suppliers are sometimes found in regions of the world that historically can be prone to the impact of natural phenomenon such as earthquakes, hurricanes or typhoons, flooding, tsunamis, and most recently, political unrest through the removal of traditional government regimes in certain countries as well as ongoing terrorist activities and threats, both real and perceived.
Natural phenomena such as wildfires, earthquakes and floods can produce major disturbances in global supply chains, as they impede business operations and reduce the producing capacity of the companies doing business in the region that the natural disaster strikes (Altay & Ramirez 2010; Alternate supply: disaster in Japan forces manufacturers to look elsewhere 2011; Belzer & Swan 2011; Burke 2005).
These regions of the world and the suppliers situated there would arguably present high levels of strategic risk for any organisation choosing to design their supply chain landscapes involving these areas.
As Stauffer (2003, par. 2) notes, “terrorist strikes, political instability in Third World countries, and last year’s shutdown of West Coast shipping docks—have awakened managers as never before to supply chain risks, some of which had been introduced or heightened by the very actions companies had taken to drive costs out of their supply chains”.
Natural disasters have the power to harm or destroy infrastructure, interrupt supply chains and ultimately have an effect upon the profitability of the business as a whole, and natural disasters tend to affect all the elements within an existing supply chain (Altay & Ramirez 2010).
When a natural disaster occurs, “gaps in supply chain security hamper the safety and security of freight transport…this risk increases the deeper in the hinterland it originates” (Belzer & Swan 2011, p. 41).
The impact of a natural disaster on a global supply chain will differ according to the type of business as well as the type of natural disaster; therefore, different natural disasters may leave certain supply chains unscathed, whereas others will be completed obliterated.
For example, in their 2010 study, Altay and Ramirez (2010, p. 60) discovered that “the damage by windstorms and floods seem to be dramatically different from that of an earthquake, providing evidence against the all-hazards approach”.
What the literature appears to be telling supply chain managers is that natural disaster do not come in cookie-cutter parcels that can be easily insured against, planned for or avoided; each one is different, and each one will have a different impact on the supply chain network (Holbrook 2011; Ngoctran 2011).
For example, Altay and Ramirez (2010, p. 60) demonstrated that the “impact of floods on total asset turnover of a firm is dependent on the firm’s position in the supply chain.
We found that while upstream partners enjoy a positive impact, downstream partners have to plan for the opposite”. What this means is that the impact of a natural disaster will be specific and not localized to the region it affects. Rather, the disaster will affect all the links in the chain.
Thus, “a supply chain-wide mitigation strategy rather than a company-specific one” appears to be the most efficient and pragmatic approach to natural disasters for supply chain managers to adopt (Altay and Ramirez 2010, p. 60).
There also appears to be an inverse relationship between the complexity of a given global supply chain and the cost that a natural disaster will exact on the network (Altay & Ramirez 2010; Gad-el-Hak 2008; Haight 2003). This is less true of political unrest.
Political unrest and terrorism differs significantly from a natural disaster in that the latter tends to happen once, whereas the former can easily become chronic.
Political unrest and terrorism can drag on for years, and the costs involved in hiring more security personnel, beefing up web security, hiring the IT expertise necessary to combat cyber terrorists, and repairing equipment or work spaces damaged or destroyed by terrorist activities can bleed the company for years at a time.
Political unrest that occurs during a change in leadership can also prove expensive for a company operating a complex global supply chain, particularly if the political regimes are corrupt. In addition, unrest of a politicized religious nature can often lead to additional costs to the company if the new regime demands that employees take time out of their work day for religious activities.
Terrorism in particular can have a long term impact on the financial stability of the firm, and this varies from industry to industry; however, as a rule, investment and access to capital tend to wane in politically charged environments (Jüttner & Maklan 2011; Sheffi 2001).
This occurs for both logical and emotional reasons. In a region dominated by terrorist activity, investors will fear for their investments more so than in a region where there is no terrorism.
Terrorism by nature invokes fear, not simply for financial investment for personal safety as well; therefore, a region dominated by terrorism quickly becomes a no-fly zone for investors, and this can lead to reduced capital for firms. This in turn affects a firm’s ability to grow.
As a result, over time regions where terrorism persists will witness an exodus of many firms, as once the problem of terrorism takes root it quickly becomes chronic and difficult to root out.
Global supply chain management involves a delicate touch and a holistic framework. Firms that grow to comprehend the “depth of their supply chains and critical dependencies” are the firms that tend to succeed over the long term (Fisher 2011, par. 12).
Cost, while ultimately the main driver of most major business decisions, cannot be the only consideration in global supply chain management. Where natural disasters and political unrest are concerned, there is no such thing as a one size fits all plan that will insulate a supply chain.
Each natural disaster is different and will affect the chain differently. A firm that employs a strategic response to each natural disaster such as building in more suppliers and incorporating both geographic and political diversity among their suppliers will be far more likely to weather the storm.
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