The International Trade Risks for Global Businesses

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Table of Contents

Introduction
Preliminary Information about Risks
Review of Literature
Conclusion
References

Introduction

Globalisation and the expansion of international trade have significantly increased the volume of world trade. This development has seen the volume of international shipping increase yearly. Now, new business practices such as outsourcing, lean manufacturing, and just-in-time inventory (among others) form the conventional business paradigm.

Through the adoption of these new business paradigms, organisations have found themselves increasingly stretching their supply chains. Unfortunately, this growth brings new challenges and risks. These challenges and risks often lead to supply chain disruptions that can significantly affect a company’s bottom-line by reducing revenues, reducing market share and inflating operational costs (among other business setbacks) (Stanley 2008).

A past FM global study sampled 600 executives around the world who identified supply chain disruptions as the greatest threat to their revenue incomes (Bosman 2006, p. 2). Supply chain risks for operating in the global market have also been investigated by professors from Georgia Institute of Technology and the University of Western Ontario who explained that organisations could take up to two years to recover from disruptions brought by supply chain risks (Bosman 2006, p. 2).

Even with such statistics, some managers do not understand that the changing nature of the business environment (brought by globalisation) has brought new dynamics in their business risk profiles. Unfortunately, managers who recognise the new changes in their business risk profiles still operate under the mistaken belief that they are helpless to the new supply chain risks brought by globalisation (Bosman 2006).

This paper explores the dynamism that globalisation has brought on supply chain management by identifying new risk elements that international trade poses to global businesses. This report also highlights risk dimensions, best practices, critical issues, challenges, and trends in international supply risk management.

Preliminary Information about Risks

It was easy to contain risks at the start of the industrial revolution. However, with the onset of globalisation (in the eighties), it has been difficult to contain such risks.

As mentioned in earlier sections of this paper, the supply chain process has been affected in this regard. Risk profile changes have especially been informed by the quest for international companies to seek the cheapest markets for developing their products and services (Stanley 2008). It is therefore unsurprising that global corporate giants such as Apple Inc. outsource some of their business processes to Asia and ship back their products to America and other parts of the world.

With expanded supply networks, companies have paid dearly for the increase in supply perils. As mentioned in earlier sections of this paper, some managers have accepted these new risks as a new cost of doing business, while others ignore them as ordinary business risks. A past study that surveyed 800 corporations that suffered supply chain risks (between 1989 and 2000) reported a 30% – 40% lower stock return among these companies (compared to the average industry standard) (Bosman 2006, p. 3).

This statistic was true, regardless of the type of industry and the time when such risks occurred. Furthermore, public companies that experienced such risks experienced a share price volatility of more than 13% (Bosman 2006). From the same study, it was reported that companies, which suffered supply chain risks experienced a 7% drop in their sales revenue growth.

Similarly, these companies experienced an 11% surge in operation costs and a subsequent increase of inventory costs of not less than 14% (Bosman 2006). From these statistics, the new risk dynamics brought by global trade have a significant impact on the sustainability of company operations.

Review of Literature

Risk Dimensions

With the proliferation of international trade, companies now face a host of new perils such as currency fluctuations, piracy risks, political risks, failed communication with business partners and cyber fraud (among others). These are just a few examples of the new supply chain risks that globalisation introduces.

The severity of these risks are scattered around different geographical areas. For example, piracy risks are rampant in unmanned shores of Somalia (East Africa). Political risks have also hampered shipping operations in trading routes along the Middle East (such as the close of the Suez Canal during the Egyptian revolution).

Within Western circles of trade, terrorism risks have been most profound. Regardless of the new risk profiles, companies still have to manage traditional risks such as natural disasters, fire, breakdown of equipments and other conventional supply chain risks (Stanley 2008).

Best Practices

Best practice in supply risk management is aimed at adopting a coordinated approach to risk management (which is built by acknowledging the importance of adopting a holistic approach to risk management). Best practices in supply chain management are hailed because they adopt a more rigorous approach to identifying and analysing risk failure points within a company’s supply chain.

According to Lynch (2011), the best practice in supply chain management is encompassed by seven core principles. These principles are: gaining visibility (up and down stream), simplifying complexities, establishing accountability for risk activities, establishing third party custodial risk, risk incentives and penalties, creating a business case from investments, providing holistic insurability, and maintaining relevance.

The principle of simplifying complexity is defined by understanding resources as tools for creating value. Alternatively, this principle may be understood under the lens of improving a company’s service offing (or product lines). The principle of establishing accountability for risk activities should be understood within the context preferring a company’s profit and loss standing as opposed to the ascertainment of the company’s assets.

The principle of creating a business case for investments is given a lot of importance as a key component of supply chain management (Lynch 2011, p. 6). In addition, like other risk mitigation strategies in different risk management profiles, providing holistic insurance is explained as a core component of supply chain management (best practice) because it safeguards against risks, which have already occurred.

However, Lynch (2011) explains that holistic insurability should be implemented beyond physical cover to other risks such as political risks, legislative risks, and financial failures. Finally (and most importantly), best practice in supply risk management is also hinged on ensuring the risk profiles identified have a direct bearing on the supply chains of greatest value. Here, Lynch (2011) advises that companies should give priority to qualitative metrics and refrain from focusing on only those risks that pose a threat to their operations.

Challenges

Even as companies grapple with the problem of new risk dynamics, the Supply Chain Council (SCC) contends that there are exceptional challenges, which pose a problem to the overall management of new risk dynamics (Supply Chain Council 2012). One such challenge is the rising costs associated with operating on a global context. Globalisation has indeed expanded the market and companies now have to meet the demands of these new market segments.

However, other operational costs are still on the rise. For example, labour costs remain sticky upwards and new technologies involved in global trade demand newer upgrades to a company’s information technology platform (thereby increasing the overall costs of operations). New regulatory demands (especially occasioned by the changing political environment) and rising freight charges also bring new costs to the overall cost pool already incurred by companies.

These new cost dynamics pose new challenges to the measurement and control of supply chain costs but the Supply Chain Council (2012) explains that to control such costs, companies can adopt several metrics. The most commonly advanced metric is for companies to identify their main cost drivers and focus on controlling them.

Another notable challenge to risk mitigation and management in the supply chain process is the lack of sufficient talent to address the changing risk dynamics that businesses face from globalisation. Indeed, organisations have scaled their operations to meet the changing business demands of new markets (especially developing markets) but there has not been a measurable response from the talent market to provide the necessary skills for managing these new challenges.

This shortfall is witnessed when the importance of training, talent management, and development is becoming increasingly important in supply chain management decisions. Supply chain leaders are therefore left with a major skill gap that threatens their efficiency in managing new risks dynamics brought by changing business operations (Supply Chain Council 2012).

Issues

In a 2000 book written by Lambert and Cooper (titled, Issues in Supply Chain Management), the understanding of supply chain management is voiced as the greatest issue in supply chain management.

The changing face of supply change management (brought by globalisation) has further compounded this definition but Supply Chain Council (2012) elaborates that managers should understand supply chain management to include “the integration of key business processes from end user through original suppliers, that provides products, services, and information, that add value for customers and other stakeholders” (p. 3).

In this regard, the efficiency of supply chain management should be perceived in the context of value addition (to customers and stakeholders). It is therefore untenable for managers to misunderstand the scope of supply chain management because it undermines the efficiency of their decisions in this regard.

Critiques

Despite the existence of supply chain management in business processes, there has been a continual failure for managers to establish distinct supply chain departments in their organisations. From this weakness, there has been a resultant weakness in merging supply chain decisions into company decision-making processes.

This way, critics have found it easy to criticise the importance of supply chain decisions and their effectiveness in complementing managerial decisions (Supply Chain Council 2012). To improve this situation, it is important for managers to realise the importance of supply chain management processes and understand the importance of integrating this process into the overall decision-making process of the organisation.

Trends

The current trends in managing supply chain risks are skewed towards moving the supply chain closer to home. Albeit current supply chain decisions have been motivated by the prospects of benefiting from low operational costs in developing countries, recent statistics reported by Iowa State University (2010) show that labour costs in these developing countries are quickly growing.

For example, labour costs in China are increasing by about 20% every year and different companies are now moving their supply chains to low-cost countries (as opposed to countries that have low labour costs) (Iowa State University 2010). This is the current trend in supply chain management.

Conclusion

Supply chain risks have increased with the increase of global trade. This paper identifies increased costs in supply chain management as a prevalent issue in the practice. Indeed, many organisations find it expensive to build back-up operations, buy insurance policies for new business risks such as terrorism and piracy, or even employ new technologies in supply risk management.

Initially, such costs prove to be expensive, but if such cost measures protect organisations from the adverse effects of new supply chain risks, it is worth the investments. Therefore, company managers should understand that the benefits of managing the new dynamics of supply chain risks outweigh their possible costs.

References

Bosman, R 2006, The New Supply Chain Challenge: Risk Management in a Global Economy, FM Insurance Company Limited, Berkshire.

Iowa State University 2010, Emerging Trends In Supply Chain Management, Iowa State University, Iowa.

Lynch, G 2011, Supply Chain Risk Management: What’s working? What’s not. Web.

Stanley, E 2008, ‘Benefits, barriers, and bridges to effective supply chain management,’ Supply Chain Management: an International Journal, vol. 13 no. 1, pp. 35 – 48.

Supply Chain Council 2012, The Five Most Common Supply Chain Challenges. Web.

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