Strategies for managing long-term risks to the supply chain

Companies have to prepare for long-term risks such as climate change or geopolitical developments. Combining precise data with intelligent methods enables proactive risk management that increases resilience and ensures sustainable competitiveness.

In recent years, long-term risks have increasingly become the focus of leading companies. Many corporations have already improved their ability to respond to potential risks for their supply chain as part of their supply chain risk programs. At the same time, however, these efforts are matched by a steadily growing risk. Due to rising global geopolitical uncertainties and climate change, supply chain disruptions are not only increasing in frequency, but also in severity. In addition, the recovery phase after the occurrence of such risk events is increasingly longer and more difficult, as, for example, transport routes or suppliers permanently fail or become unsustainable in terms of risk. How can companies prepare for and respond to the increase in these long-term risks? The good news is that those risks can be predicted using early indicators and companies can therefore take precautionary measures.

Model and manage climate risks

The effects of climate change have been felt in Europe for years. Whether it’s particularly hot summers, violent storms, floods caused by severe weather events, or devastating fires: Climate events are no longer just an issue in the Third World, but are affecting business activities in many major economic areas. For many companies, their supply chain is their Achilles’ heel in terms of climate change threats. When identifying potential climate-related risks, it makes sense to differentiate between supplier risks, transportation risks due to disruptions in the transport infrastructure, and risks regarding energy and water supply. It is also important to consider the various climate-related risk factors and their effects:

• Heat and dry periods: Potential impact on employee health, water availability and inland navigation
• Heavy precipitation, flooding and hail: Endangering buildings, production facilities and inventories
• Storms and lightning: Potential damage to sensitive equipment, power supply and telecommunications
• Sea level rise, spring tides: Possible effects on maritime transport, buildings and production facilities

Geo intelligence methods can be used to link climate models to the specific supply chains of companies. In this process, the specific climate-related risks for supplier locations as well as transport and supply routes are determined and aggregated as well as visualized in an overall model. The model created in this context enables the identification and evaluation of a company’s climate-related risk situation.

Dealing with political risks

Political risks and, in the narrower sense, politically motivated violence, war risk or the threat of terrorism are consistently among the greatest business risks. At the same time, political conflicts – especially in democracies – are part of everyday political life. They are continuously gaining in importance, especially after the USA’s change of course in foreign policy and the withdrawal of troops from Afghanistan. The good news is that political conflicts and wars usually don’t start overnight, but have a long lead time that can be easily identified. The challenge is to filter out the news that are actually relevant from the information overload of other political news.

By capturing what is happening in a dynamic model, the full spectrum of conflict activity can be mapped. Generally, political conflicts can be classified according to their expected impact:

• Social Conflicts: Interest groups pursue their demands (mostly against the state) and usually try to enforce them through demonstrations, protests or strikes.
• Violent Conflicts: Violent groups – usually outside the social order and often found in states with limited statehood – attempt to enforce their interests through the use of firearms and other light weapons. The control of important transport routes is often used as a source of income for these “rebel groups”.
• War or Warlike Conflicts: Large and well-organized groups or states try to enforce their demands through the use of heavy weapons and try to force down the opponent through severe damage to production facilities, transport routes and infrastructure.

Modern analysis of political country risks not only requires a precise description of what is threatening, but also answers to the questions of when and where risks arise. A long-term comparison and analysis of data can identify patterns that support the assessment of the current conflict situation. In doing so, knowledge can be gained, particularly about the resilience of states, which promises enormous benefits in long-term supply chain planning. Thus, a distinction can be made between “effective” and “less effective” political conflict solvers. This distinction is particularly helpful in times of growing uncertainty, when terrorist attacks are also being carried into the centers of Western leading states. By geo-referencing the location of conflict, the spatial dimensions of actions can be mapped precisely. As a result, the risk posed by political conflicts can be calculated much more accurately.

Interdependencies between climate-induced changes and geopolitical developments

Since there are often interdependencies between different types of risk, individual risks shouldn’t be considered in isolation. Climate-related changes such as a regional water scarcity or loss of habitat will create or intensify political conflicts, especially due to climate-induced migration movements. Conversely, political developments can also cause considerable environmental damage and natural disasters, for example through the reckless exploitation of natural resources. Predicting the interdependencies, however, is still difficult with current means.

Risk management and long-term risk minimization

Even if individual companies only have a limited influence on climate change or geopolitical developments, they are not defenseless in the face of long-term risks, but are required to take active precautions. Particular attention needs to be paid to risks that are characterized by both a high probability of occurrence and a significant loss expectation. Taking cost aspects into account, it is worth balancing the costs and benefits of risk prevention measures.

Predictive analytics and geo-intelligence-based simulations can be used to evaluate various risk management measures, such as multi-sourcing, near-shoring, or building additional buffer stocks. Intelligent, proactive risk management thus increases resilience to long-term risks and ensures the sustainable competitiveness of the company.

With the MBI CONIAS approach, all data is systematically collected at the subnational unit level. Therefore, differentiated situation reports of conflicts can be created, conflict dynamics can be recorded, and safe spaces can be identified. This results in a highly differentiated, empirically based overview for many countries, showing not only risks but also opportunities. The MBI CONIAS approach is particularly innovative in this regard because data and development stages are collected from two very different types of conflicts: On the one hand, there are conflicts that began with an initial disagreement, then escalated, via pressure and threats, first sporadically to violence and finally to war. On the other hand, however, there are also those that began very similarly to later wars, but could then be settled peacefully. The multitude of data and attributes collected allows for a differentiated assessment of supplier locations as well as supply chains. This means that changes in the risk assessment can be communicated quickly for proactive risk management.

By integrating the MBI CONIAS data into Orbica’s solution, both climate-related changes and geopolitical developments can be mapped. This enables precise analyses and targeted measures, which are essential for the prevention of long-term risks. Tackle this important topic within your risk management now in order to be as prepared as possible for any long-term risks to your supply chain and sites. Our team of experts is happy to support you. Contact us for a non-binding consultation.

About the author:
Dr. Nicolas Schwank
Chief Data Scientist Political Risk
Michael Bauer International GmbH

In cooperation with:
Matthias Frye
Director of Marketing and Sales Europe
Orbica UG