Editor's Note: This story is part of a spotlight series on supply chain risk management. To see all of the stories in this series, please click here.
2016 was a cataclysmic year for supply chains.
In March, across the Atlantic, the United Kingdom voted to withdraw from the European Union, leaving the world with more questions than answers. In the U.S., President Donald Trump’s electoral victory in November promised to usher in an era of protectionist trade policies, punishing global supply chains.
But, “far from being an exception, 2016 was more likely a foretaste of things to come,” Verisk Maplecroft wrote in its 2017 political risk outlook. The risk management firm believes regulatory instability may become the new normal through 2019, as nativist parties spread worldwide to threaten the status quo that many businesses built their supply chains around.
Today, the firm’s predictions seem likely as trade disputes, state violence in Venezuela, corruption scandals and instability in the Middle East and Europe escalate. Now, more than ever, it’s pivotal that supply chain managers retool their strategies for mitigating political risk, both foreign and domestic.
What counts as political risk?
In general, it is the acceptance that companies will be forced into changes in policies and regulatory regimes.
“Political risk is just a constant volatility that companies have to have sensors out for,” Sandor Boyson, research professor & co-director of the supply chain management center at the University of Maryland’s Robert H. Smith School of Business, told Supply Chain Dive.
However, political risk can mean different things to different companies, and in different countries. It can encompass a degree of political violence, a country’s rule of law and the prevalence of corruption, as much as economic stability and infrastructure.
In other words, any business concern that can be influenced by policy — even market access — are subject to political risk.
“Any time you have a company going beyond its borders means it [needs] a high degree of risk control, and it starts to become vulnerable to changes in policy regime, in tax regime, et cetera,” Boyson said.
The various types of political risk
The world is in a constant state of change, with each country simultaneously pushing a regulatory and international agenda that may affect business practices. For multinational companies managing global supply chains, keeping up with each new rule and regulation can be as burdensome as the regulations themselves.
As an example, the U.S. addressed 3,853 new rules in 2016, adding to former President Obama’s 20,000-plus tally. Rulemaking does not stop at the border, however: trade deals, disputes, and other country’s regulations add to the burden of managing political risk factors.
Therefore, companies may benefit from dividing risk factors into three distinct types:
- Domestic, regulatory risks – Industry-specific shifts within countries, such as traceability rules for perishables or the electronic-device mandate for the trucking industry in the U.S. Shifts in tax regimes, as seen in India or Australia, also count as political risk.
- Shifts in international policy – Shifts in a country’s stance toward imports and exports, or participation in existing international institutions. The U.S.’ crackdown on Buy American policies, and existing trade disputes with Canada and China over lumber and steel, respectively, are a few examples.
- Cataclysmic events – Major events that threaten to undo the status quo, such as the U.K.’s vote to leave the European Union. Further examples are shown in the chart above. Depending on the level of regime control, new heads of state — like the Philippines’ Duterte — can significantly alter a country’s business environment.
Due to the complexity of political risk management, large companies frequently outsource the service to third-party firms capable of analyzing data and events on a real-time basis, according to Boyson.
Playing offense: moving from risk to resilience
Risk management today is less about responding to potential risks than ensuring resilience against them.
“Resilience against events that could disrupt operations is a top priority for business executives seeking to minimize risk and maximize performance across their operations,” Boyson said. “The ability of businesses to overcome disruptions throughout the world can make all the difference.”
Yet, building resilience requires a shift in companies’ mindset to be proactive, rather than reactive. Gary Lynch, founder of The Risk Project, makes a case for a new model of risk management for businesses in his recent book, “Uncertainty Advantage.”
Political risk is just a constant volatility that companies have to have sensors out for.
Research Professor & Co-director, Supply Chain Management Center, Robert H. Smith School of Business
“Companies have been in sort of a defensive posture vis-a-vis risk,” Boyson said, citing arguments in the book. “What I think the next thing should be should be more of an opportunistic value creation model of risk."
If an elevated risk level is the new normal, perhaps it’s time to find a silver lining.
"If you can outpace your competitors and seize the opportunities generated by certain change configurations — by the political, economic, market and geographic forces — then that gives you an advantage other companies don't have," Boyson told Supply Chain Dive.