In a recent earnings report, JPMorgan Chase’s Chief Executive Officer, Jamie Dimon, stated, “We have been closely monitoring the geopolitical situation for some time, and recent events show that conditions are treacherous and getting worse. There is significant human suffering, and the outcome of these situations could have far-reaching effects on both short-term economic outcomes and more importantly on the course of history.”[1] Risks to supply chains from increasing geopolitical tensions have been a top business concern for a while. Brian Bourke, Global Chief Commercial Officer at Seko Logistics, explains, “Supply chain managers today are thinking more about geopolitical risk than they are about any other risk.”[2] And, Oscar de Bok, Chief Executive Officer at DHL Supply Chain, claims, “Many companies today are prioritizing a supply chain that can withstand geopolitical shocks.”[3] None of this is good news.

Addressing Geopolitical Risks

The Economist staff writes, “At first glance, the world economy looks reassuringly resilient. America has boomed even as its trade war with China has escalated. Germany has withstood the loss of Russian gas supplies without suffering an economic disaster. War in the Middle East has brought no oil shock. Missile-firing Houthi rebels have barely touched the global flow of goods. As a share of global GDP, trade has bounced back from the pandemic and is forecast to grow healthily this year.”[4] Great! Then why is Dimon so concerned? As The Economist explains, “Look deeper … and you see fragility. For years the order that has governed the global economy since the second world war has been eroded. Today it is close to collapse. A worrying number of triggers could set off a descent into anarchy, where might is right and war is once again the resort of great powers. Even if it never comes to conflict, the effect on the economy of a breakdown in norms could be fast and brutal.”

Mara Karlin, a Professor at Johns Hopkins University’s School of Advanced International Studies and former U.S. Assistant Secretary of Defense for Strategy, Plans, and Capabilities, believes we have already crossed the threshold into a new era of warfare. She explains, “An era of limited war has ended; an age of comprehensive conflict has begun. Indeed, what the world is witnessing today is akin to what theorists in the past have called ‘total war,’ in which combatants draw on vast resources, mobilize their societies, prioritize warfare over all other state activities, attack a broad variety of targets, and reshape their economies and those of other countries.”[5] She points to Russia and Israel as prime examples of this new era of warfare. On the other hand, Thomas P.M. Barnett, the Principal Business Strategist at Throughline, writes, “I’m not seeing ‘total war’ of the kind that Sherman waged in 1865 or Goebbels attempted to marshal in 1943 or Japan threatened with regard to a prospective US invasion of the islands. I’m seeing Ukraine on a war footing, Russia somewhat so, and helpers on both sides nowhere near anything like that.”[6]

Some people might think it’s just luck supply chains haven’t been more disrupted by geopolitical events. However, supply chain risk managers can’t afford to count on luck in their efforts to make supply chains more resilient. That’s why Simon Coote and Sam Wilkin, executives with WTW, argue that supply chain risk managers deserve a voice during any discussion about how geopolitics could affect business operations. They explain, “Geopolitical risks are driving significant losses, and potential gains, for organizations. Risk managers have the motivation and the means to influence geopolitical risk strategies.”[7] They offer five reasons why supply chain risk managers deserve a seat at the strategic risk management table. They are:

• Your organization needs to look beyond government affairs specialists. “Traditionally, geopolitical risk discussions have been the domain of government affairs departments. However, the complexity and scope of geopolitical risks today demands a more integrated approach.”

• The business could be vulnerable if it sidelines risk management in geopolitical strategy. “Excluding risk management from geopolitical discussions can lead to inadequate risk identification, a siloed approach to crisis management and inefficient resource allocation. Such oversights can result in significant financial losses and missed opportunities.” For years, supply chain expert Lora Cecere, founder of Supply Chain Insights, has been explaining, “The supply chain IS Business, not a department within a business.”[8]

• Risk managers have the tools to manage geopolitical risk effectively. “[Risk managers] hold an array of tools, tactics and frameworks that could prove indispensable to your organization in managing geopolitical risks effectively. These include ERM frameworks, which foster a proactive risk management approach to safeguard your organization from complex risks, as well as quantitative risk assessment models and scenario planning.”

• Risk managers need to bridge the communication gap with government affairs. “To enhance your organization’s strategic approach to geopolitical risks, [supply chain risk managers] may need to start speaking the language of government affairs. This involves understanding government and political affairs stakeholders’ key concerns and terminologies, which will better enable [them] to contribute to discussions and strategy development.”

• Risk managers can demonstrate the value of risk management in geopolitical contexts. “By preparing case studies or scenario outputs, [supply chain risk managers] can show where [their] involvement either already has, or may have, led to better geopolitical risk mitigation and decision-making. These outputs can emphasize the importance of proactive risk management approaches that anticipate and prepare for potential geopolitical disruptions, as well as [supply chain risk managers’] ability to quantify risks and the impact of mitigation measures.” Scenario planning tools, like the Enterra Global Insights and Decision Superiority System™ (EGIDS™) — powered by the Enterra Autonomous Decision Science® platform, can help business leaders rapidly explore a multitude of options and scenarios.”

A report published earlier this year by HSBC insists, “[Geopolitical uncertainties and tensions have] never had a greater potential to wreak havoc on trade flows.”[9]

Concluding Thoughts

Boston Consulting Group analysts, Marc Gilbert and Nikolaus Lang, agree with the staff at The Economist about the fragility of the international system. They write, “The system shaped by Western-inspired institutions, trade, and security regimes is fraying, with post-Cold War international cooperation giving way to increasingly acrimonious competition. Some believe this signals a return to a bipolar world order in which nations fall in line with one of two superpowers — Cold War 2.0, in other words. That view is far too narrow. If anything, current momentum points toward a multipolar world, where dynamic middle powers assert their influence through multiple blocs, regimes, and regional groupings.”[10] As a result, they insist, “Large multinational corporations, as well as those that depend on the free flow of goods and services beyond their borders, need to treat geopolitical risk with the same urgency as digitization, AI, and the climate crisis.” They offer a few suggestions about how companies can develop “geopolitical muscle.” Those suggestions are:

• Tailor scenarios and develop signposts. Monitoring emerging shifts in the geopolitical landscape is foundational for establishing a proactive posture. … Utilizing data and analytics, including from third parties, [companies] can then develop a set of ‘signposts’ that serve as an early warning system that a business-critical change is afoot. Some signposts can be tuned to obvious developments, such as military movements. Others can be aimed at more subtle ones, such as a policymaker stepping down or a new legislative effort taking shape.”

• Plan your response. “Once the signposts are established, companies can draft detailed plans for how to respond when one appears.”

• Remain vigilant. “Signposts and scenarios need to be refreshed at least every two years or after a major incident. While the changes captured may be minor, it is important to ensure these tools remain fit-for-purpose at all times. Signposts also must be monitored vigilantly.”

• Structure to initiate action quickly. “When a signpost appears, companies need to be organized in a way that ensures the information moves swiftly up the chain of command into the hands of senior decision makers.”

Gilbert and Lang conclude, “A company’s geopolitical muscle is not built overnight. It takes commitment, dedication, and effort to strengthen and maintain.” A few years ago, another group of Boston Consulting Group analysts, concluded, “While there is no universal formula for success, building robust geopolitical risk management organizations and processes is key to begin navigating an uncertain world.”[11]

Footnotes
[1] Rocio Fabbro, “Jamie Dimon warns of rising geopolitical tensions: ‘Conditions are treacherous and getting worse’,” Quartz, 11 October 2024.
[2] Paul Berger, “Geopolitics Is Raising the Costs of Supply Chains,” The Wall Street Journal, 3 May 2024.
[3] Ibid.
[4] Staff, “The liberal international order is slowly coming apart,” The Economist, 9 May 2024.
[5] Mara Karlin, “The Return of Total War,” Foreign Affairs, 22 October 2024.
[6] Thomas P.M. Barnett, “Everything everywhere all at huh?” Sunday Cutdown XLVIII email, 28 October 2024.
[7] Simon Coote and Sam Wilkin, “Five reasons why risk managers deserve a seat at the geopolitical risk strategy table,” WTW, 24 September 2024.
[8] Lora Cecere, “Sage advice? Only for turkeys.” eft, 1 February 2013.
[9] Staff, “Building Resilient Supply Chains in Geopolitical Disruptions,” Material Handling & Logistics, 19 June 2024.
[10] Marc Gilbert and Nikolaus Lang, “Geopolitical Risk Is Rising. Here’s How CEOs Can Prepare.” Boston Consulting Group, 21 May 2024.
[11] Clint Follette, Marc Gilbert, Ilshat Kharisov, Michael McAdoo, and Pattabi Seshadri, “Turning Geopolitical Risk into Strategic Advantage,” Boston Consulting Group, 30 March 2021.