For many companies, one of the key lessons of the pandemic is that they must continue to reduce potential constraints and risk in their supply chain. A first step in that effort is to identify any components that are acquired from a single source or are custom-made. In terms of risk management, leveraging multiple suppliers and incorporating greater flexibility in component specification is akin to maintaining redundant data centers. Validation and purchasing of components from multiple suppliers can also substantially mitigate risk and add greater resiliency to the supply chain.
However, there are other risks associated with adding new suppliers. Notably, companies need to examine the country of origin of each component, as well as the inherent geographical risks associated with those countries. Here are some specific geographical risk factors that must be considered:
With the rise of global warming, weather-related events including tornados, floods, forest fires, and snowstorms are routinely causing shipping interruptions and delays. Switching to a supplier at another location can help companies navigate region-specific constraints. While storms and natural disasters are unpredictable, companies can assess the geographic area from which components are sourced and determine the potential risk levels of extreme weather or other events such as earthquakes. Depending on the severity of the disaster, major impacts to supply chain can be observed far beyond the local area, such as with the earthquake and tsunami in Japan in 2011. Companies should identify potential concerns and work with suppliers to understand their disaster preparedness plan.
In addition to environmental concerns, access to transportation and other infrastructure is a major geographical consideration. Nationally, regional storms and flooding can damage or close major highways, airports, railways, and ports, as well as impact the stability of telecommunications, electricity, and water. Components or necessary raw material sourced internationally increases risk. The current difficulties and increased lead times associated with maritime transportation, including container availability, port delays and congestion have been felt across the globe. Ideally, companies should identify potential shipping and logistics constraints and source components from multiple geographies to achieve greater flexibility.
Geopolitical factors represent another potential source of geographical risk. Tariffs are an important consideration for components sourced internationally, as they can add uncertainty and fluctuation in component costs. The possibility of other geopolitical tensions, that could give rise to trade or border restrictions, policy changes, and other regulations should be routinely evaluated. Economic and social instability based on political factors — ranging from labor strikes to terrorist threats and even war — can have a major impact on supply. Monitoring what is occurring in each country where components are sourced is essential.
As companies refine their supply chains for greater flexibility and resiliency, integrating additional suppliers from different geographical locations can substantially reduce risk. But knowing the risks associated with those additional geographical locations is an essential aspect of effective supply chain risk management.