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Trump presidency makes supply chain disruption planning critical

The current political climate is a charged one. Companies that have a global supply network should start thinking about risks -- and how to handle them -- today.

As the United States adapts to the Trump White House, business analysts are speculating as to potential shifts...

in global trade relations. These discussions serve as alerts.

The possible need for rapid adaptations in international supply chain logistics means that business leaders in general -- and supply chain leaders, in particular -- must be proactive in planning for supply chain disruptions.

Historically, the effects of sudden shifts in trade between nations range from financial inconvenience to the instigation of war; they are seldom advantageous to all parties. At best, operations are usually slower and more expensive; at worst, a supply chain can collapse altogether.

However one feels about the new executive leadership in Washington D.C., any possibility of a sudden change in trade between the U.S. and another nation must be taken seriously, regardless of the cause.

Increased tariffs or sanctions -- especially when suddenly imposed -- or unavailability of raw materials can cause catastrophic supply chain disruption. And in the current international climate, depending on the industry, the impact could be higher prices, limited product availability and reduced service to U.S. consumers.

For U.S. logistics planners, then, it's prudent to assume the worst, and plan for it. With the news headlines declaring new threats to global relationships on an almost daily basis, it's not unthinkable that the United States could soon be at odds with a country important to the global supply chain; for example, Mexico or China (though, as of this writing, Trump seems to be changing his stance on China).

As it relates to a company's global supply chain, such tension could trigger sudden financial pressures, delays, shortages or even a collapse within supply relationships.

What can business leaders do now to mitigate potential supply chain disruption?

Go global for primary suppliers, regional for backups

From the perspective of keeping U.S. companies strong and successful, it's worrisome that, currently, the premiere global and regional supplier nations carry some of the highest potential for diplomatic breakdown and, in turn, trade repercussions. This unusual circumstance underscores one of the most important guiding principles of international multisourcing: When choosing a preferred source, go global; when selecting one or more backup suppliers, go regional.

Supply chain managers can easily appreciate the wisdom of this. The best prices and terms for the purchase of raw materials will ultimately be found on the global market, all else being equal. Also, the expense of global shipping is more than offset by highly competitive pricing and the economies of scale to be found in bulk purchasing and shipping.

Regional sources tend to be more expensive, but they can be helpful to have as backup suppliers. If a supplier halfway around the world suddenly cannot or does not deliver, or if that supplier is slow or suddenly becomes much more costly to deal with, the disruption to your company can be massive. The regional supplier's higher cost can be mitigated by the potentially faster delivery. The net cost of failover to the backup supplier could be close to nothing.

This is the smart play for supply chain leaders: Source globally first, when possible, and choose supplemental suppliers within your region.

Effective supply chain management means having a plan B

It is precisely because the global economy has expanded peacefully and steadily over the past decade that the principle of global-primary, regional-secondary is not yet universal. International disruptions, when they have occurred, have tended to result from natural disasters and benign raw materials shortages, rather than political instabilities, at least among the largest supplier nations. The economic upsides of the strategy, however, already hold sway in some international industries.

The apparel industry is a prominent example. Asia is the world's global go-to source in that industry; raw materials and cheap labor are plentiful; more so than anywhere else in the world. As such, companies from all over the globe have made Asian suppliers their primary sources.

For companies that practice this method, there are true payoffs. Region by region, backup sources are well-organized. European apparel companies turn to backup suppliers in Turkey and North Africa, close enough for rapid and cost-effective failover. In the United States, smart apparel companies buy first from Asia, but look to Central America -- Mexico and Haiti, for example -- for secondary suppliers.

Here's an unfortunate truth: If the U.S. does, in fact, wind up in trade conflicts with both China and Mexico, the cost of capris and skinny jeans could skyrocket overnight.

Supplier companies have a new strategic opportunity

In the global tech industry, sourcing from a single supplier isn't even a question -- multisourcing is a must. Popular products generally sell all over the world, and that level of demand is complicated by the product's brief lifecycle.

Here's an unfortunate truth: If the U.S. does, in fact, wind up in trade conflicts with both China and Mexico, the cost of capris and skinny jeans could skyrocket overnight.

The iPhone is a prominent example, with each new version selling tens of millions of units, only to be phased out in less than 24 months. The iPhone 5S and the iPhone 6, for example, rely on components supplied by 10 different countries. Apple's leaders would be insane not to carefully multisource every last part. It's also worth noting that Apple's products rely on a complex supply chain of more than 200 suppliers that stretches across the globe.

The tech industry, then, boasts an astoundingly high level of multisource contracting. And a clever innovation has emerged to exploit this trend -- dual-sourcing initiatives among suppliers. Companies that supply raw materials should strongly consider creating cosourcing alliances.

For an example of how cosourcing alliances work, look to the story of Panasonic Corp. and Infineon Technologies AG. Semiconductor giants Panasonic and Infineon have created a partnership, offering supply contracts to tech companies jointly and each serving as the other's backup. While Panasonic is headquartered in Japan, and Infineon in Germany, both have operations all over the world. Service from a primary or secondary supplier in specific instances is determined by the buyer's geographical advantage, so everybody wins.

This kind of forward-thinking contracting is not only mutually advantageous throughout the supply chain -- it could soon become essential in a global marketplace where tremors of political instability can shake up production anywhere, at any moment.

A new and riskier world

The growth of the global supply chain has been something to see thus far in the 21st century, and, so far, has been healthy and rapid. The current political rhetoric may or may not signal interruptions to that growth moving forward, but it certainly signals an opportunity to plan strategically for the possibility of a riskier future. 

Next Steps

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The best supply chain analytics for your company

This was last published in February 2017

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