Growth from Geopolitical Risk with an Elastic Supply Chain

This is part of?our Newsletter Series. To get expert guidance on supply chain practices?and their impact on the broader political, social and economic landscape, hit the subscribe button here.

By Pierfrancesco Manenti , VP Analyst, KI Leader

The current geopolitical situation around the world is presenting challenges for organizations, limiting trade and commerce. While growth remains a top priority for CEOs, the fragmentation of the global marketplace poses significant obstacles to meeting growth expectations.

Unfortunately, the natural reaction to geopolitical risk isn’t helpful.?

While it is instinctive for supply chains to focus on the potential negative impacts of geopolitical risks, survey data reveals that organizations have varying perceptions of the challenges they pose. Some have found opportunities amidst geopolitical tensions. According to our survey, 40% of supply chains were impacted by recent geopolitical risks, with Perfect Order Fulfillment performance falling below expectations. However, 45% met performance expectations, and 15% exceeded them amidst geopolitical events.

Opportunity in Risk

The natural response to mitigate geopolitical risk is to operate within "trust boundaries," which are geographical areas deemed comfortable for business operations. The IMF calculated that, after the Russian invasion of Ukraine, trade and foreign direct investment (FDI) between a U.S.-leaning bloc and a China-leaning bloc declined by roughly 12% and 20%, respectively, more than flows within blocs. These patterns hold true even when excluding the United States and China from the analysis1.

It’s easy to focus on a safe, siloed approach that keeps operations within an individual bloc. However, this approach may limit opportunities for growth, as maintaining access across global markets while supplying goods from within a singular bloc will not always be possible.

How can CSCOs support their CEOs' ambition for growth?

CSCOs should move away from fear and view geopolitical risk and its uncertainty as an opportunity. They should set up a more elastic supply chain by building a change-ready network that can stretch or contract supply in response to geopolitical risks. By operating beyond trust boundaries and trading across geopolitical blocs, CSCOs can actively support CEOs' focuses on driving business growth.

Take Cocoa, For Example

Take as an example, sourcing of cocoa beans around the world. About 70 percent of the world’s cocoa comes from West Africa, an area that has historically been highly charged with geopolitical tensions. It has also recently been impacted by heavy rainfalls and deforestation challenges. Currently, major African cocoa plants in Ivory Coast and Ghana have stopped or cut processing because they cannot afford to buy beans, meaning chocolate prices around the world are likely to soar.

To ease the risk this presents, Unilever’s ice cream business — which sources large amounts of cocoa from Ivory Coast — has also approved the sourcing of cocoa beans from Latin America. Because the produce quality profile is different, the supply chain has worked with R&D and their supplier ecosystem to define standard specifications and production processes to guarantee constant finished quality, despite variation in the mix of sourced beans. It helps the R&D team by conducting product risk assessments to identify specifications that could be impacted by geopolitical tensions.?

Going Beyond Trust Boundaries

It is crucial for CSCOs to clearly define their operational limits beyond trust boundaries, striking a careful balance between corporate values and standards and the practicality of ensuring business continuity and growth. For instance, the recent piracy crisis in the Red Sea has introduced risks to transportation, prompting many organizations to prioritize safety by opting to circumnavigate Africa instead of utilizing the Suez Canal. However, this alternative may be less environmentally sustainable, highlighting the trade-off involved in such decisions.

As geopolitical risk profiles evolve over time, CSCOs should continuously assess their operational limits in light of of those geopolitical risks. This involves evaluating the drivers behind expansion into new geographies or changes in sourcing and manufacturing locations. Market-specific visibility and scenario planning are key to assessing the potential impact of geopolitical risks on the supply chain, informing the need for changes in existing supply lines.

One example of frequently reassessing the situation comes from French alcoholic beverage manufacturer Pernod Ricard. Following the Russian invasion of Ukraine, the company stopped exports to Russia. In April 2023, it attempted to restart exports, but received threats of a boycott. So, just one month later, the business announced plans to stop direct exports to Russia and close its remaining offices in the market, which before the invasion represented 2% to 3% of global sales.

Geopolitical risk is an ongoing reality, and uncertainty is expected to intensify in the coming years. CSCOs with a short-sighted strategy may adopt a wait-and-see approach, reacting to crises as they unfold and mitigating their implications retrospectively. However, this approach poses significant risks as failing to be prepared with elasticity can leave the supply chain vulnerable to losses. For more information on this subject, see Supply Chain Executive Report: Empowering Growth Through Geopolitically Elastic Supply Chains (subscription required). Or you can listen to our podcast on the topic on?Gartner.com, Apple Podcasts and Spotify.

?

More Supply Chain Risk Management Resources:

• Supply Chain Strategic Planning Toolkit: 2024-2025
• Gartner Monthly Supply Chain Alert
• Gartner Tools to Benchmark and Prioritize Supply Chain Risks
• Supply Chain Risk: Key Strategies for Success

This newsletter provides an opportunity for Gartner analysts to test ideas and move research forward. Some comments or opinions expressed hereunder are those of individual analysts and do not always represent the views of Gartner, Inc. or its management.