When I first moved to California in 1990, I was told by Stanford’s campus housing people to keep an earthquake emergency box on hand at all times. Its contents included a radio, flashlights, warm clothes, medical supplies and a few other items. Later in Boston, I stuck with the idea, but added stuff suited to hurricanes, blizzards and extreme cold. After 9/11 the kit got still bigger – food, water, fuel, camping supplies, even weapons. It became known as the Anarchy Closet.Happily I’ve never needed it, but this year… who knows.
The past week saw both Theresa May’s much anticipated Brexit speech and the final preparations for Donald Trump’s inauguration as President of the United States. Meanwhile in Davos, world leaders gather to jockey for position at the front of a pack of nations itching to take the lead in world affairs going forward.
Will tariffs suddenly rise? Which currencies will surge and which will plunge? Will the European Union survive? These kinds of questions are increasingly topical for supply chain executives trying to prepare for 2017. Risk factors are interacting and multiplying as geopolitical and regulatory uncertainties accompany fresh fractures in the institutional foundations of our global economy. In the words of Jens Nordvig, the Danish economist and currency specialist: “It is a complex world with messy answers to questions that seemed simple fairly recently… in this world, significant macro shocks will be more prevalent.”
Data from our Future of Supply Chain survey, collected after Brexit but before the US election, points to a high level of worry about risks arising not so much from traditional business factors like supplier failures or capacity shortfalls, but from political externalities. Legal and regulatory issues including taxes, trade policy and environmental laws is third most worrying of all supply chain risks, just behind shipping disruptions, which also escalate with tensions between trading nations.
Perhaps most telling is the marked tendency for concern to rise with seniority. Board-level accountability means answering questions about the materiality of exchange rate impacts, punitive tariffs, port delays or even stranded production assets.
The takeaway for supply chain leaders is that preparedness in 2017 might mean building your own version of the Anarchy Closet.
- Fatten your inventory – job number one is assurance of supply. It will cost money, and with interest rates rising inventory is going to be scrutinized increasingly carefully. However, keeping product flowing is the highest priority no matter what happens.Inflation may finally be on the horizon, which could make passing along costs easier, plus shortages arising from trade skirmishes could help dampen customer impatience. The key here is to analyze revenue exposure arising from sudden supply hiccups and put precise prices on buffer inventory at all levels – raw material, WIP and finished goods.
- Local for local – as the old saying goes, “all politics is local”. This is much more obvious today than it was 12 months ago, and supply chain executives would be wise to think about what it means. Five years ago, we saw the first major movements away from low-cost country sourcing. That should continue. Mary Barra of General Motors talked about this recently, noting that they try to make cars in the markets where they’re sold. Automation is making this easier and product platforming techniques limit cross-border part dependencies, but it’s no longer a matter exclusively, or even mainly, of costs. As a kicker, the marketing benefit of ‘locally made’ products continues to gain momentum.
- Information is power – my home Anarchy Closet includes an old-fashioned walkie-talkie set. The idea is to maintain communication even if phone and internet fail. Political risk can spiral out of control, at which point who says your control tower will still work? Redundant communications systems are yet another added cost, but their value in a time of confusion could be immeasurable.
Don’t Miss the Upside
Uncertainty rules, but let’s not forget that the US stock market is way up since November. Economist Joseph Schumpeter’s concept of ‘creative destruction’ says that progress happens messily.
This is no time for supply chain to retreat in fear.