3 keys to shockproof your global supply chain

Practical actions that managers can take to reduce their supply chain’s exposure to geopolitical shocks.

By Mike Rosenberg

In January 2024, in an attempt to protect a critical sea route through the Suez Canal, the United States and its allies were drawn into a military conflict with the Houthi militia in Yemen. Interventions ranged from shooting down drones, to controversial air and missile strikes in Yemen itself.

While concerns are high that such exchanges could lead to a wider war, the impact on global supply chains is already being felt.

The current conflict began on November 19, 2023, when Houthi soldiers hijacked the Galaxy Leader, a 189m car carrier transiting empty from Turkey to India. Since that episode, the Houthi faction has fired rockets and drones against dozens of ships in the Red Sea.

The attacks are a stated response to the Israel-Hamas war, with the Houthis asserting they target ships linked to Israel, though they have since targeted many ships with no ties to Israel (nationality in shipping is, in any case, seldom transparent) which are simply trying to pass through to the Suez Canal.

The Canal cuts a week to 10 days off shipping journeys between Europe and Asia, and 12% of global trade passes through it. We all remember when the container ship, the Ever Given, became stuck in the Suez Canal in March 2021 and disrupted global trade for several days.

Now, as major shipping companies and oil giant BP have elected to avoid the Red Sea altogether and take the longer journey around Africa, disruptions to supply chains and knock-on effects of transport prices look set to have serious repercussions for the world economy.

Our global system is fragile and vulnerable to geopolitical forces in areas many businesspeople know little about. I recommend that business leaders consider the resilience of their global supply chains and rethink the focus on cost that has dominated the thinking of the international business community for the past 20 years.

Below is an article I originally published in 2017. It contains tips, still relevant, on shockproofing your global supply chain, increasing preparedness, and charting a better course in 2024 and beyond.

Imagine a military standoff or even war breaks out in one of the world’s busiest shipping lanes: would your business be able to cope with the knock-on effects on your supply chain?

This is a question that more companies should be asking themselves, especially with two of the world’s most strategically important shipping routes already on high alert.

The Strait of Hormuz — the only sea passage from the Persian Gulf to the open ocean — and the South China Sea are two regions at the epicenter of escalating tensions.

The Iran agreement brokered under former U.S. President Barack Obama was scrapped under Donald Trump. If Iran should cut off the strait through which 20% of the world’s oil passes, global energy supplies would be seriously disrupted, even assuming it could be reopened in a few days or weeks.

Similar disruptions could occur in the South China Sea, where Brunei, China, Indonesia, Malaysia, the Philippines, Taiwan and Vietnam all make competing territorial claims.

As such, managers ought to be keeping a very close eye on geopolitical events. Just because the issues may be in far-flung locations doesn’t mean they should be far from mind.

This is particularly true in a world where many manufacturers and retailers have embraced a lean approach to inventory management, minimizing stocks and the associated carrying costs. While lean supply chain management may make financial sense, helping to boost the firm’s efficiency and reduce waste, it leaves companies with a much slimmer margin for error. If there is an accident, miscalculation or armed conflict affecting these global supply chains, many companies could find themselves with serious interruptions, resulting in stock-outs or plant shutdowns.

Preparing for geopolitical uncertainty is something that I teach at IESE Business School and that I published a book on, called Strategy and Geopolitics: Understanding Global Complexity in a Turbulent World.

For too long, executives have accelerated business expansion abroad, using simple frameworks that are inadequate for increasingly complex realities. As the world shifts to a less stable geopolitical structure, these executives may find themselves ill-equipped to handle the geopolitical issues that can determine their success or failure in different markets. When critical events do happen — such as terrorist attacks or civil unrest — companies are often taken by surprise. Indeed, I was surprised to find myself caught up in the kind of situation that I normally only ever write about. It is sobering to live through such events firsthand.

In order not to be taken off guard, it is crucial to anticipate and prepare for change. Those who do are more likely to prevail over the long term.

This article explains the corporate drift that may be putting your operations at risk. Then, I suggest some practical actions that you can take to reduce your exposure to geopolitical shocks.

The full article is published in IESE Insight magazine (Issue 35, Q4 2017).

This content is exclusively for personal use. If you wish to use any of this material for academic or teaching purposes, please go to IESE Publishing where you can purchase a special PDF version of “3 keys to shockproof your global supply chain” (ART-3095-E), as well as the full magazine in which it appears, in English or in Spanish.