As the global business landscape grows more complex and politically fraught, companies are struggling to balance cost reduction, supply chain resilience, and access to key markets.
This brief is based on the article How Geopolitics Changes the Procurement Equation.
Companies have spent the better part of three decades building procurement networks that prioritize speed, quality, and cost efficiencies. But shifting geopolitical dynamics are changing the supply chain calculus for CEOs. The wars, trade restrictions, regulatory shifts, and other disruptions of recent years have laid bare the fragility of global procurement networks that pivot on the uninterrupted flow of goods, services, and capital. Companies caught unprepared by supply shocks have had to pay more for materials and shipping—and sometimes halt production—damaging both the bottom line and their reputations.
The increasingly complex business landscape that leaders must navigate does not lend itself to narrowly focused traditional sourcing strategies. Today’s procurement network must also be built to withstand geopolitical shocks.
From Best Cost to Best Value
A more resilient procurement network starts with opening the aperture for choosing sourcing locations from a best-cost lens to a best-value one. While speed, quality, and cost remain core drivers of this approach, they are considered more holistically and are accompanied by three additional drivers: sustainability, risk, and supplier innovation.
The best-value approach not only takes stock of the world as it is today but considers how its shifting dynamics could change the operating landscape. For example, at first glance, a supplier that offers the lowest-priced input may appear the most attractive. But if the country or region in which it operates is at risk of domestic unrest, armed conflict, tariff actions, or climate disasters, it may not be as appealing.
The weight assigned to each of the six value drivers varies from one company to another. And the lowest-cost supplier may indeed remain the most attractive option in some cases. What businesses gain, though, is the ability to anticipate risks that might otherwise catch them unprepared and even turn geopolitical disruptions—such as government incentives for promoting certain industries—into a strategic advantage.
Managing and Mitigating Geopolitical Risks
Companies that handle geopolitical risks effectively don’t merely react to events as they happen. They build robust systems to map and proactively monitor current and future risks and initiate action when needed. This includes establishing a clear, up-to-date picture of a supply network’s global footprint, developing scenarios for assessing that network’s geopolitical risk exposure, and creating a list of signals that trigger decisive actions when they surface.
This capability should not be outsourced. Rather, it needs to live inside an organization and be staffed by professionals with expertise in geopolitical analysis, data interpretation, risk management, and strategic sourcing.
In addition to building this “geopolitical muscle,” companies can ease risks through the following strategies:
- Extend the supply base across several countries to ensure ongoing access to critical parts or materials should a single supplier experience a disruption.
- Develop stronger ties with suppliers so they can provide early warnings of political or policy shifts that can impede business activity, help brainstorm solutions, and even offer priority access should shortages develop.
- Optimize design specifications to lessen the impact of potential disruptions on critical parts.
- Vertically integrate to control more of the supply chain and reduce reliance on external sources vulnerable to geopolitical upheaval.
The world order that underpinned traditional procurement strategies of the past 30 years is giving way to a more complex, fragmented global landscape. CEOs who adopt a best-value approach to procurement, complemented by geopolitical mitigation strategies and muscle, are far more likely to see events work in their companies’ best interests rather than against them.
As the global business landscape grows more complex and politically fraught, companies are struggling to balance cost reduction, supply chain resilience, and access to key markets.
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