Geopolitical risk 'demands CEO supply chain proactivity'

Businesses leaders must be proactive if they are to maintain strong supply chains in the face of the shifting geopolitical landscape, says McKinsey.

Global Director of Geopolitical Risk Ziad Haider says shifting geopolitical risk means business leaders must move out of reactive mode on supply chain “if they are to develop the resilience they need to thrive amid a fragmenting global order”.

“We’re transitioning from a more or less unipolar world to a much more multipolar world,” Haider told McKinsey Global Editorial Director Lucia Rahilly in a podcast.

He added: “From an economic point of view, the US is still in a core position but there’s also the EU and China, so it’s much more of a tripolar world. 

“The global governance put in place after World War II is just not working,” he says, citing Russia’s invasion of Ukraine, but also pointing out that the Indo-Pacific is also in a state of flux, with escalating US-Sino strategic competition. 

“Today Ukraine, tomorrow East Asia?” Haider asks. “Will the instability we’re seeing in Europe also occur in Asia, which is the engine of global growth?”

Much of the discussion of geopolitical risk has focused on supply chain resilience. On this, Haider advises organisations to “disaggregate the risks of maintaining a supply chain in a geopolitically challenging market”.

Spreading risk is key in world of geopolitical risk 

Strategies to disaggregate supply chain include measures such as spreading the manufacture of goods across different regions, through a combination of nearshorting and friendshoring, while retaining 

core segments of the supply chain on home territory, or moving them back home (reshoring).

“Many companies are doing this,” says Haider, but goes on to warn that “a lot more care and diligence is needed to make sure there isn’t forced labour involved in that supply chain”.

He continues: “There’s a dimension of supply chain that is moving to less geopolitically challenging countries, or what some would call ‘friend-shoring’, be this India, Indonesia or Vietnam. 

“There are regulatory and other challenges and opportunities there as well. The risk, in addition to people and supply chains, is reputational. How do you maintain a global footprint but be ready to answer the question about why you are in a problematic market?” 

Haider warns that the bar for explaining where you are and why you’re there “has gone up from external stakeholders, be this media, or parliament or internally, from colleagues”. 

He says: “This is something companies are having to balance. What you say in one market very quickly shows up in the other market, so you can’t get away with shading your messaging too much.”

Asked how CEOs must respond to this changing world, Haider said “board and leadership focus needs to be much more granular”. 

He added: “Every month the board needs to look at the top five markets of geopolitical concern and create a clear gameplan about what will be done to manage those risks, and that starts with having a common set of facts.

“Even within an organisation there are different points of view. You must think about how the board will be educated around these topics. Is there a common fact pattern? How are you monitoring risks in an operational way, not just in an academic way?”