BCG: Should Geopolitics Change Your Procurement Strategy?
In today's volatile global landscape, geopolitical factors are significantly reshaping procurement strategies for businesses.
Traditional priorities of cost-efficiency and speed in supply chains are increasingly being overshadowed by a necessity to navigate geopolitical risks and build resilience.
Armed conflicts, trade wars, sanctions and unexpected geopolitical events have created a complex environment where CEOs must skilfully balance cost reduction with enhanced market access and supply chain robustness.
The move towards regional sourcing footprints is one strategy companies are deploying to address these multifaceted challenges. Rather than relying solely on global suppliers, organisations are re-evaluating their sourcing strategies to enhance resilience and reduce vulnerabilities.
This is particularly crucial as recent geopolitical tensions – such as the Ukraine war and attacks in the Red Sea – have led to substantial supply chain disruptions, prompting companies to rethink their procurement strategies.
BCG, a leading global management consulting firm, explores this in its latest report. It confronts the "tricky balancing act" and asks,"how to reduce procurement costs at a time of high inflation, while at the same time improving access to key markets and ensuring that their supply chains are resilient in the face of geopolitical risk?"
Anticipating disruption
BCG's report highlights that geopolitical events can have far-reaching implications for strategic sourcing. Fluctuating currencies, inflationary pressures and regulatory changes can all disrupt supply chains and alter the supplier landscape.
To mitigate these risks, businesses are advised to diversify their supplier base, cultivate strong relationships with suppliers and implement comprehensive risk management strategies.
Staying informed about geopolitical developments and leveraging technology can also enhance a company’s ability to anticipate rather than merely react to disruptions.
Ongoing tensions between the US and China, combined with a rise in nationalistic industrial policies, have fundamentally altered the dynamics of global sourcing.
Tariff hikes and trade restrictions have compelled importers to seek alternative sources, shifting the focus from a singular dominant manufacturing hub, once considered to be China, to a more diversified landscape. Countries such as India, Vietnam, Mexico, Poland and Thailand are emerging as viable alternatives, leading to what is often termed a "China plus many" approach to sourcing.
Building geopolitical expertise
In navigating these complexities, BCG asserts that it is essential for companies to develop geopolitical capabilities and expertise.
“We need to reposition our businesses more deliberately given a very polarising political environment," comments Mitchell Harris, former CEO of BNY Mellon Investment Management.
"We must be more nimble, recognise the shifting client sentiment in terms of pricing, cybersecurity and regulatory transparency, as well as consumer and corporate activism.“
Training sourcing professionals in areas such as geopolitical analysis, data interpretation, risk management and strategic sourcing is imperative. By enhancing cross-functional collaboration for risk management, organisations can improve their capacity to anticipate geopolitical shifts and adjust their procurement strategies accordingly.
Additionally, companies should implement a three-step approach to managing geopolitical risks effectively:
- Monitor global developments: Keeping a close eye on geopolitical events allows companies to stay ahead of potential disruptions.
- Create a geopolitical risk heat map: This tool helps visualise risks and prioritise sourcing decisions based on current geopolitical landscapes.
- Develop risk mitigation strategies: Establishing contingency plans ensures that companies can respond swiftly to unexpected events.
By integrating these practices into their procurement strategies, businesses can better position themselves in an unpredictable environment.
A holistic approach
The current global supply chain is undergoing a significant reorganisation driven by the need for resilience, as evidenced by the challenges posed by the COVID-19 pandemic and rising geopolitical tensions.
This shift is compelling businesses to make necessary changes, even as the cost of reorganisation plays a critical role in decision-making processes. The focus has gradually moved toward fortification and resilience rather than mere regionalisation.
In conclusion, the landscape of global sourcing has evolved beyond the simplistic metrics of cost, quality and delivery time. It now encompasses the vital need to build resilient supply chains capable of withstanding dynamic changes in the global environment.
A holistic, strategic approach to procurement is not just an operational improvement; it represents a pathway to greater value, sustainability, resilience and competitive advantage in a market marked by uncertainty.
Businesses that can effectively navigate these geopolitical complexities will find themselves well-positioned to seize opportunities and mitigate risks, thus ensuring continuity and success in an increasingly interconnected world.
Geopolitical risk management is not merely a procurement challenge; it is an organisational imperative that requires immediate attention and action. By proactively addressing these factors, companies can enhance their supply chain resilience and safeguard their operations against future disruptions.
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