How Geopolitical Risk Impacts Supply Chain Planning and Pallet Selection

• Supply chains are being redesigned to address increased geopolitical risk
• Reconfigured global supply chains have implications for pallet selection and management

In February 2021, President Biden met with a bipartisan group of lawmakers in the Oval Office prior to signing an executive order. That order called for a review of supply chains for critical goods and materials such as semiconductors, rare earth minerals, large-capacity batteries and pharmaceutical ingredients.

“We shouldn’t have to rely on a foreign country, especially one that doesn’t share our interests or our values, in order to protect and provide for our people during a national emergency,” Biden remarked. He held up a semiconductor chip for dramatic effect. A well publicized chip shortage had already thrown a monkey wrench into U.S. automobile production.

Supply chain disruptions have become increasingly common. In 2021, supply chains were rocked by hurricanes, the Suez Canal blockage, Texas winter storms, jammed ports, forest fires, Pandemic-driven labor issues and more.  Supply chains have scrambled to respond in the short term and plan for reducing risk over the longer term.

Another aspect of uncertainty that supply chain planners also must weigh is that of geopolitical risk. In our last installment, we discussed the issue of Debt Trap Diplomacy in general, and the China Belt & Road Initiative (CBRI), in particular. In this follow-up, we look at debt trap diplomacy through the broader lens of geopolitical risk with an eye as to how such risk is managed through supply chain design and pallet selection.

What is geopolitical supply chain risk?

Geopolitical supply chain risk encompasses a broad range of conflicts and events resulting from political decisions. And as consultant Jacob Shapiro and others have emphasized, geopolitical unrest can also result from climate and food uncertainty. Climate and geopolitical risk can be intertwined.

According to a white paper from riskmethods and Spend Matters, the most obvious and high-profile geopolitical risks are wars and revolutions, “but even the less dramatic can cause serious consequences for businesses, with major effects for customers.” For example, it notes the shift toward protectionism has impacts on tariffs and other barriers to trade, forcing supply chains to configure. One recent example of this would be the trend of Canadian-based forest products companies responding to U.S. softwood tariffs by purchasing mills in the U.S. Southeast.

What are the impacts of supply chain disruption?

From empty shelves to shortages of new vehicles to skyrocketing material prices, the impacts of supply chain disruption have become increasingly obvious since the start of the COVID-19 pandemic. Here are some of the more obvious impacts:

• Interrupted supply
• Price volatility
• Loss of sales in the short term
• Danger of product substitution in the longer term
• Loss of investor and customer confidence

How are supply chains reducing risk?

Increased emphasis on planning, flexibility and monitoring. By definition, the onset of a crisis dictates a highly pressurized situation with little time to respond. By mapping supply chains and identifying potential vulnerabilities and alternatives, operators will be better positioned to pivot in the face of an unexpected disruption. Additionally, frequent monitoring of geopolitical risk can also help improve lead time.

Diversifying supply and increasing pipeline inventory. One obvious tact to reduce reliance on suppliers from a high risk country is to diversify. In a McKinsey survey of supply-chain leaders undertaken in 2021, 55% of interviewees indicated having implemented dual sourcing programs. Another common tact to help ensure supply is to increase inventory along the pipeline. This practice was instituted by 42% of respondents.

Nearshoring of supplier base and production. As global supply chains become increasingly fragile, one response is to shorten supply chains and bring them closer to home. McKinsey reported that 11% of respondents had undertaken initiatives to nearshore production, while 15% had made moves to nearshore suppliers. Similarly, a recent study by Gartner found “found that 33% had moved sourcing and manufacturing activities out of China or plan to do so in the next two to three years.”

According to Mauricio Claver-Carone, president of the Inter-American Development Bank, Latin America could increase its exports to $72 billion annually if it was successful in capturing just 15% of U.S. exports from its top-10 source destinations outside the Western Hemisphere.

Supply chain risk mitigation and implications for pallets

Pallet selection and management decisions are best made in alignment with overarching supply chain goals and should not be taken for granted. For example, a diversification strategy may result in the need for new pallet suppliers in different companies. Pallet risks such as specification or ISPM 15 non-compliance can be mitigated through the use of a 3rd party quality assurance service provider or a quality assured pallet program.

Likewise, moves to increase inventory will come with a corresponding need to purchase more pallets at the point of palletization, whether at the production facility or at an import warehouse. This comes at a time when pallet prices have already weathered record highs. Given longer inventory turn times, there may be implications for new pallets with a modified GMA spec that can be reused or resold as a core at an attractive rate. Both options lower the cost of the useful asset life.

As for nearshoring, such moves might result in more goods being palletized at the point of production rather than at the import warehouse, so there might be a shift in pallet consumption further upstream in the supply chain, which must be addressed.

There are other potential considerations as well. The use of IoT-enabled pallets can help improve visibility and pinpoint bottle necks. Nestable presswood pallets or plastic pallets, for example, can help improve empty pallet freight and storage efficiencies. Likewise, low profile corrugated pallets, such as those pioneered by IKEA, can help improve container cube utilization at a time when freight costs remain dizzying.

In the final analysis, each supply chain is unique, and requires a detailed analysis to ensure the best application for these trying times. As you reconfigure your supply chain to reduce risk, why not reach out to First Alliance Logistics Management to explore options towards optimizing your pallet system. We blend logistics with pallet management and the wisdom of our supply partners.