Mitigating Risk in a Time of Trade Headwinds

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U.S. trade
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Risk factors are everywhere, especially in this era of escalating trade tensions among the world’s strongest economies.

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On top of the common risk factors businesses face — like weather events, supplier inefficiencies and freight costs — it’s critical to be smarter than ever about insulating supply chains from risk, whether from one-off events or longer-term developments.

Bill DeMartino, general manager of riskmethods North America, recently stopped by MetalMiner’s Forecasting Workshop to lay out the many risk factors impacting supply chains today, in addition to tools businesses can use to mitigate those risks.

riskmethods serves brands around the world, leveraging artificial intelligence to mitigate supply chain risk. The company offers several tools for businesses to assess the risk landscape, including the riskmethods Risk Radar™, which provides real-time insights into a firm’s supply chain network, and the riskmethods Impact Analyzer™, which generates impact scores so firms can assess how risk events might affect their supply chain network.

The appetite and will to change how companies orchestrate their supply chains is extant, particularly in response to the imposition of tariffs over the last year and a half.

“Based on survey data, we’re seeing a lot of these companies are reengineering their supply chains because of the tariff situation,” MetalMiner Executive Editor Lisa Reisman said.

When it comes to the metals sector, specifically, DeMartino pointed out a number of factors businesses should consider when working on their supply chains, calling out the acronym VUCA, which stands for “volatility, uncertainty, complexity and ambiguity.”

The tariff situation, for example, which kicked off approximately 18 months ago with the Trump administration’s Section 232 tariffs on imported steel and aluminum, fits under the category of ambiguity.

“This is the world that we’re operating in today,” DeMartino said. “This is the world that you have to deal with, this is the world that suppliers have to deal with.”

DeMartino said businesses need to improve at proactively managing risk rather than responding reactively. That approach includes monitoring supplier sites on a regular basis in order to better assess supplier quality and be able to adjust the supply chain network, if necessary.

So what are the challenges — risks — businesses are facing?

In a survey of the workshop’s attendees — metals procurement professionals — DeMartino noted many listed the same things: weather events (including natural disasters), financial health and geopolitical issues. When it comes to onboarding new suppliers, businesses typically assess price and service levels, but there are many other factors to consider, some of which might be early warning signs.

DeMartino said that last year riskmethods sent out approximately 22,000 threat alerts related to the approximately 250,000 active sites the firm covers in its database, noting that many of the alerts covered aligned with the concerns brought forth by the workshop attendees in their survey responses.

“We are seeing cyber attacks, civil unrest and all kinds of things that are critical,” he added.

Notably in the metals sector, in March, Norwegian aluminum producer Norsk Hydro fell victim to a cyber attack that impacted operations across all segments, particularly extruded solutions. When the company announced its Q1 2019 financial results in June, the impact of the cyber attack amounted to between NOK 300 million and 350 million (or approximately between U.S. $34 million and $39 million).

For onboarding itself, companies should of course consider price and financial health, but also consider a much wider range of risk factors, including: the nature of the business, where they operate, the geopolitical environment, the history of disputes in the supplier’s location, availability of labor, and currency issues, among other factors.

Another key factor is identifying early warning signs of emerging threats  — for example, with respect to financial health, if a supplier experiences a patent infringement or product recall, while later-stage warnings include plant closures or the departure of a company’s CFO — so the company is in a position to act before the credit rating is updated.

As for locations, China is of course a popular offshore sourcing location for U.S. companies. However, given the ongoing escalation in trade tensions between the two countries, U.S. businesses would be wise to at least consider alternative sourcing locations if possible.

Earlier this month, President Donald Trump announced the U.S. would impose a 10% tariff on an additional $300 billion in Chinese goods, effective Sept. 1, thus subjecting nearly all imports from China to tariffs. (Last week, however, the United States Trade Representative announced the U.S. would delay tariffs on some articles in the tariff list, including cellphones, laptop computers, video game consoles, certain toys, computer monitors, and certain items of footwear and clothing.)

With the climate of trade uncertainty in mind, DeMartino said businesses should treat countries the same way they treat individual suppliers. However, for companies considering moving parts of their supply chain out of China to other countries — India, for example — it’s important to remember that while those other countries may not be subject to the same tariff-related risk, they could present other forms of risk worth considering.

As businesses make these types of decisions, supply chain mapping is a valuable tool that offers a “visual representation” of the company’s supply chain base, DeMartino explained.

One obvious but important example, he noted, relates to physical events, like storms. When a particularly powerful weather event occurs, a meticulously mapped supply chain can allow for easy visualization of the problem area and whether or not the event will have a significant impact on the company’s supply chain base.

In addition, if a company moves from a single-source situation to dual-sourcing, but both sources are located in the same geographic risk area, the company will likely face the same issues it would if it were single-sourcing. As such, supply chain mapping allows businesses to visualize the risk landscape in a more comprehensive fashion.

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“Once you are able to create this visualization, it allows you to gain a lot of unique insights and values that you would not have otherwise,” DeMartino said.

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