Will the Next Wave of Global Failures Hit in 2018?

Will the Next Wave of Global Failures Hit in 2018?

The next economic disaster could be triggered by geopolitical – not financial – forces.

The 2008 global financial meltdown sent shockwaves through the world’s economies that are still being felt today. Are we about to witness another global-scale meltdown in 2018, but one triggered by geopolitical, not financial, forces?

Eurasia Group’s 2018 forecast of political risks posits this disturbing scenario, and given the precarious nature of the world’s political health right now, it’s one that we should take seriously.

“In the 20 years since we started Eurasia Group, the global environment has had its ups and downs. But if we had to pick one year for a big unexpected crisis – the geopolitical equivalent of the 2008 financial meltdown – it feels like 2018,” says Eurasia.

Last year the world entered a period of geopolitical recession, according to Eurasia. The election of Donald Trump as President of the United States has “accelerated the descent into a Hobbesian state of international politics.” This has brought the world closer to a geopolitical depression.

Whether or not you agree with this assessment, it is certainly the case that the arrival of President Trump on the world stage has stirred the political pot. Eurasia points to four flashpoints that are a cause for concern: China’s willingness to step into the leadership vacuum, the number of places across the globe where a misstep could cause a major conflict, the deepening of a global tech war, and the impact of a July presidential election and the NAFTA negotiations in Mexico.

Each of these flashpoints could detonate a crisis that ripples through global supply chains. The latter one is the easiest to relate to from a supply chain perspective. The scrapping of NAFTA would halt cross-border trade worth billions of dollars, disrupt the supply chains of multiple industries, and reverberate through the world economy. Relations between the US and Mexico – already soured by inflammatory rhetoric – will become even more acrimonious.

The scale and complexity of these geopolitical risks make it very difficult for companies to assess the likely fallout and prepare for the worst. But there are ways to prepare. Playing what-if scenarios to familiarize the organization with different outcomes is one measure. Planning is important too, even though contingency plans formulated in a desktop environment might be largely ineffective in an actual crisis. The planning process acquaints managers with crisis situations, and builds knowledge that they can use when major disruption hits the company.

Another key area that is worthy of attention is the resilience of the supplier base, which I address in my book The Power of Resilience (MIT Press, September 2015).

In the aftermath of the 2008 financial crisis, many suppliers went belly up when sales declined owing to the bullwhip effect (increasing swings in inventory and orders owing to shifts in customer demand as one moves up the supply chain) and a lack of access to credit. A Business Continuity Institute survey in the summer of 2009 found that 28% of companies had suffered a disruption caused by a financial failure of a supplier in the preceding 12 months. Spending on supplier risk management soared. For example, one automotive supplier went from a sixth-month assessment cycle to a weekly assessment for first-tier and second-tier suppliers.

Companies faced mounting product quality concerns during the downturn, as suppliers’ manufacturing capacity declined, and their workforces were decimated. Fewer people meant more knowledge gaps, more sporadic production runs, and less people to do quality-critical tasks such as maintenance and inspections.

Being aware of these experiences can help us prepare for a future calamity. For example, in today’s uncertain world it is sensible to double-check the integrity of suppliers, and the company’s vulnerability to supplier defaults. Also, review mechanisms for shoring up the finances of high-risk suppliers, such as securing lines of credit for them in stressed markets, or even investing in them.

As Mark Twain is reputed to have said: “History doesn’t repeat itself, but it does rhyme.” A geopolitical meltdown may be a different animal from the 2008 crisis, but we have enough experience from that disaster to help us prepare for what 2018 might have in store for us.

This article was written by Yossi Sheffi, Elisha Gray II Professor of Engineering Systems at MIT, and Director of the MIT Center for Transportation & Logistics.

 

 

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