We are witnessing unprecedented complexities in supply chains influenced by politically motivated policies and legislation, and the impact on organizations will be both direct and indirect. It is imperative for procurement and supply chain management to accept and plan for new forms of risk in global supply chains for both public and private sectors.
5 Dynamic Factors of TPRM
Regarding geo-economic risks, third-party risk management (TPRM) would benefit from the unification of terms so risk management frameworks can be better aligned with current events. The post pandemic economy will likely be the new normal for the foreseeable future. Today’s recommended approach to TPRM can be broken down into 5 dynamic factors:
1. Trade & Export Controls - Controlling or blocking foreign investment in critical infrastructure or technologies and delisting companies such as the United States’ actions against Chinese companies.
2. Investment Screening Mechanisms - Regulating the export of technologies that have multiple use potential.
3. Data Localization Measures – Incentives and legislation aimed at redesigning and reshoring supply chain activity such as the recent US legislation that has done this through Executive Order 14005: Ensuring the Future Is Made in All of America by All of America's Workers.
4. Sanctions – Discourage universities and research centers from hosting students from other countries to prevent the dissemination of knowledge considered strategic.
5. Subsidies – Investments in disruptive technologies and targeted research and development.
Questions to Ask
Much of this activity has been driven by concern about the level of hyper-connectivity through complex global supply chains and increased threats from cyber security. For procurement and supply chain management (P&SCM), establishing a more agile set of questions is needed such as the following:
Do you have exclusive or shared IPR with a specific list of countries?
Do you license the use and/or production of multipurpose technologies to a specific list of countries?
Are you reliant on state investment for specific aspects of R&D?
Are obligations disclosed when any of the 5 dynamic factors listed above are triggered?
Are notifications being distributed immediately upon infringements of IPR or technology use or duplication by specific countries?
Where is data hosted and what cloud platforms are being used?
Are there any “extra-territorial” sanctions such as USA organizations whereby citizens would be prohibited from dealing with a French bank giving a loan to an Iranian company, even if the loan were legal under French law?
Can provide evidence and validate the levels of traceability and transparency in key suppliers?
Changes will continue as we can see from China seeking to create a parallel financial infrastructure to counter the US controlled SWIFT system and European system INSTEX, with the China International Payment System (CIPS) using the Yuan as a currency standard. Global technical standards are currently being challenged to make them less Western centric to level the trading opportunities. Taking the complexity out of complex global supply chains will not be quick and easy, so effective TPRM is here for the foreseeable future.
Sources for further reading:
Henrique Choer Moraes and Mikael Wigell, ‘The Emergence of Strategic Capitalism: Geoeconomics, Corporate Statecraft and the Repurposing of the Global Economy’, FIIA Working Paper 117 (2020), https://www.fiia.fi/en/publication/the-emergence-of-strategic-capitalism
For a discussion, see Christian O. Fjäder, ‘Interdependence as Dependence: Economic Security in the Age of Global Interconnectedness’, in Mikael Wigell, Sören Scholvin and Mika Aaltola (eds.), Geo-economics and Power Politics in the 21st Century: The Revival of Economic Statecraft (London: Routledge, 2018).
Mikael Wigell, Harri Mikkola and Tapio Juntunen, ‘Best Practices in the Whole-of-Society Approach in Countering Hybrid Treats’, INGE European Parliament Study (Brussels: European Union, 2021), https://www.europarl.europa.eu/RegData/etudes/STUD/2021/653632/EXPO_STU(2021)653632_EN.pdf
Juan C. Zarate, Treasury’s War: The Unleashing of a New Era of Financial Warfare (Philadelphia: Public Affairs, 2015), p. xi.
Geofrey Gertz and Miles R. Evers, ‘Geoeconomic competition: Will state capitalism win?’, The Washington Quarterly 43, 2 (2020), p. 117.
Made in China 2025 strategy and plan: https://www.csis.org/analysis/made-china-2025
Scanmarket Briefing notes – Ukraine-Russin conflict x 2