The intensifying Middle East conflict: Impacts on global supply chains

A: If the conflict escalates further, the financial markets could experience heightened volatility, leading to challenges in capital availability for businesses operating in high-risk sectors. This may deter investments in infrastructure, especially in areas such as logistics and energy, where long-term stability is crucial for return on investment. Furthermore, rising insurance premiums on goods transiting through conflict zones and the potential for cybersecurity risks from state actors could pose additional challenges that have not yet been fully realised.

Another key area that may be affected is sustainability. As companies shift their focus toward managing immediate geopolitical risks, they may deprioritise sustainability initiatives, such as reducing carbon emissions or transitioning to renewable energy sources. This could create tensions between sustainability and supply chain stability whereby companies are forced to rely more heavily on carbon-intensive fuels to navigate supply chain disruptions in the short term.

A: In the short term, CPOs and Supply Chain Directors will likely continue prioritising immediate risk mitigation measures to safeguard supply continuity (supply chain security), particularly in sectors directly affected by the conflict, such as energy, aerospace, and IT hardware. Sectors reliant on semiconductors, like the Information and Communication Technology industry, could face significant challenges if facilities in Israel face disruptions, forcing a pivot toward diversification in sourcing strategies.

In the longer term, CPOs are likely to shift their strategies toward building more resilient, agile supply chains by increasing regional diversity in their supplier base, investing in more predictive risk assessment tools, and considering nearshoring opportunities to mitigate the ongoing geopolitical risks in the Middle East. The aerospace, energy, and consumer goods industries will need to re-evaluate their exposure to raw materials from the region and adapt to longer-term price volatility.

A: Supply chain segmentation by criticality is the first that comes to mind – this means categorising and managing different components or suppliers based on their importance to your overall operations. By identifying the most critical components, you can ensure these high-risk components receive focused attention and highly tailored strategies to secure supply.

Another approach is strategic stockpiling, which allows companies to safeguard their operations against unexpected shortages or delays by having pre-allocated reserves of essential resources. Strategic stockpiling usually includes the following steps:

1. The identification of at-risk components, typically items with long lead times, with limited suppliers, or sourced from high-risk regions.
2. Inventory level management: Using predictive analytics to calculate the optimal amount of stock to hold and where to hold it based on usage rates, supplier reliability, and expected lead times. The goal is to balance having enough to cover emergencies while minimising the impact on cash flow.
3. Diversification of stock locations: Spreading reserves across different regions or warehouses to prevent a single point of failure.
4. Continuous monitoring: Ensuring stockpiles remain relevant and preventing stock shortages due to demand surges during crises.

Other risk management actions to consider include increased contracting flexibility (giving businesses the ability to adapt their contracts with suppliers to accommodate unpredictable changes) and dynamic shipping re-routing (adjusting shipping routes in real-time based on emerging risks or disruptions to ensure the continuous flow of goods). Contracting flexibility may involve:

• Alternative sourcing clauses (provisions that allow companies to source from alternative suppliers if the primary supplier is unable to deliver due to geopolitical events)
• Force majeure clauses (helping parties avoid legal penalties if they are unable to meet contractual obligations due to external disruptions)
• Multi-supplier agreements (contracts with multiple suppliers for the same product or service, which enable you to switch between suppliers)
• Shorter contract terms (allowing businesses to pivot to alternative suppliers quickly if needed)
• Volume flexibility (contracts that allow for adjustments in the volume of orders based on changing demand or supply conditions)

Key aspects of dynamic shipping re-routing include real-time data monitoring (e.g. using GPS tracking, satellite data and predictive analytics) to adjust shipping routes immediately and multi-modal transport options that integrate options such as sea, air, and rail.

In addition, it is crucial to collaborate closely with logistics partners, suppliers, and internal stakeholders. By sharing resources and information, organisations can improve their responsiveness to unexpected events and strengthen their supply chains’ resilience.