Stephan Schmitz/theispot.com
The conventional playbook for managing supply chain risk — designed for natural disasters, supplier failures, and short-term market volatility — is falling short in the face of persistent, politically motivated disruptions such as trade wars, sanctions, and armed conflict. As the maneuverings of national leaders threaten supply chains, global companies are struggling to mount effective responses.
At the heart of the challenge are high levels of both complexity and uncertainty. Long-standing U.S. trade policies have been disrupted and become more unpredictable; acts of war or terrorism can upend executives’ assumptions about security risk overnight. The scale and complexity of companies’ supply chains make it challenging to predict the impact of such events across their networks. Against this backdrop, it’s critical that companies make a more systematic effort to understand, monitor, and manage geopolitical risks.
Companies may approach the same risks in different ways. There is no single solution or guaranteed outcome. But the businesses we studied have one practice in common: They have — or strive to have — end-to-end visibility into their supply chains. They prioritize understanding the contributions of and the risks to their suppliers and customers at every level. While they may have an incomplete picture, given the challenges of obtaining information from suppliers outside of the top tier, they do their best to stay well informed, create new options to enable flexibility, and then make the necessary adaptations to their procurement networks as needed. (See “The Three Pillars of Supply Chain Risk Management.”)
We developed a three-part framework to help managers structure their thinking about conditions that are constantly in flux. The framework, which emerged from our study of 13 multinational companies, offers a guide to help them understand geopolitical signals, develop strategies that anticipate and mitigate supply chain risks before they materialize, and respond to events on the ground.
Understand Geopolitical Signals to Inform Decisions
The information that managers need to make choices that strengthen supply chain resilience comes from three foundational practices: scenario planning, real-time geopolitical risk monitoring, and supply chain modeling and optimization.
Scenario planning helps managers navigate uncertainty by envisioning plausible futures and preparing for hard-to-predict but high-impact events.1 The managers we interviewed include competitors’ supply chain vulnerabilities in their scenarios because geopolitical disruptions can create competitive imbalances that better-prepared businesses can exploit.
Supply chain managers at a U.S.-based agricultural equipment manufacturer we studied take an end-to-end view of their company’s global supply chain, which includes factories across the Americas, Europe, and China. They continually create and evaluate scenarios that might disrupt their ability to serve customers in more than 140 countries. The approach enables them to understand the potential effects of a disruption more comprehensively than they could if they were to focus regionally, on a set of suppliers, or on other isolated segments. What might happen if one or more suppliers begin to struggle financially and it results in longer lead times for orders? If a sole-source supplier is acquired, how might that change customers’ access to its intellectual property or how their own intellectual property is protected? If a disruption constrains a competitor’s inventory, will it raise prices?
Real-time geopolitical risk monitoring, whether carried out internally or by third parties, ensures timely awareness of emerging threats. The most effective monitoring extends beyond quantitative indicators of customer demand or supplier lead times to systematically track press reports and other sources of information about political developments that may foreshadow disruptions.
Our research included a European car manufacturer that produces most of its SUVs in the U.S. and monitors potential trade policy changes to inform manufacturing decisions. For example, in the run-up to the 2024 U.S. presidential election, it studied the major parties’ positions on foreign trade. The company begins developing new vehicles three to four years before they are expected to hit the market, and it recognized that future tariffs could affect the costs to produce vehicles under development. That, in turn, would affect pricing, which has implications for sales. Since the 2024 election, U.S. trade policies have become more volatile, threatening product life cycles and supply chain configurations. New and anticipated tariffs on raw materials and components are expected to raise prices and suppress domestic consumer demand. If tariffs are short-lived, as the company currently expects, demand should recover quickly. If not, its product-mix flexibility gives it the option to shift production to unaffected products and locations.
Supply chain modeling and optimization integrates the insights from scenario planning and risk monitoring.2 Multiple companies we studied have begun to use digital twins — virtual models of supply chain operations — to simulate what-if scenarios. The technology can capture dynamic supply chain interactions, helping managers both model a broader range of scenarios and quantify the impact of decisions more accurately across multiple performance metrics, including cost, revenue, and company performance relative to competitors. A U.S.-based printer and laptop manufacturer we studied used digital twins to quantify the costs and benefits of restructuring its supply chain, and the results led it to diversify where it makes its products.
Anticipate Risks and Define Options
The companies we studied apply the findings from their scenario planning, monitoring, and modeling activities to plan for disruptions before they happen. These anticipatory strategies fell into two categories: supply chain process adjustments and supply chain structure design.
Process adjustments include options such as engaging in strategic inventory, directed-buy agreements, or risk-adjusted customer-managed inventory and streamlining processes through enhanced information sharing.3
Strategic inventory refers to purchasing larger quantities of critical components or materials in anticipation of potential disruptions. For instance, a company we studied in the semiconductor equipment industry purchased a five-year supply of a critical material several years ago when a potential war between Russia and Ukraine threatened its availability. Because the major global suppliers of the material were concentrated in both countries, the manager responsible for purchasing acted when he read reports that Russia might invade Ukraine.
Through directed-buy agreements, companies can require suppliers to procure greater quantities of components, while customer-managed inventory gives the buying company the authority to actively manage the supplier’s stock.
A European home appliances manufacturer we studied maintains a regionally focused supply chain that is suitable for bulky products. It can, for example, minimize shipping costs for its finished washers, dryers, and other goods. Lower-tier suppliers are the main source of geopolitical risk to the company because their manufacturing operations are concentrated in one country, making them susceptible to trade disruptions.
To manage this risk, the company is not only developing an end-to-end view for visibility into risk exposure at the lower tiers but also sharing its demand forecasts and risk assessments with its Tier 1 suppliers. Additionally, the company has acquired control of suppliers’ sourcing and stocking decisions, enabling it to manage its inbound inventory.
The company benefits from reduced shortage and holding costs, and it can get better prices for inputs due to its market power. It can also negotiate with suppliers to determine how much inventory-related cost each will bear to reduce their risk.
This approach creates safety buffers that mitigate supply and demand shocks. For companies that manufacture complex, expensive products, like consumer electronics and automobiles, customer-managed inventory helps to keep prices stable for consumers.
Strategies like these help companies weather disruption in the short to medium term because they can continue working with existing partners while adding safeguards. In contrast, supply chain structure design can involve more fundamental changes. Companies may decide to shift to suppliers in lower-risk locations. They may develop strategic sourcing partnerships to share risks and ensure preferential access to supplies during shortages. Or they may choose vertical integration to control the supply of critical components themselves.
Structural transformations can take longer to implement — years to build a new factory compared with days or weeks for inventory adjustments. Some initiatives we studied required board approval due to their complexity and cost.
The printer and laptop manufacturer mentioned previously made changes to address customers’ conflicting preferences for high quality, competitive pricing, constant availability, and short delivery times. The company had centralized production — mainly in China — to take advantage of concentrated manufacturing expertise and competitive labor costs. However, relying solely on factories in China to make products that would be distributed worldwide became riskier due to increasing U.S.-China trade tensions.
To defend against these risks, the company began adding factories in Thailand, Vietnam, Mexico, India, and Brazil, which have a lower geopolitical risk profile than China. Having a diverse array of manufacturing locations creates options for shifting production quickly. Further, the company has invested in the ecosystem that supports the new production locations. For instance, it engages with local suppliers for commodity inputs and works to entice existing suppliers of specialized materials to set up nearby. These steps take time to execute, however: It takes two years to add a new factory, and longer to build an ecosystem.
Such strategies are calculated bets. Competitors are making them too, according to one executive — which raises the stakes. The sources for some critical inputs are still geographically concentrated in high-risk regions. However, developing contingencies for all potential disruptions would be extremely costly. Diversification makes risk management as cost-efficient as possible.
Adapt to Current Conditions
Building the kind of optionality described above requires advance planning: These adaptations can provide meaningful short-term mitigation only if companies have already invested in the tangible assets or business relationships that make them possible.
With those prerequisites in place, managers can exercise options when disruptions occur. The appliance maker can draw down its extra inventory. The technology manufacturer can ramp up production in a less-risky place. The question is when to pull the trigger. In a chaotic environment, wait and see can be a valid approach.
We observed this at a first-tier automotive supplier in Mexico that, at the time, was continuing to monitor U.S. tariff policies but had not yet made changes to its supply chain. The company has few competitors due to the high fixed costs of operating assembly plants and decreasing demand for internal combustion engines. (Many suppliers are shifting production to serve the market for electric vehicles.) And while customers have raised the possibility of this supplier setting up a new factory in the U.S., they have balked at sharing the cost.
However, the company is aware that customers won’t be able to absorb tariff costs forever, and it will start asking suppliers to share them. We have observed that companies in multiple industries, including semiconductors and e-commerce retail, are talking to suppliers about bearing part of the tariff burden.
Build the Capabilities for Geopolitical Risk Management
The framework outlined above gives managers a structure for identifying strategies and actions to better navigate geopolitical disruption. However, none of the companies we studied had adopted every element of the framework, and how they applied the practices varied. Supply chain managers should work closely with their risk management teams to determine which strategies offer the greatest benefit and to chart a practical path forward.
The optimal approach depends on many factors, including the competitive environment in a company’s industry, the extent to which it is directly affected by conditions in a given location, its geographic footprint, its supply chain complexity, its risk tolerance — even leaders’ assumptions about the future. For instance, companies in highly competitive industries typically need to react to a disruption immediately, whereas those with unique offerings or high margins may have more breathing room to wait and see. A company with one supplier and no immediate alternative cannot adopt multiregion sourcing in the short to medium term. It can, however, strengthen its position through new partnerships and inventory management processes. Leaders anticipating a recession might wait to set their response in motion, assuming, for instance, that if the economy contracts in the short term, tariffs will be lifted.
We suggest that as businesses work through these decisions, they prioritize the following practices in order to apply our framework effectively. (See “A Checklist for Managing Geopolitical Supply Chain Risks.”)
Widen the view. When companies assess supply chain risks, they typically focus on individual countries and consider their political stability, economic conditions, or regulatory environments. However, geopolitical risks cross borders.4
Scenario planning must account for how shifts in bilateral or multilateral relationships could affect operations. Managers have to be aware of such risks or threats before they can create options or choose which ones to exercise. Any data that companies can get about each link in their supply chain can help them uncover vulnerabilities that may otherwise be hidden or overlooked.
Additionally, geopolitical risks cannot be addressed unilaterally, because disruptions can cascade through multiple tiers of the supply chain. Managers need to understand and influence suppliers and customers from end to end so that upstream or downstream vulnerabilities do not undermine their risk mitigation efforts.
For instance, a supplier located in a politically stable country may still have its operations disrupted if that country’s trade relationship with a key partner deteriorates. If the company understands the lower-tier risks, its managers can collaborate with the supplier to define options for both companies. They might use their models to test responses for the supplier and then work with it to diversify its sources, or agree on a trigger point for purchasing more inventory.
Get better data, and use it effectively. Companies must move beyond simplistic models of their supply chains and surface-level risk assessments toward systematic data collection and analysis that connects geopolitical indicators with supply chain performance metrics. To make this possible, they need high-quality data and analytical tools, such as digital twins, to quantify the potential impact of different scenarios and make more informed decisions about risk mitigation investments.
When companies feed digital twins transaction-level data about regulatory requirements, end-to-end material and financial flows, and geopolitical constraints over time, they can test thousands of disruption and response scenarios. With more realistic simulations of possible futures than are possible with traditional modeling tools, they can make more accurate bets; this, in turn, can enable them to make better real-time decisions in response to events on the ground.5
As noted earlier, getting data that covers the entire supply chain can be challenging. Managers will have to develop relationships with companies beyond their direct suppliers and agree to share data. However, their organizations can benefit even if the data they collect is not comprehensive. Digital twins will be most effective when managers include not only historical data covering periods of stability and instability across the supply chain but also real-time data — or as much of it as the company can collect.
For example, we developed a digital twin for a consumer electronics manufacturer that incorporates data from its offshore contract manufacturers in Asia, as well as data the manufacturer’s distribution centers collect about its retail customers. The retailers themselves have complex supply chains, including their own distribution centers across the globe, and thousands of stores. The end-to-end data enables the manufacturer to model how disruptions to production affect sales and distribution, and evaluate potential responses.
Invest in government relations. Unlike natural disasters or market fluctuations, geopolitical risks can sometimes be anticipated through careful monitoring of political developments and policy decisions. Companies can benefit from understanding how government officials make decisions and having access to information that isn’t being reported by the news media.
Many global companies hire people with deep expertise in politics or partner with lobbying firms, policy research firms, and other organizations that maintain strong relationships with policy makers. Their political-intelligence gathering can provide early warnings of policy changes that are likely to have significant supply chain implications.
Several companies we studied maintain offices in Washington, D.C., for this purpose. The extent of investment in government relations will naturally depend on a company’s size, industry, and exposure to geopolitical risk, but all corporations should carefully consider how such investments could enhance their resilience.
Maintain financial flows and liquidity. Geopolitical disruptions often trigger financial complications alongside operational challenges. Currency volatility, banking restrictions, payment delays, and tax implications can compound the direct effects of supply chain disruptions.
The interaction between material and financial flows must be included in companies’ scenario modeling and planning. Managers will need strategies for managing finances during a geopolitical crisis as much as for managing their physical supplies.
In many of the companies we studied, supply chain managers collaborated with the finance team to plan for maintaining adequate liquidity, diversify their banking relationships, and prepare for restricted access to a country’s financial systems.
Our framework represents an initial step toward systematic management of geopolitical risks in global supply chains. We derived it from the strategies that supply chain managers at large companies are actively using to identify and mitigate risks from tariffs, sanctions, wars, and other government decisions.
Regular scenario planning and continuous risk monitoring, supported by advanced modeling and supply chain optimization, can help managers weigh the trade-offs among different strategies. Once they have prepared for short-term process adjustments and initiated long-term structural changes, they will be able to react quickly to developments on the ground.
Our framework and recommendations can support managers in developing data-driven strategies that anticipate the future and are realistic to implement. What works today may prove inadequate tomorrow as political relationships shift, new conflicts emerge, and governments develop new tools for economic statecraft. Companies that invest in building adaptive capabilities rather than rigid contingency plans will be better positioned to navigate this uncertainty.