Globalization Creates New Risks, Demands Supply Chain Risk Management

There's no doubt that globalization has been tremendously beneficial. For many businesses, it has provided improved efficiencies, increased stability and greater success.

However, globalization has its down-sides, too. Perhaps all the international complexity and interdependence will create new vulnerabilities that simply eclipse potential benefits?

Either way, one thing is clear: there is no turning back now. Outsourcing and the internet are just two factors among many that will continue to drive global trade, and businesses today really have no alternative except to learn to manage more complex and interconnected supply chains.

But, what are the risks involved?

A new report from Lloyd's deep dives into the issue and examines in detail how globalization has improved our society, while at the same time leading to increased political, economic, health and cyber risks. In Globalisation and Risks for Business, Lloyds calls on governments and businesses to work together at an international level to predict and prevent the aggregation of these risks in the future.

Specifically, the report urges companies to build their own resilience against systemic risks by:

conducting risk audits, which include contingency and disaster management plans,

stress testing for low-probability catastrophe scenarios,

examining and enhancing industry codes of conduct, and

working with governments to monitor risk aggregation and educate society to ensure the nature of risks is understood.

That's a tall order, to be sure. But, I agree with the Chairman of Lloyd's, Lord Levene, when he encourages companies to embrace globalization as long as they do so armed with strong, comprehensive risk management systems.

"Distance is no longer nature's insurance policy which insulates you from the disasters and tragedies happening halfway around the globe. From pandemics, to supply chain failures, globalization means that businesses are exposed to events which happen far away from their head offices," Lord Levene says. "However, we remain strong advocates of world trade and free markets. We cannot go backwards. We should not be protectionist. Instead we must manage these risks better. Business models, and particularly our risk management systems, must change as the risks change."

TAGS: Finance
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