CFO Chapter 4: Geopolitical Relations and Supply Chains
If tea, bananas, and coconuts were suddenly removed from the face of the Earth, it would be very strange. However, for those involved with the trading of these commodities, it could spell disaster. Whilst most goods cannot be magically erased in their entirety, in the complex world we live in of geopolitical relations and growing scarcity of non-renewable resources, there are ways for it to seem like they are.
Assets and access to them are therefore crucial for businesses no matter which industry they operate in. After all, if Apple could not acquire any lithium, they couldn’t make any more iPhones. Sales of their flagship product would be devastated, and their ability to attract talent from across the world would plummet.
Despite on the surface a CFO’s role being to evaluate financial numbers and plan for the future, they must therefore always be conscious of the sources which enable their companies to continue to make money. Without taking care of this, there wouldn’t be any numbers for them to evaluate!
In this CFO Chapter, we will therefore explore how financial leaders can expand their skillset into the realms of diplomacy, research and logistics in order to keep the tap turned on when it comes to their core assets.
Being in the know
Sticking your head in the ground has never been a good idea when there is a crisis. However, it is arguably even more important not to when things are plain sailing. During these periods, there is an opportunity to take a detailed assessment of what is going on in the world.
From business to business, what their “world” constitutes of will always be slightly different. For instance, the likes of Cadbury’s will be wanting to know the latest on cocoa bean production, whereas for Aston Martin this is unlikely to be of interest – unless they start making hot chocolate fueled cars.
However, there are some general items which at least one person in every business should be aware of. Usually that person is the CFO, and these are the examples they should be abreast of:
- Politics – an entire nation’s direction is determined by those who govern it. From taxes to subsidies, and international relations to workers’ rights, they are all decided within the walls of a parliamentary building.
Given the wide range of political views, how these decisions pan out in one country compared to another can be extremely polarizing. This makes keeping up to date with every political decision nearly impossible but dedicating time to those related to the economy and international relations are definitely a good idea.
Recent examples like Brexit and the war in Ukraine go to show just how much of an impact politics can have on business. Overall, financial leaders who remain up-to-date with global politics are able to gauge which countries have a political agenda which complements their operations and whether in the future there could be the risk of this changing.
- Cultures – globalization has been an extraordinary revolution which in turn led to booming consumerism. However, nowadays there is a resurgence of protecting traditional cultures along with individualism.
This isn’t to say that people are suddenly completely shunning well known brands but there is a growing wish for cultures to be respected. Consequently, companies are being scrutinized in ways which they never were before. Ironically, this has come around due to more choice being available.
For example, Coca Cola’s “share a Coke” campaign is remembered by many as a brilliant success. However, in Israel it proved highly controversial due to the Coke bottles containing no Arabic names. This hugely expensive campaign therefore ended up isolating roughly 20% of Israel’s population. The ramifications of this decision isn’t precisely known but goes to show just how costly a lack of research regarding a country’s demographic and culture can be.
- Inflation – price is nearly always a defining factor in a purchase. This is especially true when a commodity must be bought in bulk via a contract for a set amount of time. With financial leaders holding the purse strings of a business, this is something they are always very aware of.
As such, they must therefore also be mindful of any fluctuation to price. This means that inflation should be monitored closely in countries where businesses trade. Such intent is to not only protect their buying power but also to assess the spending power of their customers. Without such research, the finances of a company could quickly take a nasty hit considering how quickly inflation can take hold.
- Technological advancements – the last couple of centuries have produced rapid levels of innovation. The structure of DNA has been discovered, the internet was born and AI is growing more advanced by the minute. Whilst these are now all things we take for granted across the globe, breakthrough moments were usually stumbled upon in one place.
A commitment to invest in technology and scientific research can therefore shape a region of the world, including the businesses which operate there. Silicon Valley is an example of precisely this – an area which seems to breathe innovation. As a result, CFOs concerned with the long-term development of their business should be mindful of where they are situating their operations in terms of technological interest. Not only could this give them a competitive edge, it could also help them lead the way in new fields.
Having all the knowledge in the world on the markets and relationships in play which are important to your business is one thing but being able to apply it beneficially is another. Before we even look at ways for CFOs to apply their knowledge productively, lets first assess some of the ways they can sharpen their expertise:
- Crisis planning – nobody likes to be in a crisis but what they fear more is not being prepared for one when it comes along. Simulating various scenarios which could feasibly occur – no matter how drastic they might seem – is one of the best ways to be ready for the worse.
It should be noted that not all crisis planning is equal. Despite crises often happening due to unpredictable circumstances, the best crisis plans are ironically meticulously developed over weeks and months. Moreover, the culmination of such a plan is only truly beneficial if it is enacted, not filed away in a dusty draw. After all, the purpose of crisis planning is to be able to operate smoothly when such an issue truly arises. Role-playing crises before they occur might sound triggering but in reality are extremely beneficial – creating business-like muscle memory across your entire organization.
- Engaging with consultants on the ground –staying up to date on various issues across the globe is no easy feat considering the rate at which new developments occur. A contemporary example of this is the geopolitical tension between the US and China which could cause numerous scenarios which are detrimental to a financial services provider in the Asia-Pacific region. However, by working with EY’s Geostrategic Business Group for help, they were able to identify certain signals they should be wary of and which thresholds would indicate that they should take specific actions to protect their business.
That’s why working with consultants who specialize in certain fields and geographies is extremely useful. Employing their services means acquiring unrivalled expertise whilst safeguarding time to focus on primary financial activities. Overall, this results in a better standard of intel being collected, supporting firms in becoming prepared, resilient and adaptable for a range of risks.
Action speaks louder than words
The world is a volatile place, so much so that any individual can appreciate this. However, when having the responsibility for the finances of an entire company which consists of numerous employees and no doubt trades with international partners, the level of unpredictability which has to be contended with only becomes larger.
Nevertheless, as the protectors of business’ money, CFOs must be able to act appropriately no matter what happen. Preparing for the unknown is particularly difficult but below are some of the best actions they can take:
- Diversify – diversity is nothing but a strength. This is true within teams, within investment portfolios and when choosing suppliers. Considering diversity for all three of these examples are in fact significant to financial leaders; however, for the purposes of this CFO Chapter, we will focus on the latter – suppliers.
It is all well and good sourcing a business requirement from one origin if it is of the required quality at a suitable price; however, being completely reliant is a risky move. This is because supply chains can be disrupted for various reasons such as freak weather accidents, war halting trade routes, or even administration. A recent example of this, and one which is unfortunately only likely to get worse in years to come, relates to climate change and the Panama Canal. Currently, it is a popular trade route thanks to it shortening the 8,000 mile journey around Cape Horn to just 48 miles; however, already the weight of ships which pass through are having to be reduced due to lower water levels. If this continues to get worse, firms will either have to deal with additional costs, longer production times, or find new suppliers.
- Intelligent software investment – for any CFO to steer their finance operations through potential challenges, they need to be prepared and agile. In our modern world, this means that software is a must. Without it, data couldn’t be collected, seamless collaboration couldn’t take place, and there simply wouldn’t be enough time in the day.
For CFOs seeking to keep on top of the predicaments which geopolitical relations and supply chain alterations can cause, there are two main pieces of software to invest in. The first is automated reconciliation software. Although this might not sound related to these issues, how intrinsic it is to everything which a finance team does is undeniable.
By deploying automated reconciliation software like Aurum, financial leaders can be assured that the data they are working with is fully audit-ready, consists of no errors and is at their disposal for analysis in record speeds. Results like these not only impact the reconciliation function of a finance team but everything they do. Moreover, the best reconciliation software is intelligent. This means that it is able to adapt in new circumstances. Without this, when manually reconciling, new systems, connections, currencies, data sets etc. can take a while to get to grips with. Fortunately, software like Aurum has a vast bank of APIs, accounts for fees, multi-currencies and more so that even if new suppliers suddenly have to be adopted, reconciliation and the vital metrics it provides can continue smoothly.
Another form of software to deploy which will show a CFO’s intent to cope with any difficult scenarios is that of supply chain planning software. What this software specializes in isn’t hard to guess but how it works is extremely complex. Mercifully, the best examples transform difficult logistical problems into easy to analyze formats. With everything from demand planning to supply-side response planning being simulated from within, financial leaders can gain the insights they require to make educated decision in a variety of circumstances.
- Political risk insurance – being prepared is a form of taking out insurance. However, literally taking it out is a proactive measure which guarantees a greater degree of security. Unfortunately no insurance is able to cover all eventualities but a popular one for businesses who wish to feel safer is that of political risk insurance.
With this cover in place, CFOs’ decisions to expand into new geographies becomes slightly simpler. Whilst risk and reward will always have to be weighed up, potentially volatile countries which offer big opportunities become far more viable to enter.
A world of constant change
Unfortunately, the best preparation, the best will and the best intent in the world don’t always deliver the right result. With a whole host of responsibilities already upon them, CFOs should therefore not be disheartened if things largely out of their control do not unfold in the way which they wish.
Nevertheless, being proactively engaged with geopolitical relations and factors which can impact supply chains should still be encouraged. Doing so is by no means easy but with automated software to save time on repetitive tasks like reconciliation, and heeding the advice in this latest CFO Chapter commitment to building a resilient business becomes possible.
In the next installation of the CFO Chapters, we will be looking at Strategic Learning – something every CFO is increasingly engaging with as they assume the unofficial role of Chief Strategy Officer alongside their main responsibilities. You can find out more about this chapter plus the others which will feature in 2023 by clicking here.