Risk Management - Blog 3/5: Operational Risk

Let's start by reminding again of the five key risk categories that companies must consider when designing a framework to manage risk for business across borders.

Operational risks in global operations can be silent killers. They lurk in everyday processes—supply chains, manufacturing lines, IT systems, and even the simplest human error. Left unchecked, they can stop production, erode margins, and tarnish reputations. In international business, these risks are magnified by distance, complexity, and local conditions. Understanding and planning for them isn’t just prudent; it’s essential.

What Is Operational Risk? Operational risk refers to the chance that a company’s processes, systems, people, or infrastructure failure will derail business objectives. It spans supply-chain breakdowns, quality-control lapses, logistical bottlenecks, technology failures, and workforce issues

Real-World Shockwaves

Pandemic and the Great Chip Shortage

When COVID-19 lockdowns shuttered factories and stalled transport, lean, just-in-time supply chains were exposed. By 2021, a global semiconductor crunch cost automakers an estimated US$210 billion in lost revenue, as factories paused and inventories ran dry. Toyota’s rival supply-chain woes underscored the risk, but Toyota itself suffered far less disruption. After the 2011 Japan earthquake, it mapped multiple supplier tiers and built an early-warning system to flag at-risk components. In September 2021, while competitors slashed output up to 40 percent, Toyota leveraged its buffer stock and supplier visibility to maintain production targets.

Infrastructure Interruptions

A single accident in March 2021—the grounding of the Ever Given in the Suez Canal—halted one of the world’s busiest trade arteries for six days, delaying oil, consumer goods, and parts across the globe. Cyber-attacks can be just as crippling: the 2017 NotPetya malware outbreak spread through corporate networks, bringing Maersk’s global shipping operations to a standstill and costing the company up to US $300 million in lost revenue.

Regional Nuances

United States

Operational infrastructure in the U.S. is generally advanced, but companies may face other operational challenges. One is scale and complexity – serving a large, diverse market across 50 states can strain logistics (e.g., setting up distribution centers to ensure 2-day delivery nationwide is non-trivial). Weather-related disruptions can be significant: hurricanes regularly impact the Gulf and East coasts (forcing supply chain re-routes), while winter storms can disrupt power and transport. Another operational risk in the U.S. is labor issues: shortages of skilled labor in certain regions, or disruptions like strikes (for example, port worker strikes on the West Coast affecting imports, or trucker shortages impacting inland logistics). Companies also find that high compliance standards (safety, environmental regulations) require strong operational controls to avoid shutdowns or fines. On the plus side, the U.S. offers robust third-party logistics and suppliers, which companies can leverage to distribute risk (e.g., using multiple logistics providers, multiple warehouse locations).

China

China is often called “the factory of the world,” and operationally, it offers excellent manufacturing infrastructure and supplier networks in many industries. However, this concentration itself is a risk, as companies realized when China faced COVID-19 lockdowns. A local disruption can ripple globally if a company sources heavily from China. China’s infrastructure is generally modern, but regional differences exist (coastal areas have world-class ports and roads; interior regions less so). Another operational consideration is compliance with local standards and government mandates – Chinese authorities may impose sudden rules that can halt operations. Companies need local staff who can manage these issues and maintain good standing. Moreover, intellectual property in operations is an operational/security risk in China; mitigating this might involve carefully vetting partners and segmenting critical production steps. On the positive side, firms can capitalize on China’s efficient domestic logistics. Still, they should have backup plans for export routes. Many firms are now pursuing a “China + 1” operational strategy – keeping significant production in China while developing parallel capacity in another country – to ensure continuity if either location has problems.

Latin America

Infrastructure gaps—underdeveloped roads, slow ports, and complex customs—inflate costs and delay shipments. The World Economic Forum ranks no Latin American nation in the top 25 percent for transport infrastructure quality. Organized-crime threats compound the risk: Brazil reports over 22,000 cargo robberies annually, forcing carriers to invest heavily in security escorts and satellite tracking. Transportation strikes add volatility: Rosario grain ports halted exports in April 2024 amid protests against labor reforms, and Buenos Aires commuter trains crawled to a halt in May 2024 over wage disputes.

At-a-Glance Comparison

Region	Key Operational Risks	Recent Example	Mitigation
United States	Scale/complexity, weather, labor tensions	Texas grid failure (Feb 2021); East Coast port strike threat (Sept 2024)	Multiple logistics partners; backup power sources
China	Production concentration, sudden regulatory changes, COVID lockdowns	Shanghai lockdown output drop Apr 2022; Big Tech market cap wipe in July 2023	“China + 1” supplier diversification
Latin America	Infrastructure gaps, crime-related theft, labor strikes	Cargo bandits block trucks (2018); Rosario grain port strikes (Apr 2024)	Invest in security tech; alternate routing

Building Operational Resilience

Effective resilience demands foresight and agility:

• Supplier Diversification & Buffers

  Spread critical inputs across multiple suppliers and regions—embracing a “China + 1” mindset to avoid single-source risk.

• Enhanced Visibility & Control Towers

  Deploy digital “control towers” with IoT tracking and AI risk alerts to monitor real-time inventories and shipments. Companies like Kraft Heinz use these platforms to automate distribution and detect anomalies before they escalate.

• Local Capacity & Infrastructure Investments

  Where power or utilities are unreliable, install backup generators or on-site water treatment. Regular crisis drills and clear response protocols fortify teams against natural disasters or infrastructure outages.

• Adaptive Product & Process Design

  Modular designs allow component substitution when standard parts are unavailable. Maintaining some idle capacity at alternate sites ensures production can pivot when a facility is disrupted.

• Global Quality Controls & Audits

  Establish consistent standards and audit suppliers frequently. Two-way communication channels help partners flag emerging issues early.

• Insurance & Financial Buffers

  Carry business-interruption insurance and maintain contingency funds or credit lines to absorb the financial shock of sudden disruptions.

Conclusion

Operational risk is inevitable, but catastrophic outcomes aren’t. Companies can absorb shocks and bounce back swiftly by mapping critical processes, investing in visibility, and building flexible, diversified networks. As extreme weather events continue to rank as the top supply-chain threat in 2024, agility and preparedness will distinguish leaders from laggards.

Are you interested in developing a risk management framework suitable for your company? Look at our scalable approach. For a small company, we suggest starting with a basic framework that can be further developed as needed.

References

• 2020–2023 Global Chip Shortage

• Toyota Supply-Chain Risk Planning

• Ever Given Suez Canal Blockage

• NotPetya Cyberattack

• Texas Power Grid Failures

• US Port Strike Looms

• Shanghai COVID Lockdown Impact

• China Big Tech Crackdown

• “China + 1” Strategy

• Latin America Infrastructure Challenges

• Cargo Bandits in Brazil

• Argentine Grain Port Strikes

• Buenos Aires Train Protests

• Supply Chain Control Towers

• Top Supply-Chain Risk: Extreme Weather