The development of tailored operational strategies and risk management frameworks that position entities to maintain business continuity in the event of ad hoc or sustained future supply shocks is a critical task that boards must now tackle head-on.
What was once operational is now strategic – as is the risk of not getting it right.
The impact of the disruption and the required action from boards
We now operate in a world that has the tendency to see things as pre-pandemic versus post-pandemic. Borders are closed and port entries are restricted, resulting in not only the emptying of supermarket shelves and an immediate shortage of personal protective equipment, healthcare products and other end products that were once abundant, but also critical delays in the supply of component products for manufacturers.
The dual-track supply and demand shocks have produced a rapidly fluctuating cycle of price hikes and discounts, with the market – and all of us – struggling to keep up.
To manage and mitigate this dramatic shift, businesses should:
- Undertake a risk assessment and map existing supply chains for potential exposure.
- Conduct greater due diligence on suppliers, taking into account the heightened risk of insolvency for many entities across the globe (with the peak insolvency period likely towards the end of 2020 once existing stimulus measures are wound back).
- Consider alternatives, such as new markets or the renegotiation of contracts to provide a mutually beneficial arrangement for the short to medium term.
A proactive response to the changed environment could be the determining factor between businesses that thrive and those that fail.
Risk assessment – identifying issues to ensure resiliency
Undertaking a risk assessment is essential for businesses to mitigate the challenges now posed by closed borders, protectionist behaviour and a reduction in the efficiency of transportation.
In our recent publication, ‘COVID-19: From black swan to boiling frog’, we outlined the need for boards and senior management to break down every aspect of their business operations to enable stress testing and business continuity plans for every kind of disruption to which they could be exposed – and critically, this should not be limited to the current pandemic context. Indeed, the supply shocks that could result for so many entities from a rapidly changing climate have the potential to be far more extensive and enduring than any pandemic.
Businesses should consider the risks posed to their supply chains beyond first tier suppliers. One tool to assist in this process is to undertake a mapping exercise of suppliers using existing procurement procedures. This enables businesses to assess the key areas of exposure – whether sourcing, manufacturing, labour or transportation. An assessment of that kind should allow for risks to be quantified and priced, which will assist in warding off the potential impact of recession.
One example of supply chain risk has been the exposure of developed economies to the manufacturing of personal protective equipment for healthcare professionals. It has necessitated they be defined as ‘essential’ and where possible manufactured locally. Safeguarding the health of those on the front lines is a priority that exists irrespective of cost.
Due diligence – good business decisions are reliant on data
Businesses should also conduct due diligence on the various parties in their supply chains and this should extend beyond core environmental, social and governance risks.
Especially important in the context of the current economic downturn sparked by the pandemic is a consideration of the solvency of suppliers, their short and medium term trading prospects and their underlying capacity to fulfil orders. Questions should target key suppliers’ available inventory and their production and order fulfilment status. This will provide insight on the ability to perform contractual obligations.
An example of due diligence that can be undertaken is the impact of transportation and petrol prices. On 20 April 2020, the global petroleum industry witnessed a historic plummeting of benchmark US oil below $0 a barrel, while Brent crude oil has fallen nearly 70 per cent from the beginning of the year. The drop in oil prices raises questions about the future of the global and regional energy industry as well as the role of fossil fuels in the transition towards a more sustainable energy future following the pandemic.
Managing that transition, and the impact of broader climate-related demand and supply shocks, will also need to be prioritised by all businesses – no matter what sector they operate in – on a regular and sustained basis going forward, pandemic or no pandemic.
Consider alternatives – redefining the future of business
There is an immediate need for businesses to find solutions to the disruptions posed by COVID-19. Parties throughout the supply chain should consider alternatives to reduce costs and ensure sustainable supply. This will become increasingly important following the end of economic stimulus measures.
Businesses should consider renegotiating contracts with customers and suppliers in good faith. There may also be an opportunity for businesses to diversify or explore new markets. Particular attention should be given to parties situated in or dependent on manufacturing in regions most affected by the pandemic.
With greater reliance on working from home arrangements, expected to continue for the foreseeable future across multiple industries, businesses need to pay particular attention to component shortages impacting IT and cybersecurity and how to support an increasingly virtual workforce while also controlling the risk of cyber attacks.
And now over to you
Businesses that have thrived in challenging circumstances, be it natural disaster or financial downturn, are the businesses that continually redefine how they operate. It raises the critical question: what are you doing to enable your business to not only survive but thrive?