Different crisis, same messages
Of course it is terrible to see how the COVID-19 crisis is spreading. First and foremost sympathy goes out to the patients or victims affected by the disease. In the media there are unlimited discussions about the disease, the origin or the fatality rates and comparisons with other diseases (like the influenza virus). All the blogs, articles, interviews, reports, etcetera demonstrate how many different opinions there can be amongst those who are knowledgeable and those who don’t have an expert clue. And voilà, public press panic is created with almost pandemic proportions.
The last weeks the media attention sky-rocketed with regard to the effect on the economy of the disrupted Supply Chains. This is where my attention was raised. Reading interviews and articles with quotes from MIT professor Yossi Sheffi (HBR article Feb 28, 2020) and professor Jan Fransoo (Financieel Dagblad March 6, 2020) I started digging into my memory. In 2008/2009 I deep-dived into Supply Chain risk management. I read a lot about it, developed a Supply Chain risk game and wrote some blogs/articles. Re-reading these old blogs I felt sad and a bit angry. The conclusions from these blogs and recommendations are as valid now as they were more than 10 years ago. It is all about supply chain resilience and being pro-active.
Therefore I also fully agree with the conclusions from Jan Fransoo that we will see effects from the created instability in the supply chains for months to come.
What’s the difference with 2008/2009?
There are parallels with the crisis from 2008/2009 after the fall from Lehman brothers.
If we consider a supply chain, we can identify different flows; a physical flow of products, a flow of money and a flow of information. In Supply Chain risk management theory a distinction is made between supply risks, process risks, demand risks, control risks and environmental risks.
If we look from a bird’s eye perspective, the 2008/2009 crisis was caused by a disruption in the flow of money. Actual shortage or fear for shortage of (external) availability of money resulted in “shocks”. Companies stopped producing or reduced inventories in order to free-up internal working capital. As a result stable supply chains suddenly became unstable with all kind of consequences.
In the current situation there is no lack of money, maybe even on the contrary. The starting point now is lack of resources in the physical supply chain. Starting from no or late arrival of raw materials from China it extends to shortage in people resources (employees not able or allowed to come to offices and/or factories) or transportation resources (e.g. imbalance of containers). This all creates supply and process risks. In addition we observe demand risks, for example due to stockpiling (interesting discussion with professor Richard Wilding on BBC television about selfishness of stockpiling). Resulting effect again, stable supply chains becoming unstable.
A different reason but similar consequences.
The good news is that hopefully the reason now is less persistent than the banking crisis in 2008/2009. At the moment however the uncertainty is still there and we have to wait and see what happens the next months.
Why didn’t we learn?
Let’s start with the observation that there are huge differences between companies. The risks depend on your markets and products, e.g. are you acting locally or globally? Another hot topic for a media hype; is this the end of globalization?
The question is why we didn’t learn from the crisis in 2008/2009? There are exceptions of course, some companies did learn. Companies that were pro-active and are frontrunners in managing their unstable supply chains and have been mitigating the risks. Other companies are still expecting that they won’t be affected or even deny that they will be impacted. Wake-up please…
In general however I believe Supply Chain risk management didn’t get the attention it deserved. Thinking about mister Covey, Supply Chain risk management is a topic that is an excellent example of something that is important but not urgent. Until it suddenly becomes urgent and then we realize we are too late.
The second reason is that it is not as “sexy” as disruption, digital, new markets, etcetera so less attention at C-level. In addition it is a topic that is quite difficult to grasp. In a technical approach we can identify the risks, break them down into probabilities and impacts and design control measures. The more difficult ones are however “the black swans”; unexpected events you didn’t see coming. Is COVID-19 a “black swan”? Is the next virus the next “black swan” or will it be an information melt-down due to cyber-security issues?
Different reasons therefore why risk management does not appear often enough on the C-level agenda.
The answer to “black swans” is supply chain resilience. A conceptual term which needs understanding, attention and work to organize it. Let me give a real life example from our daily practice where we help and see a lot of examples of companies implementing and executing S&OP/IBP. Interesting discussions always when we challenge how risks and opportunities are addressed in the executive meetings. Normally opportunities get priority, but the discussions on risks are skipped or delayed till the next meeting….
What’s Next? A C-level responsibility.
So where do we go from here?
First of all, all attention and resources are needed now on executional and operational level to solve the short term issues and implications.
But don’t make the mistake to stop there. The next crisis or “black swan” is around the corner… Therefore a couple of advices. First of all, C-level needs to take ownership on risk management. Whether this is making it a standard agenda topic in the board meetings, assigning a Supply Chain risk project team, providing training on Supply Chain risk management, executing a risk assessment or giving accountability to one of the board members. It will vary from company to company what you choose but drive it and lead from the top….
Secondly, use processes already in place to incorporate risk management as an integrated topic. As an example which I mentioned earlier, S&OP/IBP processes are in place in a lot of companies. These processes can be excellent vehicles to embed risk management. It safeguards risk management as a process that needs to be implemented and maintained. Let’s avoid going back to the important/not urgent approach after this crisis.
In my opinion it’s the responsibility of C-level to elevate Supply Chain risk management to a pro-active mindset topic.