How to Manage Threats to Your Business
Here’s an arresting factoid courtesy of McKinsey & Co.: Because of various global disruptions, every year over the past several years, at least one company in 20 has suffered a supply-chain disruption costing at least $100 million.
Notice what’s missing from that statement? Right: no mention of the COVID-19 pandemic.
As McKinsey reports in a new paper, disruptions — some with staggering costs — have been slamming supply chains with some regularity in recent years. Maybe one or more of these disruptions has ensnared your own organization.
The difference, of course, is that the 2020 coronavirus outbreak has had an unprecedented impact, involving many more than one in 20 companies and throwing the world economy into turmoil. Needless to say, if we somehow managed to put it off before, the virus is a wake-up call that now is the time to assess your organization’s risk profile and take steps to protect it.
“Building flexibility and resilience in operations has gone from one priority among many to business-critical,” the paper said. “In this context, organizations need a new approach to manage supply-chain risk and build resiliency.” They add: “Companies will need a much deeper view of their supply-chain vulnerability and exposure to create effective mitigation and business-continuity plans.”
The authors of “Is Your Supply Chain Risk Blind — or Risk Resilient?” suggest several best practices to help you gain that deeper view and to plan accordingly:
- Find your vulnerabilities and exposures — “A comprehensive understanding of supply-chain risk considers two distinct elements: first, the underlying vulnerabilities in the supply chain that make it fragile, and second, the level of exposure or susceptibility to unforeseen events [or shocks] that exploit these vulnerabilities.”
- Understand your supply chain’s structure — Most organization probably have a good handle on their Tier I suppliers. But ignorance is not bliss when it comes to vendors that are further out on the chain. The solution is to build greater transparency through collaboration and the use of analytics. Who is most at risk? “Supply chains that have higher concentration, interconnectivity, depth (in terms of sub-tier layers) and codependence — or that show low substitutability and transparency — are the most vulnerable,” the authors note.
- Challenge established investment and design decisions — This is not an area where you want to rely on “what’s always worked.” According to McKinsey: “Typically, companies struggle to quantify risks, and fall back on methodologies that generate a discrete point estimate versus a range of outcomes. This approach often results in systematic over-optimism that minimizes the expected value of catastrophic risks because of a perceived low probability.”
- Risk resilience needs a risk culture — If the pandemic has taught us anything, it is that “building resiliency is not only a matter of awareness, but of setting an intent across the organization, clearly communicating to the entire workforce, and taking tangible action to address the immediate and long-term risks.”