COVID-19: How the pandemic should shine a spotlight on risk management strategies

Alejandro Alvarez, Partner: Operations Performance at Ayming, believes risk management strategies should be the top priority now, and in the future...

Tell us about your experience in supply chain and procurement? 

I’ve been in the procurement and supply chain space for the last 15 years, both in industry working fast moving consumer goods (FMCG) and over the last 10 years, more on the consultancy side of things. I’ve been working for different different types of clients across many industries and that allows me to have a view as to the importance of supply chain risk assessments in the context of what’s going on today, around the world.

Looking at the evolution of procurement, how would you say the conversation surrounding risk management has changed? 

I think it certainly hasn’t been prioritised for some types of businesses. However, I do believe that there’s quite a long way to go if you look at the procurement function becoming more strategic and having a seat around the senior management table. One of the challenges that we will have spoken about with professionals is the need  to prioritise the short term benefit or savings on top of more value adding activities. For example, making sure that there is a clear risk assessment carried out periodically to make sure that in the case of a world event the companies are prepared now.  To what extent the conversation has changed will also be slightly different when it comes to small or large businesses. A smaller medium sized business will typically be focused a lot on the day to day delivery and making sure that their clients are satisfied that the goods and services that they provide are indeed meeting the needs of their customers and not necessarily thinking actively around potential risk. Whereas for large businesses you will typically have a more mature risk management approach to procurement. 

I do believe that when it comes to priorities, with a few exceptions in very special industries a risk assessment is not necessarily the top of the list. So, from my point of view, one of the key lessons we can take from what’s going on now is that a thorough approach towards managing risk can be much more valuable than a short term priority to deliver quantitative effects.

What were some of the initial impacts that COVID-19 had on the global supply chain?

I think we’re already starting to see the real impact now. You might recall I think the whole outbreak started before or during the Chinese holiday season, right? So many manufacturing businesses would have already planned for reduced workers or reduced workforce and so on. At the same time, the lead times from China to the rest of the world are affected. I think it is very hard to say to what extent the different supply chains around the world will be disrupted. But what is clear is that the risk management topic is currently one or two in terms of priorities around boardrooms. I think they say that there’s nothing positive about what is going on. What’s interesting from my point of view is learning from what is going on so that businesses can try to propel on forward.

How important is it at a board level to stay in tune with what’s going on and not to fall victim to panic?

Panicking doesn’t help anybody. It also serves no purpose. I think what this will highlight is the need to have transparency across the supply chain. I think that is a key word because for many businesses, we have a clear view around who they are getting the main raw materials and services from and who are their key tier one, suppliers. The challenge that many businesses have is a disability from the tier one to the tier two vendors. But those vendors that may be procuring and or requiring goods and services from, in this case, China. That is where the main risk could be found. 

So what can procurement professionals do? Well, again, when it comes to risk, there’s one very old strategy that has been there for a while, which is called dual sourcing, right. I think what we’ve seen and carried over the last few weeks with all of our clients is that they ask; can you please do a quick brief assessment on our supply chain? That’s the first question. Second, do we have alternative sources of supply? I think that strategy will be something that will be prioritised going forward, if not, in the short term more in the medium and long term.

How important will supplier relationships be in this? 

I think it highlights the importance of having a good supplier relationship management activity. If you think about it, it is in the main interest of your suppliers. It doesn’t matter who you are, your suppliers want to make sure that you are delivering according to contract and if then you start to establish that is not the case, they risk losing their business. So I think it highlights the need to work closer in particular with key tier one suppliers to aim to make sure that transparency exists across the supply chain. Risk management strategies have been together for a number of reasons, but one that comes to mind is your tier one supplier, we know the market more often than not, they know the market potentially better than us as a buyer. They are the ones that can potentially suggest risk mitigation strategies that can result in a win win for both. 

COVID-19 has well and truly caught many global organisations by surprise, but just how much can an organisation possibly plan for this? How could one expect the unexpected as best as possible? 

No one has no one has a crystal ball, but I think organisations can plan for different types of risks or they can plan for potential situations that could arise. Having alternative sources of supply can be a strategy that you put in place due to economic reasons. However, in the event of an emergency, where a key supplier in specific markets may have some difficulties, then that same risk management strategy that was put in place for a known risk also helps you mitigate some of the unknowns that may arise as well.

I would say it’s about being as thorough as possible in the risk management strategy, but also realistic that you know there will be a time where the organisation will just have to be quick and react in order to meet potential risks that were not forecastable. 

What advice would you give to try and handle this situation and any supply chain risk as best as possible?

One is get transparency across your supply chain. Have a relatively good understanding of the supply chain of your key materials, you know raw materials, components, whatever that you’re buying. Understand the market and then get close to your suppliers and talk to your suppliers. In particular, the larger ones, they will be keen to work with you to develop strategies together. 

Is it possible to look for successes and stories of good in amongst all of this?

Organisations at this moment in time have prioritised risk mitigation activities and they have worked internally with their operations supply chain procurement departments to put in place certain studies that will help them overcome the current situation.

What is important going forward is not to put this in a drawer in six months and forget about it. It’s important to remember that unfortunate situations happen and therefore, periodically reviewing these strategies pays for itself many many times over as opposed to not having a thorough approach towards managing risk and then suddenly being in a position where you cannot fulfil the needs of your customers.

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