Confronting risk

From the October 2020 print edition

The COVID-19 pandemic has driven digital transformations across many organizations, forever changing the traditional business model and how organizations work. Moreover, this global pandemic has elevated our dependence on our supply chains and the importance of robust vendor governance strategy as part of every business’s continuity and disaster recovery plan.

Business Man on a Wire. Risk Management Concept

The pandemic revealed how unprepared the supply chain was for a major global business disruption. Many businesses already had business continuity and disaster recovery plans to cope with a full range of potential emergencies from both natural and human causes. However, the majority of them did not have the scope wide enough to cover the global economic shutdown brought about by COVID-19; even fewer had plans that integrated with the business continuity and disaster recovery plans of their most strategic high-risk vendors. As a result, 94 per cent of Fortune 1000 companies have seen supply chain disruptions, in addition to the challenges around business operations and employee health and welfare. And while some areas, like retail, will take a lot longer to recover, it is important for all industries to reassess their resiliency and put adequate measures in place to mitigate the risks that we have encountered as a result of COVID-19.

Disaster prepping
Business continuity and disaster recovery plans must include business continuity plans of strategic high-risk vendors. Such plans (for both organizations and their vendors) must evolve from the typical types of disaster scenarios, to now include disruptions that we have encountered in 2020 thus far, along with ones that might arise as commerce and essential services continue under the shadow of the pandemic.

Focusing on the vendors and supply chains, the best starting point would be a review of contracts, ensuring that they all include adequate business continuity plans, as well as the steps for the plan’s execution clearly outlined in a RACI chart (responsible, accountable, consulted, informed). For the vendors that already satisfy the above mentioned point, it is crucial to confirm if they are already operating under business continuity plans. If not, do they anticipate invoking such a plan? In either case, what is the availability of resources and personnel required to continue to perform and maintain the supply of goods and services?

These types of conversations, along with any augmentation of their plans, are a lot easier to tackle with a robust vendor governance strategy, where the business and the vendors are having regular monthly/quarterly business reviews as a platform to work on any business operations challenges, as well as the potential resurgence of challenges associated with the current pandemic.

Focus on strategy
Conduct an end-to-end supply chain risk assessment and devise a robust strategy. Vendor rationalization has always been the most cost-effective, operationally efficient long-term strategy. Nevertheless, COVID-19 has taught us a valuable lesson on the risk of having all your eggs in one basket. Those organizations that over-rationalized their vendor base have found themselves in a bigger predicament than those who focused on vendor diversity.

A strategy would be to categorize your vendors into local and international. While international vendors are usually a lot larger and thus have better economies of scale, as a business it is crucial to assess whether the cost of supply is overshadowed by the lengthy lead times, transportation logistics, border-crossing disruptions and the overall demand put on the international vendors that might force them to prioritize their customer needs based on different factors. Establishing a tier-two vendor base – a base of local, smaller providers limited in their geographic coverage – can be a saving strategy during a crisis, even if the cost of the goods or services they provide is not on par with the tier-one vendors.
A great example of this that we have all experienced, is the procuring of PPE from April to June of this year. Those businesses that had the tier-two vendors in their rosters able to supply PPE did not struggle with procurement challenges, transportation logistics, quality issues and the massive price gouging that the rest of us went through.

Go back to basics, such as demand versus supply, assessing the cost of holding inventory on hand versus the risk of inventory scarcity in the future. In most cases, supply chains have been designed on the principle of lean-machine (minimal inventory on hand, drop ship options, just-in-time deliveries and so on). In the example of PPE – where for the long foreseeable future there will be a need for it regardless of the industry – there is a case to be made for holding some of that low-cost, low-maintenance inventory on hand as a back-up plan to the tier-two vendor back-up plan.

However, regardless of tier-one or tier-two vendors, a robust vendor governance strategy is critical for a sustainable supply chain. As part of the vendor governance strategy, it is important to implement reporting tools and frequently monitor risks and mitigating factors, as well as any impacts that it might have on both the vendor business operation and your organization. Partnering with your vendors and collaboratively and proactively (not reactively) addressing any business operations challenges, including business continuity plans, is the only way to remain one step ahead of any potential disruptions.

Get tech savvy
Stay on and evolve the digital transformation journey that was amplified by COVID-19.

It is obvious by now that the pre-pandemic way of doing things is behind us, so embrace digital transformation, technology and the Internet of Things (IoT). By doing so, massive and pervasive disruption caused by this global pandemic will have minimal chance of being repeated in the future.

Start by focusing on process automation, completely cutting out the no- or low-value work, and reinvesting those resources into different technologies and IoT networks, such as enterprise resource planning (ERP) and material resource planning (MRP) systems, that will shift business faster and more efficiently across the entire supply chain. Embracing the digital transformation and investing in supply chain is key to keeping the supply chain stable amid future business disruptions. COVID-19 is a wake-up call for the entire supply chain ecosystem, shouting loud and clear that better technology is needed in this effort.

As the saying goes, ‘never waste a good crisis.’ Now is the time to review and assess all the lessons learnt of the past six months, revamp the supply chain and vendor governance strategy and integrate it into your organization’s business continuity and disaster recovery plans. It is time that we all plan for the best, but truly be prepared for the worst, going forward.

Sanja Cancar-Todorovic is director—strategic relationships, global real estate asset management, at Manulife.