When Business is Booming, Risk Management is Often Overlooked

   When business is doing well, companies often overlook risk management—a mistake that can backfire when situations turn dire, as we’ve seen during the COVID-19 pandemic.

Even though the lean supply chains many companies have adopted are highly efficient, they remain vulnerable. This fragility became evident when organizations faced disruptions caused by the pandemic.

It is crucial to learn lessons to ensure companies can mitigate the risks of future disruptions, including investing in enhanced risk-mitigation capabilities. Procurement teams should consider the following approaches.

The Problem Escalates

   In mid-February, the virus was largely perceived as a problem limited to China—or at worst, Asia. Today, however, it has spread widely across Europe and the United States, making its impact on global supply chains increasingly clear.

Disruptions in freight transport, mostly originating in China, have affected Europe and North America as the virus spreads. It is projected that throughput at the Port of Los Angeles, the largest U.S. port, could drop by roughly one-quarter.

COVID-19 has shifted from a localized health issue to a global business disruption.

Unprecedented Severe Events

   The virus’s mortality rate of roughly 2% is relatively low. A study of patients in China in February found that among people under 50, the mortality rate was only 0.4%.

However, the alarming reality is that around 17% of patients experience severe symptoms requiring intensive medical care.

With a high infection rate and unknown characteristics, the rapid international spread of COVID-19 has strained healthcare systems and alarmed populations worldwide.

Beyond global healthcare, the outbreak has also disrupted supply chains worldwide.

For example, U.S.-based agricultural equipment manufacturer Deere & Co. incurred an additional $40 million in transportation costs as maritime shipping disruptions forced the company to rely on more expensive air freight.

These circumstances illustrate the significant impact on global supply.

Investing in Risk-Management Capabilities

   In normal times, investment in risk management tends to be overlooked, as managers assume that untested plans are an unnecessary expense if major disruptions never occur. However, if a company relies on 10,000 key suppliers in a Just-in-Time model, a problem at any single supplier can halt production. In the event of a serious disruption, companies end up incurring massive costs to respond rather than relying on an efficient contingency plan.

While serious investment in building a resilient supply chain may not attract much attention during a crisis, companies should focus on the following:

1. Build rapid resilience:
This is not just about creating a “virus-proof” supply chain. Many mistakenly equate risk management with predicting specific future disruptions, leading them to invest in forecasting platforms. Unfortunately, few products can accurately predict risks or map their negative consequences. Instead, focus on installing measures that allow the supply chain to withstand a wide range of impacts.

2. Ensure multiple sources for critical materials:
The key to risk management is diversification. While sourcing from a few large suppliers may lower unit costs, it raises costs in the event of a disruption at a single source. Although backup systems may contradict lean production principles, having suppliers spread across regions or industries can reduce the severity of various threats.

3. Map your supply chain:
Many companies learned after disruptions that they relied too heavily on single transport hubs or connection points. One procurement executive revealed that before a supply disruption occurred, he was unaware that his supply chain depended heavily on China.

While most supply chain disruptions are unpredictable, decision-making under threat can create an even more volatile environment. Procurement teams should lead the organization to ensure supply chains can recover quickly.