No one can say they weren’t warned about the likelihood of a global pandemic or a war in Ukraine. And, in the light of President Xi Jinping’s recent comments at the 20th National Congress of the Chinese Communist Party, where he reaffirmed his government’s commitment to take control of Taiwan one day, no one can say that companies should not think about what comes next.
Indeed, most of the risks that a company will face do not fall into the category of what the mathematician and philosopher Nassim Nicholas Taleb termed “black swan” events: random, highly improbable events that have enormous impact. A trade dispute, a viral epidemic, a product failure, a cybersecurity breach, a tsunami — these are not “black swans” but, as the business writer Michele Wucker memorably puts it, “gray rhinos”: highly probable, highly predictable, high impact, but neglected threats that are charging toward the company like a crash of rhinos (who show visible signs of aggression and whose attacks can thus be predicted nearly 100% of the time).
In other words, they are “when,” not “if,” events — and this means they can be prepared for.
For many CEOs, preparing for something that may not happen on their watch will seem like a luxury they can ill afford. But, in fact, the benefits of doing so are not just about protecting on the downside. CEOs building resilient companies can expect to profit on the upside too:
So, CEOs have every reason to prepare for the next crisis — and no reason not to. But how, exactly, should they prepare? They need to start building long-term resilience now. If they wait until the next crisis strikes, it will be too late. We recommend three steps.
1. Create a world-class sensing and risk-monitoring operation.
To get a clear view of the likely risks in their supply chain, CEOs need to invest in risk intelligence and strategic foresight, creating a team of procurement super-forecasters equipped with the latest artificial-intelligence (AI)-powered sensing technology. An effective risk-monitoring operation should encompass not only direct, or Tier 1, suppliers but also indirect, or so-called Tier N, suppliers who operate deep within the supply chain.
Also, it should take account of eight essential risk categories: four associated with individual suppliers (operational, financial, reputational, and structural risks), three associated with a supplier’s country or region (disasters, geopolitical, and fiscal risks), and one associated with a supplier’s industry (industry risks). Within each of these categories, there are three or four specific risks. For example, a supplier’s structural risk might be its dependence on one or two Tier 3 suppliers or its involvement in a hostile-takeover bid. A supplier’s geopolitical risk might be its operations in a war zone or a territory that imposes tariffs and other trade barriers. And a supplier’s industry risk might be its dependence on one or two monopolistic suppliers who then suffer a production delay.
Having established a framework, CEOs need to feed it with data linked to specific key risk indicators (KRIs). For example, operational KRIs might be the age of a supplier’s machinery or the percentage of employees in workers’ unions; industry KRIs might be the concentration of suppliers that could lead to bottlenecks, or a supplier’s R&D into innovative technology and the likelihood of obsolescence; while disaster-risk KRIs might be the number of people vaccinated in the country and at the supplier or the number of power outages suffered by the company.
With this data, and with the help of an AI-powered algorithm, the specific risk can be plotted on a two-by-two matrix, with the Y axis reflecting the detectability of the risk and the X axis reflecting the impact of the risk. The four quadrants of the matrix correspond to: limited risk, or hard-to-detect events that have a noncritical impact; manageable risk, or easy-to-detect events that have a noncritical impact; disruptive risk, or hard-to-detect events that have a critical impact; and high-risk, or easy-to-detect events that have a critical impact.
After doing this, companies are in a good position to determine what they need to do next. If a risk is deemed to be limited, then it can be deprioritized and occasionally reviewed for any increased detectability. If a risk is found to be manageable, then it can be subject to automated tracking and daily review. If a risk is disruptive, then a company must establish its likely probability, hedge proactively, simulate any possible negative impact, and prepare a reaction plan. Finally, if a risk is deemed high, then a company must actively monitor the situation and take urgent steps to reduce the risk.
2. Simplify your product portfolio.
In the past few years, it has been the goal of companies to give consumers what they, as individuals, really want. Niche, highly personalized, “segment of one” products and services have become the norm. The trouble is that many of these products are low margin, lack a strategic purpose, require a broader range of suppliers, and lead to higher manufacturing, freight, and out-of-stock costs.
For these reasons, CEOs should look to scale back their product portfolios. That means eliminating some product lines and modifying the remaining products by simplifying their design, harmonizing their specifications, and standardizing their constituent raw materials, components, and other ingredients, as well as their packaging materials.
3. De-risk your supply chain.
CEOs need to consider a series of risk-mitigation actions that encompass the three elements of the supply chain: sourcing the raw materials, components, and other parts of products; manufacturing the products; and delivering the parts to the factories and the products to the customers.
Take manufacturing, for example. CEOs should review their make-or-buy strategy, consider investing in digital technologies such as 3D printing, and above all, switch manufacturing to locations at home (reshoring), closer to home (near-shoring), or closer to consumer markets (regionalization).
The fast-fashion industry has long valued local manufacturing — primarily for speed. It now enjoys the additional benefits of lower supply-chain risk. Similarly, Unilever has invested in highly mobile “nanofactories” housed in 40-foot shipping containers that can be sited pretty much anywhere, as need dictates.
CEOs should also consider taking back control of their supplies of critical raw materials and components. They can do this in a couple ways.
During the last semiconductor shortage, we helped the CEO of a U.S. technology company prepare for the next (that is, the current) shortage by encouraging him to have his company develop contractual relationships with companies that are instrumental in every stage of the semiconductor supply chain — and with which they previously had no direct relationship. These include semiconductor vendors (such as Infineon and NXP), foundries (such as Taiwan Semiconductor Manufacturing Corporation (TSMC) and GlobalFoundries), integrated-circuit makers (such as JCET and Amkor), and distributors (such as Avnet and Arrow Electronics).
Get ready for the rebound.
As CEOs tackle today’s crises, it might seem perverse to have to start preparing for the next crisis. But it is essential that they do so. CEOs that can get ahead now by taking the steps we’ve outlined will ensure that their companies are well positioned for the rebound in the post-crisis phase.
This content was originally published here.