Coronavirus demonstrates: Risk management protects supply chains in crises
London, March, 2020- The current risk management study by INVERTO shows that systematic risk management is neglected in the vast majority of medium-sized companies. This takes its toll when crises such as the current coronavirus break out. Companies that have important suppliers in China could soon find themselves standing in front of empty warehouses. Decision-makers can take precautions with differentiated risk management.
“The basis for using sophisticated strategies is the systematic identification of risks,” says Thibault Lecat, Managing Director at INVERTO UK. “Companies definitely have to catch up here!” According to the study, only 55% of companies with a turnover of more than 1 billion euros systematically record and evaluate risks. Of the small and medium-sized companies, only 29% do this. This means that there is no significant change in the way risks are handled compared to the previous year’s study.
Nevertheless, three quarters of all companies define countermeasures – even 76% of those that do not identify risks. The lack of systematic review may lead to standard measures being taken as a rule: For example, procurement managers predominantly conclude long-term contracts to secure prices, regularly evaluate their suppliers and distribute their requirements between at least two suppliers (dual sourcing). These solutions are used by more than 70% of those surveyed. These measures make sense, but should be supplemented by more complex methods, as the current situation in China shows.
For the first time this year, 16% of the study participants stated that they use artificial intelligence and Big Data for supplier monitoring. The use of digital solutions can help to minimize the risk of failure. Predefined emergency plans and a professional early risk detection system are also useful. “The goal of intelligent risk management is to remain capable of acting at all times,” emphasizes Thibault Lecat.
When asked about general business risks, 56% of the participants in the study cited the economic downturn as the top threat. While trade barriers and Brexit are rated as risks by 52% and 48% – almost the same numbers as in the previous year – the downturn is new on the list. Still strongly represented at 35%, but named by far fewer respondents than last year, is insufficient digitisation. Obviously, companies are no longer just recognising the need for action but are actually implementing measures.
The downturn is also leaving its mark on procurement-specific risks. In the current survey, for example, significantly fewer participants see themselves threatened by supply, price or quality risks – the figures have each fallen by ten to 15% compared with the previous year.
Contrary to the trend, the fear of supplier default has increased: At 57%, it is a good ten percent higher than in the previous year and is based on the fact that more than half of the respondents had to accept at least one loss in the past six months. This figure is likely to increase significantly due to the coronavirus. Thibault Lecat: “The pandemic shows very clearly the importance of proactive risk management. Companies that have already implemented monitoring and management measures in advance can now react more quickly and compensate for failures”.
In November and December 2019, INVERTO asked around 65 managing directors and procurement managers which risks are currently a priority for them and how they are countering these risks. The participants are working in various industrial sectors as well as in trade or services. INVERTO has been conducting the risk management study since 2013.