McKinsey; Risk Management for Risky Times
Supply chains have long since matured from linear nodes of mostly domestic sources to intricate, interdependent supply networks with highly combustible soft points. From extreme changes in demand, disruptions to supply, and the heightened cybersecurity threats that lurk over vulnerable home networks, the need for increased risk management efforts has become a matter often discussed, and one few would argue.
Yet, many organisations have still to implement new risk management techniques or more robust cybersecurity measures to ensure continued operations and safeguard competitive advantages.
McKinsey offers their thoughts on how risk management can evolve to better protect businesses’ information, finances, and reputations.
Create a ‘dynamic model’
“The fact is, too many institutions still hold a static, formulaic, and purely financial view of risk. It is difficult to manage the middle ground between preparing for everything, which is too costly and impossible to achieve, and deciding that existential risks are unknowable and therefore not worth preparing for,” stated McKinsey & Company.
They suggest that instead, organizations should implement dynamic and flexible policies that address changing competitive landscapes.
- Prioritize risk management action plans by identifying and evaluating risks.
- Conduct a “premortem” after high impact risk events.
- Avoid bias in your risk grid.
Establish a strong foundation
A companies culture defines the values, mindsets and norms that determine how employees identify and manage risks. Therefore, establish a strong company culture that aligns with your organisational values and objectives acts as a guiding force, ensuring alignment of actions.
“Our research shows that organizations that have developed strong risk-management cultures are more fleet-footed than their peers, outperforming them through economic cycles while also having more engaged employees and customers. They are also less likely to suffer from self-inflicted wounds, in the form of operational mistakes or reputational difficulties.”
McKinsey offers its ten dimensions of risk culture as a kickoff point for defining and evaluating desired behaviours.
Leaders must take an honest, realistic view of their operating models and re-design new, more responsive structures if needed, suggests McKinsey.
Quantifiably measuring resilience allows leaders to be objective and gain a true understanding of their companies core strengths and weaknesses. One mode of analysis for measuring organisational resilience is the Altman Z-score, developed originally as a means of predicting bankruptcy probabilities. McKinsey researchers successfully used the Z-Score to test company resilience through a crisis.
If change is found to be needed, figureheads must make a compelling case for change and back it with hard data. The more resilient a company, the better prepared it is to outlast the slings and arrows of outrageous fortune McKinsey concludes.
Biden establishes Supply Chain Disruptions Task Force
The US government is to establish a new body with the express purpose of addressing imbalances and other supply chain concerns highlighted in a review of the sector, ordered by President Joe Biden shortly after his inauguration.
The Supply Chain Disruptions Task Force will “focus on areas where a mismatch between supply and demand has been evident,” the White House said. The division will be headed up by the Secretaries of Commerce, Transportation, and Agriculture, and will focus on housing construction, transportation, agriculture and food, and semiconductors - a drastic shortage of which has hit some of the US economy’s biggest industries in consumer technology and vehicle manufacturing.
“The Task Force will bring the full capacity of the federal government to address near-term supply/demand mismatches. It will convene stakeholders to diagnose problems and surface solutions - large and small, public or private - that could help alleviate bottlenecks and supply constraints,” the White House said.
In late February, President Biden ordered a 100 day review of the supply chain across the key areas of medicine, raw materials and agriculture, the findings of which were released this week. While the COVID-19 health crisis had a deleterious effect on the nation’s supply chain, the published assessment of findings says the root cause runs much deeper. The review concludes that “decades of underinvestment”, alongside public policy choices that favour quarterly results and short-term solutions, have left the system “fragile”.
In response, the administration aims to address four key issues head on, strengthening its position in health and medicine, sustainable and alternative energy, critical mineral mining and processing, and computer chips.
Support domestic production of critical medicines
- A syndicate of public and private entities will jointly work towards manufacturing and onshoring of essential medical suppliers, beginning with a list of 50-100 “critical drugs” defined by the Food and Drug Administration.
- The consortium will be led by the Department of Health and Human Services, which will commit an initial $60m towards the development of a “novel platform technologies to increase domestic manufacturing capacity for API”.
- The aim is to increase domestic production and reduce the reliance upon global supply chains, particularly with regards to medications in short supply.
Secure an end-to-end domestic supply chain for advanced batteries
- The Department of Energy will publish a ‘National Blueprint for Lithium Batteries’, beginning a 10 year plan to "develop a domestic lithium battery supply chain that combats the climate crisis by creating good-paying clean energy jobs across America”.
- The effort will leverage billions in funding “to finance key strategic areas of development and fill deficits in the domestic supply chain capacity”.
Invest in sustainable domestic and international production and processing of critical minerals
- An interdepartmental group will be established by the Department of Interior to identify sites where critical minerals can be produced and processed within US borders. It will collaborate with businesses, states, tribal nations and stockholders to “expand sustainable, responsible critical minerals production and processing in the United States”.
- The group will also identify where regulations may need to be updated to ensure new mining and processing “meets strong standards”.
Partner with industry, allies, and partners to address semiconductor shortages
- The Department of Commerce will increase its partnership with industry to support further investment in R&D and production of semiconductor chips. The White House says its aim will be to “facilitate information flow between semiconductor producers and suppliers and end-users”, improving transparency and data sharing.
- Enhanced relationships with foreign allies, including Japan and South Korea will also be strengthened with the express proposed of increasing chip output, promoting further investment in the sector and “to promote fair semiconductor chip allocations”.