Preparing for an entirely new world
Covid-19 is almost certainly the biggest operational risk global business has ever experienced, according to Andreas Hoepner, professor of operational risk at the UCD Michael Smurfit Graduate Business School. “For anyone who hasn’t experienced a live war it will definitely be the biggest operational risk they have seen,” he says. “It’s not a market or financial risk, it’s an operational risk.”
And the scale of the risk will bring about profound change. “All businesses will have to change their operations,” says Hoepner. “Some businesses will have to bring a temporary end to activities. For others it may be a final end.”
He foresees particular problems for companies which have built up a lot of debt in the current low-interest-rate environment. “Companies which have been sailing close to the wind on cash flow will find things very difficult,” he says. “Warren Buffet said time is the friend of wonderful businesses and the enemy of the mediocre. It has never been more important that a business is set up properly.”
But being set up properly doesn’t necessarily mean what many businesspeople take it to. Hoepner argues that businesses which have focused simply on doing everything faster, more efficiently and at a lower cost rather than on doing the right things well will suffer in the post-Covid-19 world.
Ireland is well-placed to feed itself. The Global Food Security Index places us second in the world. We are reasonably secure in terms of food supplies
“Companies focused on doing the right things are on a better trajectory,” he says. “We are looking at an entirely new world, one where non-financial risks will become a lot more important. Anything without a monetary value doesn’t really count at the moment. That’s not going to work anymore. We are moving to a KPI-based system of operational performance where the indicators are not financial.”
‘Quite a bit of carnage’
This thinking is gaining currency internationally and he points to The End of Accounting by Prof Baruch Lev as evidence of this change. “Managers who focus on efficiency rather than effectiveness will be caught out by the crisis,” says Hoepner. “They don’t have enough buffers in the system. We are going to see very interesting times. There will be quite a bit of carnage and from a country perspective we need to be opening up again weeks or months before our competitors, not afterwards.”
Hoepner’s colleague, professor of supply chain management Brian Fynes believes Ireland is relatively well-placed to deal with the immediate issues thrown up by the crisis, not least because our international supply chains have come under detailed scrutiny of late as a result of Brexit.
“If you look at the UK, that’s the country in Europe where we have seen the most panic buying,” he notes. “About 30 per cent of their food comes from the EU and 50 per cent of it comes from overseas. They are not well prepared to feed themselves.”
Looking at the fundamentals for Ireland, he asks if we can we feed ourselves and get medicines for the next 12 weeks or so. The answer is reassuring. “Ireland is well-placed to feed itself,” he says. “The Global Food Security Index places us second in the world. We are reasonably secure in terms of food supplies, notwithstanding mart closures and so on. Once we have got over the first stage of the response to the immediate health crisis, we need to move on.”
We have a leader who is a doctor, not like the UK which have three leaders who are not doctors. That is a competitive advantage for us
There is a need to look at supply chains as people and not merely goods. “Take the health service, we need to ensure the continuity of supply of health professionals. Our first line of defence is the health service and the people working in it. The second line is made up of the direct suppliers and support services while the third line is the sub-supply and so on. They all come into play and the health of the people working in them is vitally important.”
Supply chain professionals are also strategically important in meeting the challenge of putting food and essential goods on the supermarket shelves. Fynes explains the non-linear nature of retail supply and demand, calling it the “bullwhip effect”.
“Pressure is passed along the chain until it builds up to a peak,” he says. “A baby uses five nappies a day on average, but parents don’t buy five nappies a day. There can be huge swings in demand in retail.”
This puts retail supply chain professionals in a good position to deal with surges in demand and capacity. “Supply chain professionals are used to managing these things,” says Fynes. “It’s their bread and butter. They do it every Christmas just as the health service does it every winter. Because we are an island nation and have had the big multinationals here for many years, we have trained a very strong cadre of supply chain professionals. The MSc in Supply Chain Management in UCD has been running since 1990 and around 40 students take that course every year. We also have a very strong transport and logistics sector in this country. I have no worries about the profession’s ability to meet the challenges ahead.”
Looking at how businesses maintain normal operations during the crisis, Hoepner says a number of risks must be managed. “The first risk is to manage the health of staff and continue activity,” he says. “I can also see mental health issues emerging quite quickly. Not everyone is suited to home-working and they are also anxious about their livelihoods. Cyber is the next one. Companies need to secure both the people and the tools they use. There is a steep education curve for all of us in this. There are also risks relating to governance, external and internal fraud, data protection, customers going out of business and so on.”
Hoepner concludes on an optimistic note. “We have a leader who is a doctor, not like the UK which have three leaders who are not doctors. That is a competitive advantage for us.”
This article first appeared in The Irish Times, April 22. Find the article here.