A new virus reinforces old lessons

  • Lynette Schultheis, Operations Manager, FM Global Australia

We are living in interesting times. If anyone had asked a CEO or CFO what they expected to threaten their business in 2020, a novel virus transmitted from an animal to a human would surely fall quite far down the list of likely suspects.

Since the emergence of the COVID-19 virus and in the space of several weeks, many regions and countries have had travel and movement restrictions put in place including China, South Korea, Hong Kong, Singapore, Iran, Italy and more recently, Spain and France. These restrictions are creating serious supply chain disruptions, production delays and distribution slowdown, creating a major threat for many senior leaders whose businesses depend on global inputs. Industries such as travel, hospitality and education are also facing particularly troubling times.

Many businesses in Australia and beyond are already reporting significant disruptions with many reducing revenue forecasts. Many more say it is as yet unclear exactly how much disruption they will encounter. In a survey by CNBC Global CFO Council, just under 22 per cent of companies have seen a supply impact, but more than 37 per cent­ of CFOs surveyed indicated it is still too soon to know.

Pulling the trigger

While some now argue that this crisis is merely the trigger for an expected market correction, surely no one could have foreseen that this would be how that correction would begin.

But if anything’s for sure in business, it’s that there will always be risks and crises for the C-suite to contend with. Some of these risks are internal to our organisations, and some are external. COVID-19 is just the latest example. The best leaders can do, is to make sure that we’re as aware and prepared as we can be.

In the case of coronavirus, a key learning is the importance of de-risking our supply chains as much as possible and to develop contingency plans. If the risks associated with using a supplier in a particular country or region exceed acceptable levels, senior executives should be prepared to direct a business to use suppliers in lower-risk locations.

Similarly, supply chain diversification is needed to ensure that if one location becomes problematic for any reason, you have other options whose risks you have assessed.

Finance and risk management tools can help the C-suite make informed decisions about locating supply chains. In 2019, we released the sixth edition of the FM Global Resilience Index to help CEOs and other business decision makers across the globe make more informed strategic choices when it comes to their enterprise resilience – including their supply chains.

The index ranks 130 countries on 12 economic, risk quality and supply chain-related measures – allowing the C-suite to better understand the impact of domestic and international factors on a country’s resilience to disruption.   

It highlights, for example, that key manufacturing hubs located in Asia, such as Bangladesh and Sri Lanka, both are ranked equally (#112) for natural hazard exposure. Vietnam ranked last (#130) for natural hazard risk quality, due to poorer quality and enforcement of building codes with respect to natural hazard-resistant design.

C-suites can also assess their risk to natural hazards by using tools like FM Global’s Global Flood Map, which gives businesses a worldwide view of moderate and high-hazard flood zones. It can provide executives with the evidence they need to locate supply chains and help them become more proactive in spelling out to colleagues, board members, business partners and other stakeholders the importance of supply-chain resilience.

These tools can feed into planning based on a two-to-five-year view of exposure to risks, including natural disasters and other relevant measures such as visibility and standard of corporate governance.

Some companies have recently undertaken diversification exercises including Apple who recently moved its manufacturing out of China to avoid the fallout of the trade war currently underway with the US. Today, it may pay dividends as businesses face the more immediate fall out from COVID-19 that has now spread globally.

Learning from crisis

For both businesses that have and those that have not been adversely affected by the outbreak, COVID-19 should be a learning opportunity. Beyond highlighting the importance of supply chain diversification and risk assessments, it shows the value of routinely evaluating contingency plans to be prepared for and to minimise damage from unexpected events. 

Generally, companies with effective business continuity plans will fare better than those companies that are less prepared for disruptions. While there’s no clear playbook for what should happen in the event of a coronavirus outbreak, it’s imperative businesses plan for disruptions like these.

The situation is also reason to reconsider your insurance coverage, including reviewing how your insurance policy would respond in different loss scenarios. For businesses that have closed voluntarily or due to government mandate as a result of coronavirus, there is a chance that business interruption coverage could be triggered.

While pandemics may be few and far between, unexpected interruptions to supply chains are not. It’s in your businesses’ best interest – and the public’s – to ensure there’s a Plan B in place.

This article first appeared in The CEO Magazine here.