Risk management Bavan Nathan,
former chief audit and risk officer, Tesco
Certainly, these worries are reflected in the behaviour of companies and business organisations across the continent. In Norway, for instance, a major fertiliser maker announced it was temporarily cutting ammonia production in half due to soaring energy costs. Further south, paper makers in Italy and Austria were forced to stop manufacturing altogether, crippling an entire industry. For Pro- Gest, a mill near Venice, the reasoning was clear in the most fundamental economic sense: the selling price of a tonne of paper ended up less than the energy costs needed to make it.
40%
Kiel Institute for the World Economy
14%
Institute for Government analysis of ONS data
24
Chain reaction Yet if the impact energy disruption could have on supply chains is significant, supply chain problems are hardly new. In recent months, in fact, they have become increasingly common. In the UK, supply interruptions hit the headlines in the second half of 2021, with businesses reporting their lowest stock levels in almost 40 years, according to the Confederation of British Industry. The Office for National Statistics (ONS) added that a survey of businesses found almost a quarter (23%) were unable to source goods or services from the EU, with 15% even struggling within the UK. The impact was quickly felt by the public, with ONS data suggesting that in the final weeks of October, one in six adults had struggled to get essential food items.
The minimum level of normal supply – without interruption from pipeline closures – Germany needs of Russian gas this winter if it is to ‘narrowly’ avoid fuel shortages.
It was arguably a prelude to what might follow. In August, it was widely reported that Number Ten had asked the food and beverage sector to identify potential risks to supply in the event of winter power outages. Although the government did not confirm the report, ministers acknowledged the potential for disruption to power supplies, and alluded to contingency plans. A Bloomberg report even suggested the government was planning for a series of power outages over a four-day period in January.
The percentage of UK businesses that said they could not obtain the materials, goods or services they needed from partners in the EU in January 2022.
Nathan says companies like Tesco will already know where their pinch points might be, where they can find secondary and tertiary sources should their primary suppliers fail – and how customers might react to shortages. This practice, he says, has become far more organised over recent times. Coupled with shifting economic winds, he adds that the need to be prepared is becoming ever more acute. “Unlike a strategic planning process in the past – where it’s three, six, even 12 months – it’s looking and feeling like it’s almost daily at the moment, almost a day-to-day crisis management.” And if these shorter-term adjustments are certainly important, there is equally plenty of evidence that major corporations are looking ahead as well. Perhaps unsurprisingly, technology can be a major boon here, with Adidas aiming to automate
20% of its production by 2023, sharpening its internal supply chains along the way. Nike, for its part, is moving in a similar direction. Apart from exploiting automation, the Oregon conglomerate has expanded its inventory by over 40% – probably a wise choice in the face of continuing supply chain uncertainties.
Embracing risk (managers) If clever use of technology is one path forward, Nathan says businesses have another area that is under their control: the role of the risk manager. In relation to energy, for example, the role of risk managers has so far been limited, something he laments. But asked if they can be more involved, Nathan’s response is clear: “Absolutely.” He says that, right now, involvement stretches only to the level of exposure, leaving actual decisions to be made at an operational level.
Shifting approaches highlights an area Nathan is especially excited about: a business-wide cultural shift in the way risk managers are engaged and used. He says risk managers are good at provoking a conversation, offering different perspectives and helping colleagues across the business view a problem through a different lens – something not done enough in today’s business environment. This is only possible, he adds, if a company’s corporate culture changes too. “My philosophy at Tesco was to provoke conversation,” he says. “My team and I prepared briefing materials that said ‘you should be worried about this, but you could be taking more risks here’. Then the conversation immediately starts with colleagues saying ‘I agree with you’ or ‘disagree with you’ – then it becomes a valuable exercise. So it comes down to the culture and how you manage it.”
Nathan believes that as much as risk managers need to understand what keeps their colleagues up at night, others across the business need to better understand the role of the risk manager, and how they can leverage their skill sets – otherwise, they risk suffering a disconnect. “It may not be parallel, it could be sequential, but it’s needs-based and, all too often, if you don’t get the partnering right, that’s when the disconnect happens.” Perhaps partly the result of global events, Nathan believes there are signs of a change coming. “I’ve had an executive ask ‘where will we be in five, ten, 12 years from now – quantify what the emerging risks look like and what they mean for us.’ That’s a great place for us to be as risk managers. It’s a strategic role to play.” All the same, the onus isn’t all on the business and its strategic and operational leadership, Nathan warns. Risk managers have to be proactive and earn the right to participate by provoking conversations, building relationships and showing their worth. ●
Finance Director Europe /
www.financedirectoreurope.com
Bavan Nathan
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