Many businesses are unnecessarily incurring costs by opting to absorb the blows of supply chain disruption instead of proactively attempting to avoid them, claims a paper issued by PricewaterhouseCoopers (PwC). However, businesses could face an investor backlash if they are not resilient to the current volatile financial climate.
The paper, ‘Prospering in an Era of Uncertainty-The Case for Resilience’, was produced by PwC in association with the University of Oxford following a series of workshops with FTSE100 companies. It urges organisations to accept that they must take a radical new stance and start to adapt early rather than scrambling to action stations once the alarm bells have sounded.
The paper states that traditional risk management, focused on removing uncertainty, has become almost impossible in the current financial climate. Resilience accepts that shocks will occur and gives as much prominence to an organisation’s power of response as to its power of control. In today’s conditions, resilience is especially relevant for high-risk sectors such as manufacturing and financial services, where the global footprint of organisations could see supply chain disruptions extend across their entire operations.
Two elements of resilience are proposed: buffers and ‘adaptive capacity’ which provides the catalyst for companies to exploit opportunities rapidly. As predictability wanes, the need for buffers and adaptive capacity increases. But to exploit adaptive capacity, organisations need to have qualitative measures in place to assess performance across supply chain boundaries and organisational divisions and seek evidence of learning from near misses.
“Highly leveraged balance sheets and the ruthless exploitation of supply chains may increase short term profits but this kind of behaviour reduces buffers to a point where they cannot withstand a shock,” said Mark Dawson, PwC governance, risk and compliance partner.
“Boards need to regularly review their operational performance and short term efficiency goals to understand the trade-off between resilience and efficiency. In the boom years where most growth constraints were absent, some balance sheets became so over-leveraged that resilience buffers were completely absent, but the cost was deferred until a subsequent shock destroyed all shareholder value.”
Investors could take an adverse view of companies that failed to prepare adequately, he added. “Investors have always paid a premium over net book value for companies whose brands create longstanding relationships with their customers. Firms with a resilient reputation have a stronger buffer to withstand a crisis; those that don’t take this into account are limiting their potential value.”
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