I’ve been writing a lot about the need for the finance function of a company to be able to turn on a dime to match the pace of change in the world due to COVID-19. This is something we are increasingly hearing from our clients and seeing in the wider marketplace. Year-long planning cycles are now obsolete. Instead, organisations need to have a finger on the pulse of what's happening on the ground today, with the built-in agility to react quickly and decisively to changing circumstances. This is what will allow them to avoid challenges, of which there are many, and grab opportunities, which are certainly also out there if you look for them.
Two interconnected capabilities are essential to get this right. Firstly, the management team needs to be able to access information and insights from the people at the coalface. These are the managers and other employees who are seeing the changes as they happen, and getting a sense of what is coming down the line. In a rapidly changing environment, information and insight have a very short shelf-life, so continuous access to immediate and up-to-date information is critical. And secondly, companies need the correct tools and procedures to enable faster processing of this information and the ability to reflect these changes in their expectations or financial forecasts. Taking this a step further, the finance team, in particular, needs the ability to test new assumptions and reforecast on the fly. This will ensure they are able to appraise the impact of the changes and guide the business on what to do next.
Companies who have achieved this resilience and agility have fared better, and in some cases very well, during the health crisis and will continue to do so in a post-pandemic world. The reality is that today’s uncertainty is not going to go away once we emerge, as one hopes we are, from the brunt of the health crisis.
Firstly, COVID-19 is going to have a longtail, with vaccine inequality remaining stark, inconsistent opening of borders, and infection rates continuing to fluctuate.
Secondly, global supply chains – a symptom and enabler of globalisation – have shown their absolute frailty when confronted by the health crisis. From borders closing almost overnight, to staff shortages due to illness, to components being stockpiled, to container ships being unable to dock, we’ve all experienced how fragile these supply chains have proven to be, both in our business and personal lives. And we are now more aware about just how interdependent various goods and services are to the vagaries of their respective supply chains – even more so if they are specialised or region-specific. Look at delays in smart devices, including vehicles fitted with smart technology, thanks to our global dependence on semi-conductors produced in Asia.
The health crisis, however, is only one variable in the supply chain Rubik’s cube of interlocking dependencies. Supply chains are under threat from a cat’s cradle of additional challenges, for instance, the recent coup in Guinea saw aluminium prices rise to their highest level in a decade. Guinea is the world’s largest producer of bauxite, which is used to produce aluminium, with more than half of its exports going to China. When the military closed the country’s borders during the coup, this supply was immediately threatened.
In addition to political unrest, political decision-making has also disrupted supply chains. China has made several interesting policy decisions in recent months that have far-reaching logistical impacts on the supply chain. Brexit is another, where additional border admin is one of the reasons the UK has seen shortages of basic supermarket products and rising prices, as well as the temporary closure of high street restaurants and pubs. This has been exacerbated by a shortage of lorry drivers thanks to Brexit, the health crisis, an aging workforce, and changing tax rules – showing just how interconnected and complex supply chain issues are. As if the driver shortage weren’t enough, high energy prices have recently closed two fertiliser plants in the UK. This, in turn, resulted in a shortage of food-grade CO2, which in turn will cause food shortages and further empty shelves in grocery stores.
In addition to the pandemic and politics, supply chains are vulnerable to the escalating climate crisis and the increase in big weather events. Just this year, winter storms in Texas resulted in a power outage and related shortage of water, food, and heat in February. And this August, Hurricane Ida in the US east coast caused global cargo shipping delays.
Finally, as if that weren’t enough to contend with, cybercrime increasingly threatens supply chains thanks to the digitalisation of all aspects of organisations, including operational. In May, the eastern US experienced fuel shortages after the country’s largest pipeline, Colonial Pipeline, was shut down due to a ransomware attack.
It’s now no longer the case that when America sneezes, the world catches a cold. Instead, it really does feel like we could be at the whim of the butterfly effect at any time. And this should convince you that any efforts to support a faster, more responsive information flow to shortened and more frequent budget and forecast cycles during the health crisis should be more than just short-term band-aid efforts.
While you can’t control, or even predict, these interconnected threats to an uninterrupted supply chain, you can expect them. And your people are the ones who are going to raise the red flag about the shortage of a critical component or raw material, or about the reduced quality or the hiked price of what is available. So, as with the health crisis, your best line of defence is access to the latest information from the coalface of your organisation and the ability to shift rapidly in response. These are critical adjustments in how you work, and how you empower your people, that can have long-reaching benefits.
As published AccountingWeb September 2021