Now, more than ever, CFOs, finance managers, and others in the healthcare industry need to keep risk and supply chain disruption in mind, weighing their concerns against the need for operational efficiency and the costs that come with beefing up your supply chain.
To survive, companies need to have resilience; that is, the ability to survive, adapt, and flourish in the face of uncertainty and change. “The world is becoming turbulent faster than most companies are becoming resilient,” writes management consultant Gary Hamel, Chairman of Strategos, in the Harvard Business Review. Yet, in spite of this, he points out, “few companies seem prepared” for the new normal.
Resilience strategies are not optional
Any company that depends on a well-functioning supply chain knows that the process can break down at any time. Resilience strategies are a necessity if you want to survive. Disruption to your company’s supply chain can have deep, even irreversible, consequences. As a 2013 report by the World Economic Forum points out, supply chain trouble can cause a company’s stock price to dip for months, with an average loss of shareholder value of seven percent
The following resilience-lowering elements can lead to disruption:
Source:Pettit, Fiksel, Croxton, Journal of Business Logistics, 2013
Risks to the supply chain come from any number of directions—from natural disasters and extreme weather to political unrest, product recalls, new regulations, the unforeseen logistical challenges of entering new markets, and border delays. These factors can be difficult, or impossible, to predict, but there are strategies that companies can enact to ensure they're prepared for the unexpected.
The best defenses to deploy against disruption depend on the kind of event. The Framework for Enterprise Risk Management—developed by COSO (Committee of Sponsoring Organizations of the Treadway Commission)—is one tool that can help you to assess a risk, then calculate the best response.
In the case of relatively slow, incremental fluctuations, you should adopt a “steer and adjust” approach to build resilience, according to this framework. For more dramatic events—including cataclysmic weather events that disrupt manufacturing—you should work to “adapt and transform.” As change morphs into more abrupt change, COSO suggests a “sense and respond” approach to turbulent disruptions. If these intensify, becoming sudden and catastrophic, the goal is to “survive and flourish.”
The following elements can foster resilience, protecting against disruption.
Source: Pettit, Fiksel, Croxton, Journal of Business Logistics, 2013
An example in resilience: Cardinal Health Cardinal Health
One company that faced—and overcame—a potentially devastating event. As reported in the MIT Sloan Management Review, a demand crisis came about in 2013, after Walgreens, which then represented over twenty percent of Cardinal’s revenue, decided to not renew its contract with the company. After the announcement, Cardinal’s stock plunged 8.2%. Even so, the dip wasn’t permanent. The fact that Cardinal was “able to absorb this headwind ... and still grow,” in the words of its CEO, George Barrett, was due to meticulous preparation. “We positioned ourselves to grow in this environment. We expanded our customer base and diversified.” Indeed, Cardinal Health’s stock price has nearly doubled since that pivotal event.
Embrace uncertainty by being proactive
Just as Cardinal Health had strategies in place to mitigate the loss of a major contract, it’s critical to have a contingency plan in place, whatever the nature of the business. For all companies, proactive is clearly the way to go. Nevertheless, only 6 in 10 of healthcare logistics decision makers rank contingency planning as important, according to a UPS Pain in the Chain Survey.
Surprisingly, increasing complexities in the supply chain have actually brought about new efficiencies, like automated order systems, virtual inventories, state-of-the-art cold chain packaging, and more. And healthcare and life sciences logistics decision makers are realizing considerable supply chain improvement in other key areas such as product security and adapting to regulatory changes. In fact, more than half of executives who experienced success in these areas stated they leveraged third-party logistics providers and supply chain analyses to drive their accomplishments.
To maintain resilience, you need to develop the right capabilities to match your vulnerabilities. [See sidebars.] Keep in mind that your risk tolerance and resilience capabilities will change as your company grows, and the world changes—adjust them accordingly. Work to develop a culture of resilience at your firm. And when disruption does arrive, as almost invariably it must, consider it a learning opportunity. Turbulence may be sudden—and rough—but it almost always has a silver lining.
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