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A risk analysis is an integral part of business decision-making no matter what general management challenge you are facing. In this article, we look at the role of risk analytics in three different business management scenarios (and at the end we talk action):
Supply chain is a critical business function for both B2B and B2C businesses. The risk of having too much stock ahead of orders… well, picture a truckload of rotting fruit. And the risk of not having supply to meet customer demand? Picture angry customers in front of empty shelves before a long weekend.
For this reason, supply chain managers now use increasingly sophisticated tools to match stock to demand and analyze the risks involved. Statistical modelling tools map customer behavior patterns and detect changing demand ahead of the trend. This enables proactive planning – forecasting to ensure inventory levels are adapted through make-to-stock supply chain – and better flexibility in working capital. Companies that utilize their modelling effectively can respond rapidly to consumer market forces while keeping risk in check. Risk analytics tools allow for decision-making in terms of how closely to match trends.
Retail supply chain in the era of omni-channels
Today’s customers expect to be able to access goods anywhere, anytime. One customer wants to be able to both browse online for new spring fashions in the middle of an insomniac February night or to walk into a grocery store the next day and squeeze the fruit. Another customer wants the opposite because they care more about the fit of the fashions than the feel of the fruit. A third customer looks at the clothes online, but heads to the store to get them – this customer is accessing the channels in an integrated manner from the same retailer. To meet these demands, most retailers now use omni-channel supply chain methods, getting goods to customers through multiple, integrated channels. It’s complicated – placing retailers at greater risks for stock over- or under-sells, or stock displacement.
“In order for omni-channel to succeed,” explains Ralf W. Seifert Professor of Operations Management at IMD Business School in Lausanne, Switzerland and Singapore. “The retailer must have the capability to identify the inventory levels in the warehouse and retail network and identify the best compromise of order fulfillment cost and proximity to the consumer to satisfy the order, all without causing stock-outs for other consumers.”
Project supply chains risk analytics challenges
“Project supply chains are strikingly different from make-to-stock supply chains,” says Professor Seifert. Project supply chains provide products that are different for each customer, either personalized and implemented or even designed from scratch. The sales and operation planning (S&OP) process in a project supply chain model uses the order portfolio as the decision making platform. Instead of looking at stock levels, they look at the balance of orders and order dates for different customers, and plan around that. Avoiding obsolescence is a key risk. Consider the case of a sculptor commissioned by a small city to create an 11-tonne sculpture… but the council went back on its decision after many steps towards creation were underway. (That particular story has a happy ending, as the work was bought by the neighbouring city – the sculptor’s city of residence – for all to enjoy.)
“Rather than dozens of retailers and millions of consumers, in project supply chains there are only a handful of customers in the demand profile,” says Professor Seifert. “As each project is different, the scenario analysis for determining the cost and risk associated with each project needs input all the way up the supply chain, including to vendors.
“Statistical forecasting, demand sensing and demand-driven material requirements planning are exciting innovations for the make-to-stock world, but are not suitable for project supply chains,” adds Professor Seifert. Instead, a project supply chain risk analysis must look at projects individually and establish the timing of production and supply to best match project go-through, fitting in with other orders and avoiding obsolete overstock.
Leveraging digital tools to reduce supply chain risk
Professor Seifert says that companies using industry 4.0 digital tools to maximize supply chain need to analyze risks on three levels to overcome barriers to change. It is important to select the right technologies, to justify them appropriately, and ensure they leverage the functionalities well.
The business strategy must position the priorities of e-commerce, store traffic and order lead time, and weigh staff training and complexity.
“The business strategy must position the priorities of e-commerce, store traffic and order lead time, and weigh staff training and complexity,” says Professor Seifert. When it comes to very new technologies, the risk analysis needs to define ROI in a broader sense than what one might traditionally. “One FMCG company we spoke to was an early adopter of AGVs – automated guided vehicles that replace driver-piloted forklifts. The pilot project showed a best-case payback of five years.... However, the head of operations pushed forward, seeing the less tangible but critical value that investing in AGVs would represent. This would send a clear message that the company placed importance on safety, cleanliness and innovation. Today AGVs are widely deployed worldwide and their contribution is not questioned.”
One of the most important and sensitive business transactions is a Mergers and Acquistions (M&A) project. Seeing a successful M&A through to fruition requires planning and due diligence, particularly in terms of setting the appropriate strategy and integrating a robust risk analysis. IMD Business School Professor of Finance and Governance Didier Cossin says that the decision to embark on an M&A needs to be demonstrably based on the potential to achieve a clear business objective. He explains the importance of ensuring that the M&A is motivated by synergy – “the state in which two or more things work together to produce a state whereby ‘the whole is greater than the sum of its parts.’
“Good reasons to go ahead with M&As include reducing costs and increasing capabilities, market pricing power or product offerings,” explains Cossin, adding that this strategic rational should be clearly communicated to stakeholders.
There is no doubt that acquisitions can offer growth opportunities, but they are, by nature, complex and prone to risk. When considering an M&A strategy, opportunity often comes with risk and uncertainty.
If the outcome of decision-making shows solid business value in the merger and acquisition project, the risk analysis is necessary to keep it on track during the acquisition phase. “There is no doubt that acquisitions can offer growth opportunities,” says Cossins. “But they are, by nature, complex and prone to risk. When considering an M&A strategy, opportunity often comes with risk and uncertainty.”
Cossin points to human dynamics as the first risk for M&As. He cites Andrew Gould, former chairman of BG Group: “My observation from both near and far is that human failing is by far the most critical element in badly judged large M&A transactions. The ability to retain the power of the CEO role and the degree of intellectual humility necessary to execute it properly is not given to many people.”
A second risk, considered the top threat for global M&As in a 2016 survey, are regulatory barriers. Anti-trust interference blocks a significant number of deals, cited by 71% of survey respondents as the key obstacle. The regulatory concerns vary by industry. In energy and mining sectors, environmental regulations impact success rates the most strongly; in technology and telecommunications sectors, data protection and cyber security are greater threats.
Litigation risks are part and parcel of mergers and acquisitions, as seen in a research report that showed that investors contested 93% of M&As in 2014. A risk analysis should identify and plan for the most likely scenarios. Litigation risks can include: conflict of interest, lack of disclosure, resisting a hostile takeover or succumbing easily to a friendly one, and past mismanagement impacting future business of the post-merger company.
Cossin explains that integration failure – going back to the concept of synergy – is a risk to be avoided through constant communication “with stakeholders, stabilize the morale of both companies, supervise the integration of structures and processes, and approve specific initiatives to achieve the strategic objectives.”
Who is your competition? Chances are, your company does not have the same answers today as you did 10 years ago. The chief reason for this is something that IMD professors at the Global Center for Digital Business Transformation (DBT Center) call the Digital Vortex. Digital disruption is altering traditional competitive dynamics in virtually every industry. Your risk analytics cannot look only at your traditional competition risks – you have to contemplate risk from the never-before-seen and the extremely-rapid.
This understanding is something that the DBT Center has been tracking in surveys done in 2015 and 2017. They happily report that “more companies are getting it”.
Hyperawareness keeps you from getting thrown by the sudden arrival of new competitive threats (traditional, non-traditional, even unintentional side-effects)...It also means being aware of your own vulnerabilities.
IMD Professor Michael Wade, who is the Cisco Chair in Digital Business Transformation, says developing digital business agility is the key to thriving in this environment. The architecture that holds up digital business agility rests on three pillars: hyperawareness, informed decision making and fast execution. In this discussion of risk analysis, let’s focus on hyperawareness – because not only is your strong risk analysis critical to your capacity for hyperawareness, your analysis will only be strong enough if you conduct it in a hyperaware fashion.
“Hyperawareness keeps you from getting thrown by the sudden arrival of new competitive threats (traditional, non-traditional, even unintentional side-effects),” says Professor Wade. “It also means being aware of your own vulnerabilities… so you can adjust your business models to mitigate these.”
Risk analytics that facilitate hyperawareness need to add up to a clear-sighted view of the competitive landscape. “When a company is hyperaware of its competitive landscape, it understands the strength and weaknesses of traditional rivals, and the potential impact of new lines of business or acquisitions. They also anticipate which non-traditional competitors could threaten their market position, and the models they could use to disrupt,” says Professor Wade.
The good news is that digital technologies – the drivers of these new competitive risks – are also your friend when it comes to risk analysis. Sophisticated analytical tools will enable you to rapidly identify and cross-check risk, anticipate risk and monitor the evolution of risk situations.
Professor Wade says that “mature data analytics capabilities that augment human judgment” – those that serve your risks analysis – are the prime basis for informed decision-making. “Many companies fail despite having the information they need to make the right moves,” he says “Often, this is because assumptions held by top management were not tested or questioned. Decisions based purely upon ‘gut feeling’ or past experience have little chance of success. Instead, companies must make decisions based on insights gleaned from data analysis.”
A thorough risk analysis should not be neglected in business management decision-making. As the three examples above illustrate, risk lies within daily business operations as much as in strategic growth moves. Risk analysis enables you to be prepared and take appropriate action in the face of competitors, including non-traditional ones. So take action – analyze your risk and leverage the information to reinforce your business agenda and drive results.
IMD Business School in Lausanne, Switzerland and Singapore has been ranked first in open programs by the Financial Times six years in a row (2012-2017). IMD has been training global leaders for more than 70 years.
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