December 2021

Trends and Resources

Business Trends: Executives’ focus on lean management leaves companies exposed to risk during crises

In the wake of an extraordinary year marred by the impact of the COVID-19 pandemic, the author’s company released the results of its 2021 Operational Risk Management Survey1 of executives, a barometer of the topics that dominate boardroom discussions around the world.

Bahr, N., DuPont Sustainable Solutions

In the wake of an extraordinary year marred by the impact of the COVID-19 pandemic, the author’s company released the results of its 2021 Operational Risk Management Survey1 of executives, a barometer of the topics that dominate boardroom discussions around the world.

The survey found that corporate executives’ long-standing preoccupation with cost optimization within their organizations consequently had a negative impact on their companies’ business resilience and agility during the COVID pandemic, as overly lean systems choked off their operational and environmental, social and governance (ESG) risk response options. This is also putting them at higher operational risk during another a crisis.

The pandemic presents executives with an ideal opportunity to change their approach toward operational excellence, which requires achieving a better balance between lean management, ESG and operational risk management to ensure agility, sustainability and resilience of operations in the future.

Cost reductions leave companies exposed to risk

Lean management has been the ultimate goal of large-scale organizations for the last decade or more. Around the world, companies have focused on minimizing their inventories, streamlining their supply chains and obtaining the highest possible productivity (and profit) from available resources and assets. Companies have realized higher margins by sourcing from low-cost labor markets, by implementing just-in-time manufacturing, and from other rationalizations and efficiencies.

During the pandemic, improving productivity and cost-efficiency continued to be the prime concern of the more than 200 senior executives polled for the survey. However, that focus had unforeseen consequences. With little room to maneuver, organizations did not have the flexibility to absorb the supply, sourcing, operating and commercial shocks caused by the pandemic.

More than half the organizations surveyed had to shut down operations during the pandemic, and a quarter struggled to get back on their feet or did not start up again at all (FIG. 1). Even though four out of five executives believed they had adequate crisis response planning in place, they still felt insufficiently prepared for the effects of a pandemic.

FIG. 1. Short-term thinking about risk is a significant threat.

Ineffective anticipation of business threats and lack of recovery planning left many companies struggling to make a comeback. Although 81% of executives said they had a plan in place that they believed could address an unexpected business disruption, only 41% said that one year after the start of COVID they had been ready to respond to the pandemic. This means that effective crisis planning had clearly been insufficient among half of executives participating in the survey.

Asked how the risk profile of their organization had changed during the pandemic, three out of four respondents predictably said it had increased (FIG. 2). More than half of the organizations that said their risk profile had increased were companies where productivity was the dominant topic at the boardroom level. Furthermore, of those organizations where health and safety ranked lowest on the boardroom agenda, 58% noticed a rise in their risk profile.

FIG. 2. Change in company risk profile during the pandemic.

While executives pursued responses to various impacts caused by the pandemic, such as supply chain disruptions, lack of raw materials and workforce shortages, these responses tended to have a short-term focus and decisions taken in haste were based on fuzzy data. A long-term risk reduction strategy and recovery plan appear to have been missing.

Sustainability has gained boardroom attention

Considering all the challenges faced by senior executives during the pandemic, one stand-out topic that remained high on the boardroom agenda was sustainability.

Although operational excellence issues still get the lion’s share of executives’ attention in terms of cost-efficiency and productivity, head count and asset reliability discussions, sustainability ranks above issues such as regulatory compliance and proactive risk reduction (FIG. 3). ESG—and by extension sustainability—has earned its place on the management agenda, likely due in part to regulations and stakeholder and shareholder pressure, but is also symptomatic of the role ESG plays in determining the future ability of organizations to survive and operate.

FIG. 3. Outcomes that drive investment decisions.

Effective ESG management requires consideration of environmental and social issues and risks that hyper-lean organizations struggle to consider and include. Without a more balanced approach that examines cost optimization, ESG and risk management holistically, environmental or social disruption is likely—sooner or later—to affect business resilience.

Improve operations excellence through better risk management

Organizations have survived the pandemic partly due to government aid, and partly because their competitors were in the same boat. Had only a single organization or region been struck by the pandemic while competitors remained untouched, businesses would have found it much harder to bounce back and maintain their market position. The next crisis may not impact everyone the same way and businesses probably will not get the same level of support they received this time around.

In crises, most organizations operate at or close to their maximum risk limit. Proactively looking at short-, medium- and long-term future vulnerabilities is a way to anticipate and mitigate the consequences of emergencies. Many risks may not surface for years because of something organizations do today. Accurate risk profiling and data-based processes can help to identify current and future critical threats and determine an organization’s level of risk tolerance. Instead of just reacting to unforeseen events, the development of a contingency plan and targeted controls built on data-driven risk profiling will enable organizations to make informed decisions during crises, so they can transform risks into opportunities without compromising long-term sustainability.

However, this requires a reevaluation of lean management and operational excellence. There are some signs this is already underway. As the 2021 survey shows, sustainability is already a topic that is high on the management agenda. This may indicate a shift towards a more sustainable model of operational excellence that factors in ESG considerations. Future investments and stakeholders will, after all, judge organizations on their alignment with ESG goals, and management of ESG risks will also determine the resilience of organizations.

Environmental issues have taken some time to make it into the boardroom, but they are there now. Perhaps the lessons learned from the operational risks posed by the pandemic may spell the end of traditional lean management practices and lead to a more balanced, less siloed view of operations. It is obvious that lean management alone is not sufficient to safeguard companies in all situations. The new paradigm for successful organizations looks more likely to be an integrated management approach that balances operational excellence with ESG and operational risks to ensure agility, sustainability and resilience of operations (FIG. 4). HP

FIG. 4. An integrated approach may be the new paradigm for successful organizations.

LITERATURE CITED

  1. DuPont Sustainable Solutions, “DuPont Sustainable Solutions Operational Risk Survey 2021,” September 2021, online: https://www.consultdss.com/orm-survey-results-2021/?utm_source=pr&utm_medium=media&utm_campaign=orm-results-2021

The Author

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