If you ever want to see one of the most maddening side effects of Covid-19, read a sadly superb story from the New York Times this weekend examining the troubles of the U.S. food industry. It paints a powerful picture of the supply chain and business continuity risks many companies will face in months and years to come, with no easy answer in sight.
On the one hand are tens of millions unemployed and going hungry in this country alone, never mind the rest of the world. On the other are one food business after another — dairy farms, vegetable farms, poultry plants, cattle farms — with so much surplus food that even after they give away as much as they can to charity, they’re still throwing away even more by the ton.
That’s because the food companies’ business processes aren’t designed to switch from industrial and business sales to consumer sales — and therein lies the lesson about supply chain and business continuity risk that boards, business executives, and risk professionals need to contemplate.
For example, now that public schools and coffee shops are closed, dairies are making too much milk. The dairies can’t convert their operations to go from selling milk by the 10-gallon can to the one-quart carton, so they’re pouring thousands of gallons of milk down the drain every day. It’s much the same for every other food business profiled in the article: they’ve already given away as much surplus as they can, they still have more, so they destroy it.
The most wincing excerpt, however, is this tale from Paul Allen, a cabbage farmer in Florida:
Allen demonstrates the plight so many companies face. They have no choice but to keep doing the same fruitless task over and over, because that’s the only task they can do — and now that work is no longer profitable.
That’s the business continuity trap Covid-19 has sprung upon us. Risk and audit executives need to help their companies find a way out.
Covid’s Trap for Business Continuity
Consider the macro-economic forces at work. Our economic system is designed to reward efficiency in business operations. The more efficient your operations are, the more surplus the company has at the end. That surplus is profit.
Take that idea to its logical end, and the result is the global economy we all see today: an economy full of businesses that each do a handful of things very well; and then they hand off their finished product to the next link in the business chain.
We designed our business world to reward efficiency. Now Covid-19 has turned that principle against us, because Covid-19 rewards resiliency.
Think about it. Resiliency is the ability to keep going with business operations even amid disruption and adversity. What all businesses do, ultimately, is make and sell something to somebody else.
So when Covid-19 comes along and paralyzes the economy, and your ability to sell to customers is suddenly frozen, resiliency is the ability to adapt — to find some other way to sell to customers, so operations can keep going.
But the market hasn’t rewarded businesses for the ability to do that. There’s no profit in developing new sales channels that you might never need, or new equipment you might never use. So companies haven’t taken resiliency all that seriously. Now that we do need to take it seriously, we don’t know how. We don’t even have incentive to try.
That’s what Paul Allen’s predicament tells us. He can’t afford to gamble on reinventing his business model to sell vegetables in new ways, because Covid-19 could fade as a threat before he completes that investment. Allen has a valid point — but when he says he can’t afford to gamble on that investment, that’s the same as saying he’s had no incentive to invest in resiliency.
Another example: the toilet paper shortage. We have a toilet paper shortage because everyone is pooping at home, rather than pooping at work, school, or the airport. So demand for consumer-quality toilet paper has soared. Toilet paper manufacturers, however, can’t keep up — because their factories were designed to make either consumer- or commercial-grade TP, not to switch back and forth depending on demand.
In other words, the toilet paper industry had no incentive to invest in resiliency. Few industries do. Think about that next time you’re on the throne.
Escaping the Trap
For businesses to survive Covid-19, they need to develop that resiliency. They need to reconsider product development, manufacturing processes, and sales cycles. They need to reform existing business practices to reduce the new, volatile threats that Covid-19 poses.
That’s where internal audit and enterprise risk management teams can assist.
After all, analyzing complex business processes that cut across multiple functions in the enterprise is what those teams do. For years, leading thinkers and professional associations have talked about how audit and risk teams need to “understand the business” and be unafraid to suggest bold innovations that address strategic threats.
Well, this is your big chance.
For example, if the challenge is that you can’t retool manufacturing operations to sell your product to new customer segments, two possible solutions are 3-D printing or robotics, since they can be reprogrammed to pivot to new operations quickly. (Now I see why PwC named both solutions as part of its “Eight Essential Technologies” a few years back.)
I understand that those two solutions are easier said than done, and they may not even apply to your specific business; but the fundamental point holds. Senior executives need all the help they can get, changing business processes and business models so the business can stay alive in these trying times. Experts at enterprise risk assessment and remediation plans can bring that help.
We might as well inject self-interest into this scenario, too. The economy stinks — and when it stinks, audit and risk management functions are tempting targets for budget cutbacks. So if we’re looking for some way that audit and risk management can prove their worth during this economic whirlwind, this is one way.