Rethinking the leadership approach to risk management

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Professor Alan Waller OBE explains how supply chain leaders need to reconsider their approach to risk management, and what lessons can be learned from the KFC failure in the UK

A key requirement for modern supply chain leaders is to embrace technological change, but with it following rather than leading. That means technology is there to support the organization’s processes, systems and strategy, which are themselves driven by the customer’s needs in the marketplace. It’s a temptation to identify new technology and ask “How can we use it?”, but that’s the wrong way to approach the opportunity. That ‘technology-first’ attitude may create some interesting results, but it’s got to be led by the business strategy. Looking back at new technologies as they have emerged at critical moments in industry – whether that was barcodes, containerization, RFID, robotics or autonomous vehicles – these are fantastic inventions, but they should be used on their merits to your business, not simply because other organizations are using them. The business case must come first. The business case must be driven by strategy, and strategy must be driven by the market.

That mindset should not become an excuse for inaction – you have to make changes, because if your company is changing slower than the market, then you’re going backwards. If it’s changing slower than competitors, you’re losing competitive advantage. So you have to progress, but don’t think that technology is a panacea. The research we’ve done at Cranfield School of Management shows that there is no correlation between the amount of money invested in technology and business success.

The problems at KFC in the past week are just another example of supply chain risk in action. Supply chain risk has historically been tackled by considering the risks to existing operations: “We are doing this, what can happen to disrupt what we’re doing?” Traditional risk management mindsets are about trying to prevent that happening, estimating the probability of the impact, taking preventive action and having contingencies in place in case it does happen.

When KFC decided strategically to reallocate the inbound logistics to DHL to deliver to 650 outlets, that’s a strategic direction, which introduced a risk into the business.

However, a broader view is needed in the modern era, beyond simply looking at risk to existing operations. If business strategy is about change, and if we accept that doing nothing is not an option, then to do anything strategic is, by nature, a new risk. Strategic supply chain review is putting risk into the business that wasn’t there before.

When KFC decided strategically to reallocate the inbound logistics to DHL to deliver to 650 outlets, that’s a strategic direction, which introduced a risk into the business. Remaining focused on the market, and not ‘dropping the ball’ on customer service during the implementation of strategic change, is one of the key ingredients to success that came out of the recent Cranfield/EFESO research.

Risk is partly about existing operations, but strategic change, which is fundamentally necessary to remaining competitive, introduces new risk. Businesses don’t like to discuss risk in the boardroom, which has been apparent in much of the research and projects I’ve been involved in, across more than 50 organizations in all sectors across the world.

When we first researched this issue five years ago, we found that businesses embarking on strategic change in the supply chain experienced a 50% success rate – statistically, the likelihood of success was like tossing a coin. The latest piece of work shows that five years later, we are getting better. The success rate has risen to 70%, which is excellent progress, but think of those that are still failing to deliver the promise, yet are saddled with the connected costs and management time. Failure to be successful in strategic change is a double hit, because you have not only wasted all of your effort, you also have a business without a strategy.

It’s important leaders understand the differences between success and failure. When we look at the barriers to success, consistently we see 80% people-related barriers and 20% technical barriers. That has been a consistent figure over 12 years of this research project. Technology occasionally gets in the way of successful change, but even more often it’s people that get in the way, from top to bottom. Leadership and change management are ingredients for success: technology is necessary but it’s not sufficient alone.

When we speak to board members about their risk-management approach to strategic change, it is revealing. For example, if I ask: “Did you account for exchange rates in your risk management?” they’ll say they allowed plus or minus 10%. Well, look at what has happened to exchange rates in the past five years, it far exceeds that.

Too many risk assumptions are not realistic. If you have the same people round the boardroom table every month, having the same conversations, they become blinkered, they talk the same language, persuade each other that route A is the one and that route B will never happen. You are left with this dangerous form of groupthink.

If you have no disruptive influence, the conversation and people themselves can become fixated and lead to very poor decisions. It’s human nature that people don’t like to talk about the serious things that might go wrong, they like to talk about minor risks, like currency fluctuation. In practice, they are managing risk within their comfort zone, but real risk management is about getting outside of the comfort zone.

 

Alan Waller OBE is Vice-President for Supply Chain Innovation at the International Consultancy Solving Efeso. He is also Visiting Professor in International Supply Chain Management at Cranfield Centre for Logistics and Supply Chain Management.