Other • The Value of Preparing for the Worst
June 28, 2012
The Value of Preparing for the Worst
While I only briefly touched upon the topic in Financial Armageddon, I devoted a chapter (and more) of my third book, When Giants Fall, to the disruptive impact that economic, social, political, and geopolitical upheaval would have on the day-to-day operations and bottom-line profitability of large and small businesses.
One key recommendation was that managers would need to strike a better balance between efficiency and redundancy. Instead of being anchored to a "just-in-time" approach, with minimal reserves of inventory and other resources, businesses would also need to think about "just-in-case" — that is, what they would do if they were unable to get what they needed through "normal" channels.
Prior to the financial crisis and the other unsettling developments we’ve seen in recent years, many so-called experts pooh-poohed this kind of talk, suggesting that globalization and technology had rendered such concerns obsolete. Now, of course, attitudes have changed, and some are suggesting, as CFO.com reports in "Why Inefficiency Is a Balance Sheet Asset," that there’s value in preparing for the worst.
Excess capacity and surplus working capital help companies survive shocks to the supply chain.
CFOs and the accounting profession know well how to do an upbeat financial report on the performance of any efficiently-run organization. But how can you turn inefficiency into a profit or an asset?
Well, why would you want to? Prof, Ian Goldin knows why. He’s the director of the Oxford Martin School at Oxford University, an educational establishment that specializes in thinking about global questions that affect the future. In short, Goldin believes that "the professional push to sweat your assets is dangerous."
In a recent presentation to CFOs at the annual Finance Directors’ Forum conference in London, Goldin talked about how the high degree of globalization, integration, and connectivity has been "the best positive force that humanity has ever known." At the same time, he argued, "we must get much smarter at managing the systemic risks — whether they are cyber risks, pandemic risks, financial risks, or other risks."
In business, he said, we see this with "increasingly tight, elongated, tense supply chains and smaller capacity": efficient, yes; highly connected, certainly. But "whether it’s your working capital, oxygen bottles in a hospital, parts in a factory, spare people in your
firm . . . when there’s a shock in the system, it amplifies much quicker," he warned. A factory in Oxford can be brought to a standstill because of a small disruption in the English Channel.
Goldin challenged the accounting profession, which, he said, "is not giving us a reward for resilience and spare capacity." And he asked the CFOs present, "How do you ensure that you’re able as a finance director to value resilience and some capacity to absorb shock? How do you explain to your shareholders that actually having some spare capacity or backup systems is a good thing for the long-term survival of your firm?"
Statistics: Posted by yoda — Thu Jun 28, 2012 8:03 pm
View full post on opinions.caduceusx.com