We are on Episode IV of the special five-part podcast series on an innovative approach to managing third party risk. This week I am joined by James H. Gellert, the Chairman and Chief Executive Officer (CEO) of Rapid Ratings International Inc. (RapidRatings), the sponsor of this series. Our conversation is on helping companies manage their third-party supply chains through financial health. The RapidRatings approach is incredibly innovative, with a series of products and services that should be considered by the compliance practitioner. Today, we discuss some of the challenges Gellert sees in 2019 and going forward.
Gellert began by observing that organizations are aligning their suppliers and supply chain to be the more resilient to market volatility. With this increased volatility, suppliers need to be able to go through such periods and come out on the other side still in good business and financial health. This certainly contributes to the longer-term core health of a company. Another area critical to understanding your business risk is “what the two to three-year perspective is on a company as well as the one-year perspective. Companies tend to try to align themselves with suppliers that have strong core health so they will be around, be trusted, be nimble and agile over the next handful of years.” However, even if you wanted to avoid all risks, your organization cannot do so. This means you must work to manage risk. But with greater risk this usually means greater business opportunity.
It really turns on getting “full risk visibility”. As Gellert noted, “one cannot manage the unknown risks that can occur in unknown.” This goes to the big risks such as is now going on in the UK with the Brexit imbroglio that Parliament has put not only itself but the British nation into. Gellert said, “Everyone knows that Brexit is extremely important for the companies that are affected in the UK and in Europe, but without a resolution on what the Brexit plans going to be, no one really knows how much. This uncertainty is affecting companies and the management of their supply chains in all sorts of ways.” But even turning away from such massive unknowns as Brexit, down to a much more macro environment, Gellert believes “it is important for people to recognize that over the last 10 years this country has been in an incredible credit market, with artificially low interest rates and investors scrambling down the credit curve to find yield wherever they can.” It will end and are you ready from a supply chain risk management perspective?
While the easy credit market has bolstered the low end of the credit markets so that weak or inefficient companies have had access to capital and been able to raise money at inexpensive rates; as the market begins to change you will see more volatility in the market, higher interest rates, therefore higher costs of capital. This means that over the next couple of years, companies will be unable to refinance the debt that they have so easily financed over the last few years. Gellert believes this is “going to cause a lot of problems because private companies and smaller businesses will have a harder time raising money and that will affect their ability to expand and just deliver on goods that have obligations to deliver on.” This translates to supply chains as a convergence of factors wreaking havoc over the next few years on supply chain risk management.
We then turned to cyber risk, which is one of the, if not the, hottest risk management issues for a variety of parties, sectors and relationships for 2019 being discussed at the Board level. While this topic gets a fair amount of attention when someone starts to work with a new supplier, it gets less attention in the continuous monitoring of those suppliers. Gellert says that you must “be able to look over time during the lifecycle of working with a company on whether they’re able to continue to invest in state-of-the-art information technology systems that will allow them to avoid those cyber risks or manage those cyber risks. And companies that are weakening in financial health have less flexibility to be able to invest in the other areas that are in areas that are going to protect or expose their customers and other counterparties to risk cyber being one.”
RapidRatings has found more correlations between financial health ratings and the weak companies that carry high financial risk and their ability to deliver a quality product. The ability to deliver on time and the ability to invest in cybersecurity programs are all interconnected. Gellert sees that “They really need to be viewed as interconnected elements and not looked at as a separate topics and separate risks. The more sophisticated risk management programs are evaluating them as connected risks and making sure that their suppliers have programs in place to try to be able to spot problems before they exist.” This is another facet of getting transparency and a collaborative relationship with suppliers to discuss these problems before they become crippling events so that you can review and remediate them as they are potentially emerging. It means, above all, being proactive and understanding the interconnected relationship involved.
Many compliance practitioners and supply chain professionals understand the need for due diligence but that is only the starting point. It is the starting point for an ongoing relationship and ongoing dialogue, ongoing monitoring companies with more mature compliance programs certainly understand that in the supply chain realm. More and more companies are embracing this process. Gellert stated, “it is being able to action the analytics and action the data that emerges from the risk management itself to be able to build a more cohesive risk management process. It’s really about linking all of those through the business units of a company that may touch on the risk management of an individual supplier as well as the supply base as a whole.”
Please join us tomorrow when we conclude the series by considering the supply chain efficiency premium going forward.
This podcast series is sponsored by Rapid Ratings International, Inc. For more information, check out their website at www.rapidratings.com.