An easy answer to the downward sliding business performance is the coronavirus pandemic that is resulting in the shutdown of some of the major economies. While a cure for this declining business health is underway, the need of the hour is a major evolution of our business perspective. It will not be entirely wrong to say that more than focusing on reviving the profit margin, it is crucial to implement risk mitigation measures. Such risk mitigation measures will be instrumental to help stakeholders brace for any sudden economic shock or to seal any open wounds in their business.
Imminent Risks That will Inhibit Enterprises to Design Business Contingency Plans
Supply Chain Inconsistency- Buyers from industries such as automobile, pharmaceutical, chemical sectors are heavily reliant on the consistent supply of products and service delivery. However, with some of the major regions under lockdown, the distribution capacities of suppliers are getting severely hampered. This is creating a serious supply deficit for buyers in these industrial sectors who are left without any back-up to maintain their production schedule. This imminent challenge is making it imperative for these sectors to explore risk mitigation measures to stay immune from such sudden supply shocks.
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Breach of supply contract- Absence of definitive clauses in contracts will allow a section of suppliers to take the liberty to resort to actions that are clear breaches of contracts. For instance, the absence of a risk mitigation clause such as a price lockdown in a supply contract will enable suppliers to set prices of their products on their own terms. They will tend to state the current situation as an excuse for a sudden price hike. Considering this possibility, the inclusion of binding clauses that will ensure that suppliers stay compliant to the contract is one of the most imminent risk mitigation measures in this troubling time.
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Uncertainty in the recovery of market demand– Quite in contrary to the recession in 2008 that was triggered by economic policy failures, this perceived economic recession owing to a viral outbreak makes it difficult to anticipate the recovery of the market demand. What is more dangerous is the lack of foresight of enterprises that are also troubled with liquidity shortages. Desperate to stay relevant in the current market, such enterprises fail to assess from a long-term perspective and attempt to either liquefy their assets or pump in more investments without gauging the possibility of ROIs. This reinstates the importance of risk mitigation measures required to survive in this economy.
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Risk Mitigation Measures that are the Needs of This Hour
Collaboration with risk-mitigation advisors- Apart from the economic impact of the recent pandemic, buyers from the BFSI sector, in particular, are often challenged with the absence of effective data management, inefficient organization-wide risk modeling framework. These factors make it crucial for them to leverage credit risk mitigation measures to address the potential risks faced in this sector. As a matter of fact, the adoption of risk mitigation services in MEA is anticipated to grow due to the collaboration among governments and big corporates to reduce the economic impact caused due to the outbreak of diseases, especially caused by viruses such as MERS-CoV and Ebola in Africa and the Middle East.
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Engage with risk mitigation service providers who provide risk-scoring of suppliers- Risk scoring is an algorithm used to evaluate a vendor and rank them on a scale of 1 to 1,000 where a higher number denotes higher risk. It is advised that buyers partner with risk mitigation service providers who use risk scoring methodology as they can easily quantify threats and deficiencies associated with suppliers.
Resort to stress-testing measures- Engagement with risk mitigation service providers who offer regular stress testing will help buyers to ensure the appropriate use of capital assessment. Moreover, extreme stress testing such as reverse stress testing will aid buyers to resolve emerging threats to future business plans and strategies.
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