Supply Chain Issues Ability to Stretch Board Oversight

Organizational supply chain management is the newest, though entirely undesirable, oversight responsibility for the overburdened board.

From congested ports and truck driver shortages to extreme weather conditions, a host of disparate factors continue to create major outages in critical organizational supply chains. Once considered a transitory concern, supply chain disruption persists as a major operational, financial and inflationary risk during the global pandemic. And if not properly addressed at the executive level, oversight responsibility can become a major flashpoint within the board/management dynamic.

The roots of the supply chain problem are relatively well established. Pandemic-related factors have created labor shortages, miscalculations of demand, shortages of inventory, bottlenecks in the transportation of goods, production cuts and temporary closures of ‘factories. Individually and collectively, these disruptions have caused cross-industry ripple effects which has exacerbated access to essential technologies, commodities and raw materials needed to produce goods and commodities.

The Federal Reserve’s projections on the temporary nature of the supply chain disruption proved, like its initial observations on inflation, to be overly optimistic. Supply chain issues persist across all industry sectors, contributing significantly to inflationary pressure and diminishing corporate financial performance and product development and innovation. It’s to the point where even movie theaters are showing popcorn shortage and other grant items.

So with our apologies to the Fed, the supply chain disruption has not gone away. And it won’t, as long as the global economy continues to grapple with the lingering effects of the pandemic, public health restrictions and the overall economic recovery. This can lead to price increases and delays that limit business profit margins – while increasing the prices that businesses and their consumers ultimately pay for goods. These are factors that legitimize supply chain disruption as a real risk to the business, demanding the attention of the board.

And therein lies the “friction of governance”; whether such attention would be seen as an unnecessary board intrusion into a matter normally reserved for management. Many organizations have deep hierarchical levels devoted to operations, procurement, demand planning, and supply chain issues. Leadership teams increasingly include executives responsible for logistics, distribution, and supply management. Chances are they are well covered and may not understand the need for board oversight. Don’t worry, we have this. It’s quite technical, but that’s what we do.

On the other hand, most boards are aware of enterprise risk issues and their related oversight functions. Directors understand that what constitutes “business risk” is an evolving concept, not a static one. They read the same stories about supply chain disruption as management. They experience it in their personal lives. And they are increasingly aware of its impact on the business. They will want regular updates from management; they will not be content with a passive role. It’s a scary thing; the stakes are really high. We need to know what’s going on to do our job. May I?

In this regard, supply chain disruption is symptomatic of a growing source of tension in the board/executive management dynamic: a blurring of the distinction between governance and management roles caused by the expansion of board oversight responsibilities, fueled by the pandemic. As boards of directors are pressured by courts, regulators and activists to adopt a broader interpretation of their duties, it is natural to expect that they will come up against what is traditionally seen as the management field. And not be welcomed with open arms when they do.

When that happens, it’s time to talk. The company’s ability to identify and respond to emerging business risks depends on a consensus between the board and management as to where each stands on the issue: a division of responsibilities based on mutual respect of their respective functions and expertise. This is especially the case with something as fundamental to the business as access to critical production supplies. New challenges often require new approaches to tasks and job descriptions.

Such discussion between the board and management should be the byproduct of leadership vision, not in response to a crisis. Get ahead of the problem; the board and management can often “see it coming”. We’re talking about something that could lead to a permanent erosion of a company’s customer base. So agree on the risk, identify the duties; develop responses.

After all, we want to know about the popcorn shortage before we go to the theater, so we can bring our own “stash” rather than waiting to find out there’s a problem until we arrived at the concession stand.

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About Bob C. Zoller

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