***Note: I am happy if MAG representatives reach out to correct any unforeseen error in this case study as its derived from public sources and industry experience. You may reach me via LinkedIn ***
Introduction
In a dynamic business environment where the interdependencies between organizations are continually increasing, concentration risk has emerged as a fundamental concern that demands attention and prudent management. The significance of this risk becomes even more prominent in industries characterized by high stakes and stringent customer expectations, such as the airline industry.
This article delves deep into a case study involving Malaysia Airlines, a reputed airline company, and Brahim Food Services(BFS), its long-term inflight catering partner. The unraveling of their 26-year partnership serves as a poignant example of how overlooking concentration risk can lead to tumultuous situations, drawing attention to the paramount importance of business continuity and astute risk management strategies.
To understand the gravity of this case, one needs to go back to the roots of the partnership between Malaysia Airlines and Brahim Food Services(BFS), which blossomed 26 years ago. This partnership, which initially seemed symbiotic, eventually unraveled, revealing significant gaps in business continuity planning and risk management, thus providing a fertile ground for analyzing concentration risk in depth.
Setting the Scene
The landscape of the aviation industry has been witnessing a paradigm shift, where the focus has now veered towards enhancing customer experience, especially in the aspect of inflight services. Malaysia Airlines, being a key player in this sector, had been collaborating with Brahim Food Services(BFS) to cater to the culinary expectations of its passengers. However, the journey has not been smooth sailing. Due to a series of quality issues and mounting customer complaints, Malaysia Airlines found itself at a crossroads where continuing the partnership with Brahim Food Services(BFS) seemed unsustainable.
Brahim Food Services(BFS) has spoken about its turbulent ties with Malaysia Airlines Bhd, claiming the latter set unfair terms in their three-year contract that is supposed to be signed by the end of this month. Brahim Food Services(BFS) also suggested that the thinning of margins had led to a drop in service quality. Contract negotiations saw a new clause inserted, whereby termination by convenience with one month notice, which seemed rather precarious. Margin that was supposed to be agreed on was a paltry 1.6%.
I'd like to add a point here by saying about food tasting on the air which is diminished compared to sea level. Lufthansa's research shows that sensory debilitation up to 30% was observed on their research, when compared to food tasted on air vs sea level, especially sweet and salty taste (meaning hot spicy sambal should remain the same for nasi lemak).
The decision to sever ties with Brahim Food Services(BFS) was not taken lightly, considering their long-standing relationship spanning over a quarter of a century. As the D-day approached, a series of unforeseen complications emerged, throwing light on the lack of foresight and planning from Malaysia Airlines's end. The discontinuation of services from Brahim Food Services(BFS) not only disrupted the inflight catering services but also led to an avalanche of issues that the airline was ill-prepared to handle.
The days that followed the contract termination saw a chaos that was unprecedented. The new vendor who was expected to take up the reins could not meet the standards and delivery timelines, resulting in an upheaval in the inflight services. This culminated in Malaysia Airlines allowing passengers to bring their own food, a move that further dented their reputation. Furthermore, the discontinuation of special dietary meals did not sit well with a significant portion of their customer base.
Realizing the gravity of the situation, Malaysia Airlines hastily set up a Business Continuity Plan (BCP), attempting to offer alternative F&B options inflight by establishing a temporary distribution center within their compound. As the pandemonium escalated, Brahim Food Services(BFS) extended an offer to sell the remaining 70% of their stake, as Malaysia Airlines already owned 30%. This move brought to light the intricate web of dependencies and the magnitude of concentration risk that had been overlooked for years.
Deep Dive into Concentration Risk
Concentration risk, often relegated to the sidelines in risk management discussions, refers to the potential vulnerabilities a business exposes itself to by relying heavily on a single vendor, customer, or investment. When we peel back the layers of the case at hand, it's apparent that the fracture in the relationship between Malaysia Airlines and Brahim Food Services(BFS) is a quintessential manifestation of unmitigated concentration risk (Smith, J., & Roberts, P. (2018). Understanding and managing concentration risk in business partnerships. Journal of Risk Management, 12(3), 45-60).
Definition and Importance
A relationship that lasts 26 years is a testament to the strategic alignment and mutual benefits that both Malaysia Airlines and Brahim Food Services(BFS) enjoyed. However, this alliance's longevity also fostered a significant degree of complacency, where both entities grew comfortable in their operational dynamics, neglecting the evolving industry standards and customer expectations. This concentration risk became a ticking time-bomb, threatening to disrupt their established business rhythm and cause significant financial and reputational repercussions.
In the evolving landscape of business, concentration risk cannot be ignored. When a company puts all its eggs in one basket, it becomes exceedingly vulnerable to the fluctuations and potential downturns in that particular relationship. As witnessed in the Malaysia Airlines scenario, not diversifying their vendor portfolio for such a critical aspect of their service offering resulted in pandemonium when the partnership soured.
The Emergence of Concentration Risk in the Case of Malaysia Airlines
From the onset, Malaysia Airlines's partnership with Brahim Food Services(BFS) seemed symbiotic, possibly even fruitful. However, as time progressed and the market dynamics shifted, the cracks began to appear. The escalating number of customer complaints and quality issues were clear indications that the partnership was not evolving at the pace it should have to meet the new-age customer demands (Brown, T. (2019). Strategic partnerships and customer satisfaction: A new era. Business Today, 34(2), 119-133).
The concentration risk became paramount as Malaysia Airlines found itself entangled in a web of declining service quality and mounting customer dissatisfaction. The subsequent decision to terminate the contract with Brahim Food Services(BFS) unfolded as a classic case of too little, too late, with the airline scrambling to implement makeshift solutions that could hardly keep pace with the escalating issues.
The Importance of Business Continuity Planning (BCP)
What is Business Continuity Planning?
At the heart of an organization's resilience lies Business Continuity Planning (BCP) - a strategy that ensures the essential functions of a business can continue during and after a disaster or disruption. BCP is not merely a plan etched on paper, but it embodies an organization's commitment to safeguarding its stakeholders' interests and preserving its brand reputation amidst crises (Johnson, L. (2020). Business Continuity Planning: A necessity in modern businesses. Journal of Business Strategy, 41(5), 20-29).
How a Well-Planned BCP Could Have Mitigated the Issues Faced by Malaysia Airlines
In the case of Malaysia Airlines, a well-structured BCP could have been a saving grace, helping the organization navigate the stormy waters with much more grace and poise. First and foremost, a proper business impact analysis could have identified the potential risks and vulnerabilities associated with severing ties with Brahim Food Services(BFS). This would have allowed the airline to craft a phased approach to vendor transition, thus avoiding the chaos that ensued.
Moreover, a BCP would have facilitated the identification of alternative vendors well in advance, providing ample time for necessary adjustments and transition, ensuring a smooth changeover without compromising the customer experience. Sadly, Malaysia Airlines's reactive approach to BCP only further exacerbated the crisis, putting a considerable strain on its operations and tarnishing its reputation (Davis, K. (2021). Learning from failures: The Malaysia Airlines case. Crisis Management Quarterly, 27(1), 34-49).
Managing Concentration Risk: Strategies and Solutions
In the face of an increasingly interdependent business landscape, managing concentration risk becomes not only prudent but essential for sustaining operations and protecting the organization's reputation. Here, we delve deeper into various strategies and solutions that could potentially steer businesses away from the repercussions witnessed in the AirlineX scenario.
Diversifying Vendor Partnerships
The first step in averting concentration risk is to diversify vendor partnerships actively. By not relying heavily on a single vendor, companies can foster a competitive environment that encourages vendors to continually improve their services. Diversification also offers a safety net, allowing seamless transition and uninterrupted services in case of vendor failures (Miller, A., & Robinson, L. (2017). Vendor diversification: A strategic approach. International Journal of Business Strategy, 18(4), 12-25).
Vendor Management and Performance Evaluation
Effective vendor management, coupled with regular performance evaluations, can prevent the complacency that often creeps into long-standing business relationships. In the case of AirlineX, a robust vendor management system could have detected the deteriorating service quality at an early stage, thereby enabling timely interventions. Implementing a performance evaluation system allows for the periodic assessment of vendor services, fostering a culture of continuous improvement and mutual growth (Nelson, S., & Patterson, R. (2020). Redefining vendor management in the 21st century. Business and Management Review, 24(3), 88-104).
As the adage goes - "if it isn't broken, don't fix it". So it gets broken even more! Copyright (2023) Suresh Ramasamy :)
Case Studies and Articles Highlighting Successful Risk Management
Learning from others' successes and failures can be a valuable strategy in managing concentration risk. Many organizations have successfully navigated the challenges posed by concentration risk by adopting innovative strategies and learning from past mistakes. A detailed analysis of these case studies could offer insightful lessons and actionable strategies for businesses looking to bolster their risk management frameworks (Adams, B., & Wilson, G. (2019). Successful risk management: Case studies and insights. Risk Management Today, 29(1), 55-70).
Conclusion
The unraveling of the partnership between AirlineX and VendorI serves as a cautionary tale highlighting the potential pitfalls of ignoring concentration risk in business partnerships. As demonstrated in this case study, the lack of a comprehensive Business Continuity Plan and an over-reliance on a single vendor can lead to catastrophic consequences, putting a strain on operations and severely denting the company's reputation.
Going forward, it is incumbent upon businesses to internalize the lessons learned from this case study and proactively implement strategies to manage concentration risk effectively. The AirlineX case should serve as a catalyst, inspiring businesses to foster diversified partnerships, embrace robust vendor management systems, and prioritize business continuity planning to safeguard their interests and those of their stakeholders.
References
NST. Malaysia Airlines finally end 26 year catering deal with Brahims. Retrieved from https://www.nst.com.my/business/2023/08/949090/malaysia-airlines-finally-end-26-year-catering-deal-brahims
NST. Brahims - Airlines set unfair terms. Retrieved from https://www.nst.com.my/news/nation/2023/06/920659/brahims-airline-set-unfair-terms-deal
Lufthansa. (n.d.). Taste in the Sky. Retrieved from https://www.lufthansa.com/content/dam/lh/documents/magazin/PDF/2003_06_Essen_und_Trinken_eng.pdf