Concerns mount on supply chain risk

Supply chain risk remains a key issue for companies said Andreas Berger, chief regions and markets officer, Allianz Global Corporate & Specialty AG in a StrategicRISK video interview at the Amrae Rencontres. It was a sentiment that was echoed elsewhere during the conference.

Michel Yarhi, former head of the insurance risk management at Société Générale, president of AMRAE from 2006 to 2008, and now president of CEFAREA (French Arbitration Centre of Reinsurance and Insurance), stressed that the supply chain is now a key part of a company’s risk. “When you analyse risk today, you don’t just focus on your own workplaces but have to have a global vision. This should encompass the entire supply chain from those who provide the raw materials and components that you use in your products through to the stage when you provide your customers with these. A problem at some point in the supply chain can mean the business suffers a significant loss,” he told StrategicRISK.

Further, recent history shows that in supply chain disruption terms lightning can strike twice, at any rate as far as some industries are concerned. Michel Dennery, FERMA (Federation of European Risk Management Associations) vice-president and deputy chief risk officer, GDF SUEZ, explained.

“The earthquake/tsunami in Japan affected a lot of automobile and electronics companies that had production facilities in the region. But generally they were able to take this in their stride because they had a continuity plan and were also producing elsewhere. Unfortunately for many these alternative facilities were based in Thailand – and just a few months later were affected by the flooding there.

“No-one had really thought that the same companies could be hit by two different events in different countries arising from different causes. It was a double whammy and has posed some new considerations.”

Speaking generally on the effects of supply chain disruption, Dennery added, “The key question is how to restart operations quickly when a supplier of essential goods goes down. “It is essential to keep the confidence of customers. They will understand if there has been a natural catastrophe but they just cannot wait too long for the business to recover. So there is the danger that a competitor will come along and gain market share.”

Jason Crumley, director risk control and management, Gras Savoye, believes in proactive measures to help clients avoid loss. He explained that the basic first steps tend to be analysis of the supply chain, identification of suppliers, and evaluation of their different exposures - but he does not believe it should stop there, “otherwise you just leave the risk manager with the same problem even though he now knows more about it.

I think the broker should work with him on solutions to help both him and the people in his purchasing and production departments to properly manage these risks,” he said.

Crumley advocated an approach adopted by his company which involves a risk exposure watch platform that treats information from a large number of internet sources, enabling the identification of events taking place at the different suppliers’ sites and the geographical areas where these are located. “For example, this can highlight information as to whether

suppliers have labour relations problems, have experienced industrial incidents such as fire or pollution, are in areas that have suffered a natural hazard such as a flooding or have other types of third party liability issues. It gives a ‘heads up’ on the health of the supplier and its site, indicating exposures that have occurred or might happen.”

Knowing what is or may be in the offing can give a company the opportunity to take mitigating action. Crumley gave the example of a company using natural materials such as plants for its products. “For them the key issues include natural catastrophes as well as extremes of temperature and even infestation by insects. Monitoring the information concerning the sites means that if something untoward happens at one plantation or geographic area, they can take measures to secure the resources they need from other plantations.”

Crumley considers that some purchasing departments may be unaware of how the loss of a particular key supplier could impact the company’s sales turnover.

“The risk manager can be a pivotal player by highlighting the potential impact on sales of such a supplier going down or not performing,” he said.

However, while risk managers may be able to plan for the loss of key direct suppliers, a common problem is inability to identify all tiers in the supply chain. Kelly Lyles, general manager – France, Chartis, commented: “In our experience it has proved very difficult for risk managers to know every single link in the supply chain. And of course they cannot manage what they do not know.”

This lack of knowledge also makes it difficult for insurers to provide contingent business interruption cover. “Risk managers and insurers need to work together to provide a solution that allows us to provide cover and underwrite it properly,” said Lyles.