Supply Chain Risk Management and Business Resilience Solutions

Transcription

1 9/17/13 Risk in an Interconnected World Supply Chain Risk Management and Business Resilience Solutions Linda Conrad Director of Strategic Business Risk Zurich Global Corporate Enterprise resilience Understand issues in enterprise resilience, supply chain, business continuity and crisis response. Identify support needed to reduce your business disruption risks. Develop action points takeaways to help protect your profitability. An Enterprise Risk Management (ERM) approach can be helpful 34 1

2 9/17/13 Identify, assess, and improve risk to optimize the supply chain Utilizing a consistent risk management approach Identify critical suppliers based on profitability impact Identify vulnerabilities through comprehensive assessments Quantify risk exposures and benchmark against other risks Prioritize mitigation actions Monitor key risk indicators and test contingency plans Embedding risk management in business processes (procurement, logistics) Consider risk transfer for significant exposures 35 Understanding supplier disruption impact Japan Tohoku Earthquake (03/2011) Total economic loss estimate of $ billion Total projected insured loss estimate of over $35-40 billion Initial report of estimated CBI loss between $5-15 billion Many supply chain losses were uninsured (electric outages etc.) Thailand Floods (4th Quarter 2011) Total economic losses of almost $50 billion - Thailand's costliest Total insured losses already at $15 billion, could surpass $20 billion Portion of CBI insured losses still far from being settled Many supply chain losses were uninsured 36 2

3 9/17/13 Zurich's top-down approach helps you to: set priorities make the right decisions take targeted action Global Risks O O O O O O O O Understand your organization Business Modeling Business Impact to bottom line of organization Risk Improvement Action Decision & Action Enterprise Risk Wheel: What s the challenge? 3

4 9/17/13 Why Enterprise Risk Management (ERM)? 2012 survey by Federation of European Risk Management Associations (FERMA) found firms with a more mature approach to Risk Management have better financial results. Study found a correlation between risk management maturity level and both shortterm financial performance and long-term growth. 75% more firms with advanced risk management practices had Earning Before Interest Taxes Depreciation and Amortization (EBITDA) growth of over 10% 62% more firms with advanced risk management practices showed revenue growth of 10%. Creating an active risk culture is correlated with higher growth, as the company becomes more aware and accountable for risk. Source: 2012 study by Federation of European Risk Management Associations ERM Supports Holistic Risk Mitigation Efforts Consistent process across all risk categories Consolidation of individual ( silo ) risk management strategies Understand end-to-end critical business process that spans enterprise silos & identify process owners 4

5 9/17/13 Supply chain disruptions are more frequent Nearly 85% suffered a supply disruption in 2012 Over 50% had more than one disruption number of supply disruptions Number of supply disruptions per company per year per company per year BCI survey over 300 companies responded Zurich-sponsored study with Business Continuity Institute SC6(V3)Jul/05/10GC/ZCA Analysis of over 2,500 disruptions Accidents Production Problems Labor Unavailability and Natural Disasters Sabotage, Terrorism, Crime, Financial losses and premiums Demand Variability/Volatility Physical and Regulatory Industry-wide (i.e., Market) Lawsuits Source: The University of Manchester (Manchester Business School) SC7(V1)Jul/05/10GC/ZCA 5

6 9/17/13 Key Impact of Disruptions Financial cost Economic losses Corporate image cost Human cost Environmental 0% 20% 40% 60% 80% 100% Source Manchester Business School 43 Financial Consequences 19% 20% 14% 22% < 1M 1-10M M M >500M 25% Source: Zurich s supply chain loss event database 44 6

7 9/17/13 Matching Duration and Impact >$500 M $ M $ M $1-10 M <1 week 1 Wk - 1 Mth 1 mnth - 1 yr 1-5 yr >5 year < $1M 0% 20% 40% 60% 80% 100% 45 Supply chain disruptions increasingly impact financial performance 20-30% shareholder value impact 46 7

8 9/17/13 Evidence from Claims: Share of Business Interruption losses grows Business Interruption share Evolution of BI annually Share at Large averaged Claims (LCD) claims data % 40% 42% 30% 28% 35% 32% 27% 28% 20% 17% 16% 20% 18% 10% 0% BI Share Poly. (BI Share) Source: Zurich GCi Europe Portfolio Supply Chain Risk Assessment helping drive business resilience SC9(V1)Jul/05/10GC/ZCA 8

9 9/17/13 Enterprise Resilience Challenges 49 Assessing supply chain disruption risk 1 Supply Chain Risk 2 Risk Assessment 3 Strategic Analysis Senior Management agrees Supply Chain risk is a significant exposure. Various Supply Chain risks are assessed (probability x severity), and key risk is identified as exposure to one critical supplier. More in depth study is performed, and the upside potential considered. 50 9

10 9/17/13 1 Supply Chain Risk Senior Management agrees Supply Chain risk is a significant exposure. Begins with discussion with members of executive team Strategic risks are mapped, and vetted with the team Supply Chain Risk becomes a key focus area 2 Risk Assessment Various Supply Chain risks assessed (probability x severity), and key risk is identified as exposure to one critical supplier. Strategic risk assessment session is conducted at senior level Risks, triggers and consequences identified, defined and assessed Scenarios represented graphically to prioritize exposures & actions Top risk is failure of Critical Supplier A (SCENARIO # 4) 10

11 9/17/13 3 Strategic Analysis More in depth study is performed, and the upside potential considered. Map buildings, routes, warehouses, customers, ports and suppliers Values / quantities of goods Interdependencies identified Disruption scenarios modeled Calculation of effects Report of risk and strategies Risk assessment stages Determine those suppliers most critical to protecting profitability Develop a supply chain/value chain map Gather key supply/supplier details Evaluate risk factor information Define and evaluate risk scenarios Develop risk grading Determine risk strategies 11

12 Supply / supplier 1 Supply / supplier 1 TA MT ML RT AV AA OR GATS adj TA MT ML RT AV AA OR GATS adj Risk Factor As is As is As is As is As is As is As is As is Risk Factor As is As is As is As is As is As is As is As is Industry/Supply-Specific - Geographical Exposures B C A C B Industry/Supply-Specific - Economic - Geographical Exposures. Exposures C B B C C A C C C B Industry/Supply-Specific - Political - Economic Exposures. Exposures. C C C B C C C C C C Industry/Supply-Specific - Structural - Political Risks Exposures. B C B C B C D C B C Supplier Industry/Supply-Specific Specific - Geographical - Structural Exposures Risks B B C B B B C D B B Supplier Specific - Economic Exposures C C A C C Supplier Specific - Geographical Exposures B C B C B Supplier Specific - Political Exposures C C C C C Supplier Specific - Economic Exposures C C A C C Supplier Specific - Structural Risks B B B D B Supplier Specific - Political Exposures C C C C C Product Management / New Product Development B B C E (=C) B Supplier Supplier Selection Specific Management - Structural Risks B B B B B B B D C B Supplier Product Management Management (Financial / New Product Strength) Development B B B B C C C E (=C) D B Supply Supplier Chain Selection Performance Management B B B B B B B B C C Internal Supplier Risk Management (Financial Strength) C B B B C C B C C D Business Supply Chain Continuity Performance Management (BCM) C B A B B B C B C C Vulnerability Internal Risk To Management Accidents / Errors B C C B C C C B B C Vulnerability Business Continuity To Malicious Management Intervention (BCM) A C C A B B B C C C Commercial Vulnerability Contract To Accidents Management / Errors B B B C C C B C B B Skills Vulnerability And IP Management To Malicious (Insured) Intervention E (=C) A C C E (=C) B E (=C) B E (=C) C Regulatory Commercial Issues Contract Management A B C B A C A B A B Relationship Skills And IP With Management Supplier (Influence, (Insured) Maturity) B E (=C) B C A E (=C) C E (=C) C E (=C) Supplier's Security Of Supply B C B B B Regulatory Issues A C A A A Supplier's Knowledge And Experience Of Providing Relationship With Supplier (Influence, Maturity) A B B B A A C C A C Required Supplies Supplier's Security Of Supply B C B B B Skills and IP Managament (Supplier) E (=C) C E (=C) E (=C) E (=C) Risk Supplier's Engineering Knowledge Factor And Experience Of Providing B A B B B A B C B A Required Supplies Skills and IP Managament (Supplier) E (=C) C E (=C) E (=C) E (=C) Risk Engineering Factor B B B B B 9/17/13 Zurich supply chain rating risk model Historical database of supply disruptions Micro LCD Micro LCD GRADING - Comparisons GRADING - Comparisons Assessment and grading Risk Rating Model Other lines of business Accumulation database Value flow mapping GSP Industry and supply research Insolvency assessment Zurich s family of Supply Chain risk tools Risk Room Provides macro country insights, e.g. political stability, economic status, labour situation Total Risk Profiling Structured approach to defining risk appetite and prioritisation for dealing with risks in the supply chain NatCat - Location risk Provides exposure information for supplier locations in respect of e.g. floods, earthquakes, windstorm, related transport infrastructure Risk assessment Formalised assessment of relevant areas which are part of the due diligence process within the sourcing activity Risk understanding Profit risk exposure Enables a company to understand its total supply chain profit exposure in terms of a particular location, country or region Business interruption analysis Helps a company model its relevant BI exposures Disruption understanding Helps in the understanding of the level and nature of disruptions in the particular industry or a particular location from a unique database 56 12

13 9/17/13 Zurich Risk Room (ZRR) Provides macro country insights for example political stability, economic status, labor situation 57 Nat / Cat Location Risk Engineering team can provide information in respect of the exposure of the supplier production sites to floods, earthquakes, windstorm related and transport infrastructure

14 9/17/13 Zurich supply disruption loss event database Helps the client to understand the level and nature of disruptions in the particular industry or a particular location from a unique database. 59 Business Interruption Modeling Analysis Helps a client model their relevant BI exposures

15 9/17/13 Risk Management along the Value Chain An efficient Top-Down Approach Enterprise High protection High protection $ margin High protection Suppliers Sourcing Production Distribution Clients Understand production processes for key products Understand the key value creation processes for key products (boundaries and bottlenecks, profit margins, etc.) Assess key risks in value creation: how bad & how long Decide on best enterprise protection measures 61 Profit Risk Exposure Maps location of insured, supplier manufacturing and distribution facilities and the supply chain route including ports of travel

16 9/17/13 How we have helped other customers through risk assessment Two key suppliers at the next level in the supply chain were in significant financial trouble Exposure due to potential failure of a supplier higher than initially estimated: USD10 million vs. USD1 million Actual reliance on one supplier significantly greater than presumed: 70% vs. 20% Company discovered that key component supplier and its alternative were located in earthquake zone SC12(V3)Jul/05/10GC/ZCA Covering risks not covered by other insurance products SC16(V2)Jul/05/10GC/ZCA 16

17 9/17/13 Supply Chain Insurance Highlights All Risk contingent business interruption coverage Does not require a physical damage occurrence Allows you to transfer your supply chain risks for named suppliers Can even extend to lower tier suppliers Supply Chain Risk Assessment done before insurance quotation Risk Assessment cost rolled into supply chain policy Limits of up to $100M available; minimum deductible of 10% Pre-agreed claims methodology available for faster settlement Transparent, predictable claims settlements SC18(V1)Jul/05/10GC/ZCA 17

18 9/17/13 Supply Chain in your captive Soft insurance market is a great time to explore innovative risk transfers via captive Supply Chain, Political Risk, Employee Benefits, etc. Inclusion of additional programs can lead to greater risk diversification, a proven long-term strategy Risk integration can work to optimize handling of exposures 67 Supply Chain Healthcheck. Do you know who your critical suppliers are, and how much their failure would impact your company s profits? Have you fully mapped your critical supply chains upstream to the raw material level and downstream to the customer level? Have you integrated risk management processes into your supply chain management approaches? Do you have routine, timely systems for measuring the financial stability of critical suppliers? Do you understand your tier 1 production facilities and logistic hub exposures to natural catastrophes? Is supply chain risk management integrated into your enterprise risk management approach? Do you record the details of supply chain incidents and the actions you have put in place to avoid future incidents? Do your tier 1 suppliers have business continuity plans that have been tested in terms of their viability? Have you provided risk training to your supply chain management team? Is risk on the agenda at performance meetings with your strategic suppliers? 68 18

19 9/17/13 Risk in an Interconnected World Supply Chain Risk Management and Business Resilience Solutions Thank you! Strategic Risk Management Linda Conrad Director of Strategic Business Risk Zurich Global Corporate Zurich Insurance Group The information in this presentation was compiled from sources believed to be reliable for informational purposes only. All sample policies and procedures herein should serve as a guideline, which you can use to create your own policies and procedures. We trust that you will customize these samples to reflect your own operations and believe that these samples may serve as a helpful platform for this endeavor. Any and all information contained herein is not intended to constitute legal advice and accordingly, you should consult with your own attorneys when developing programs and policies. We do not guarantee the accuracy of this information or any results and further assume no liability in connection with this publication and sample policies and procedures, including any information, methods or safety suggestions contained herein. Moreover, Zurich reminds you that this cannot be assumed to contain every acceptable safety and compliance procedure or that additional procedures might not be appropriate under the circumstances The subject matter of this presentation is not tied to any specific insurance product nor will adopting these policies and procedures ensure coverage under any insurance policy. Copyright

20 Your Supply Chain at Risk: Why an effective Contingent Business Interruption (CBI) program is critical

21 Executive summary Supply chain resiliency is more critical to business profitability and reputation than ever before. Within the content of your CBI Program (also known as Contingent Time Element cover in the US), there are three key insights into supply chain resiliency you should consider: Key issues covered in this paper Protecting your supply chain is critical to your business performance Knowing the location and other risks of your key suppliers and the impact of their failure on your organization s performance is essential Both physical and non-physical events drive supply chain disruptions, and 85% of companies reported disruptions in 2011* Zurich has innovative tools to help you gather and report more specific risk information and supplier data so appropriate risk mitigation strategies can then be put in place Zurich offers not just physical insurance CBI coverage for supply chains but also non-physical coverage and the use of captives where appropriate Know your key suppliers and customers, where they are based and an understanding of the profit/revenue exposure if they fail. This is a fundamental performance issue as much as it is a risk management issue. Remember that your supply chain can be disrupted by more than just physical events, and it s important to consider this in your overall resiliency strategy. To obtain the CBI insurance coverage you need for your key suppliers and customers at an appropriate price point, it is important to provide your insurers with the relevant information they require. Supply chain disruption insights The interconnectivity of today s global economy poses major mnancial and reputational risks to companies. Strategies such as outsourcing, offshoring and just-in-time sourcing can create corporate efmciencies, but they also increase vulnerabilities to supply chain disruptions and expose companies to global risks no matter where they are operating. A recent study by the Business Continuity Institute has uncovered deep-rooted sources of supply chain failure. Respondents from various industries in 62 countries revealed that 85% of organizations reported at least one supply chain disruption over the last 12 months, and 50% of companies had more than one disruption. Approximately 40% of disruptions originated below the immediate Tier I suppliers. Many of these disruptions were also non-physical and outside a company s control, such as change in the government or regulatory environment, or financial insolvency at a supplier. It is not just suppliers that can create problems; it could be that your customer is not able to accept your service and hence your revenue is impacted. A number of companies suffered this in Thailand. Beyond the immediate loss of revenue, these disruptions also resulted in longterm effects such as damage to reputation, shareholder concern and increased regulatory scrutiny. Both these short- and long-term effects underscore why it should be a high priority for risk managers to help develop a resilient program to protect the organization s supply chain from the impact of unpredictable events and potential coverage gaps. Zurich has worked with a number of experts in the field to better understand supply chain risk. These risk insights can be found on *Business Continuity Institute (BCI) Survey, November Why an effective Contingent Business Interruption (CBI) program is critical

22 Challenges of future CBI coverage More onus on companies to identify suppliers/customers and their locations in their chain Companies and insurers are becoming more aware of contingent exposures/ accumulations Increasing pressure to determine key suppliers and limit further unnamed/ unspecified CBI (in particular CAT perils) Increase in time element deductibles Limits and pricing are under far greater scrutiny Coverage increasingly based on quantification of potential exposure and recovery costs for critical suppliers Companies are recognizing that supplier disruption is not only caused by physical damage and seeking broader coverage Obtaining appropriate limits of Contingent Business Interruption coverage Contingent Business Interruption (CBI) is covered as an extension to traditional property Business Interruption (BI) policies. While BI insurance can cover loss of income caused by direct damage to the insured s property, CBI can cover loss of income caused by direct physical damage at a supplier or customer location. These suppliers and customers can be named or unnamed, but this distinction could impact the limits being offered. (See sidebar at left, Challenges of future CBI coverage, for issues with obtaining CBI.) Any company considering CBI coverage for the first time, or entering into a renewal period with their BI/CBI coverage, should start planning early with their broker and insurer to gather the more defined and specific risk and supplier and customer data (including the minimum data set out in Appendix A). This can help ensure that the appropriate risk mitigation, coverage and limits can be put in place, including both requirements related to CBI and potentially a broader all risk supply chain insurance. Deeper analysis of supply chain risks and CBI coverage needs In today s complex global marketplace, many companies and their brokers are challenged to proactively address supply chain exposures and create a sustainable management solution for these risks. To assist these organizations and brokers, Zurich has developed a range of Supply Chain Risk Solutions and coverage to help organizations better address the complex and changing risk landscape. Zurich can also deliver a risk assessment methodology that enables a move from a reactive to a proactive approach.* These Supply Chain Risk Solutions help identify and quantify broad supply chain risks for the purposes of helping implement effective risk mitigation and securing appropriate insurance coverage. * These services are currently available to qualimed customers subject to relevant international regulations based on teams working out of North America and Europe. 3 Why an effective Contingent Business Interruption (CBI) program is critical

23 Complete supply chain solutions and coverage Zurich is on the leading edge in delivering robust solutions coverage to customers and brokers that will help them navigate through the increasingly complex maze of global supply chain exposures: Supply Chain Risk Solutions Traditional Property Damage and Business Interruption Insurance, including Named and Unnamed Contingent Business Interruption Supply Chain Insurance Marine Insurance Trade Credit Insurance Political Risk Insurance Builder s Risk and Construction Insurance Captive/Alternative Risk for supply chain risks Strategic Risk and Resilience Management Solutions Some of the benefits of using these solutions include: Helps protect promtability and shareholder value through possibly avoiding unnecessary supply chain disruptions Enables companies to understand some of the many factors that their supply chains are exposed to beyond physical risk Offers the opportunity to combine the risk assessment data with data from other systems for further analysis Facilitates an understanding of promt exposure at an individual supplier level and within a particular territory or product line Allows monitoring of key bottlenecks in the supply chain such as a particular port location or production site Enables companies to quantify and put into place the appropriate mitigation and recovery plans, including business continuity plans Supports supply chain decision making through enabling the risk in various countries to be compared Connects the type of supply chain exposure to the mnancial impact Helps reduce the costs of customers developing their own supply chain risk solutions through leveraging Zurich s solutions Understand your exposures: Zurich s Supply Chain Risk Solutions The purposes and benefits of Zurich s Supply Chain Risk Solutions can be divided into two main areas: Nature and types of supply chain exposures: Zurich s CBI Questionnaire Worksheet, Supply Chain Risk Assessment Tool, Supply Chain Disruption Database, Total Risk Profiling and Zurich Risk Room Structure of the supply chain and promt exposures: Business Interruption Modeling Tools and the Supply Chain Profit Accumulation Tool Nature and type of supply chain exposures CBI Questionnaire Worksheet The first step in understanding CBI exposures is for a company to work with its suppliers and major customers in gathering the data to identify and quantify the key exposures in the value chain. Zurich has developed a sample CBI Questionnaire Worksheet that can be used to help in this. It can help a company and broker determine which suppliers or customers are most critical, what CBI limits are possible and appropriate, and whether supply chain insurance is needed to cover non-physical risks. (For summary details on the award-winning supply chain insurance, see page 8.) 4 Why an effective Contingent Business Interruption (CBI) program is critical

24 Risk Assessment Tool This assesses the sources and scale of supply chain risk for an organization s critical suppliers. This is a structured analysis of the key supply chain risks, which helps quantify disruption exposures, calculate recovery costs and identify mitigation actions. The tool assesses 25 areas of internal and external exposures to provide insights to help improve the due diligence and risk management process within the supply chain. Our Supply Chain Risk Assessment Tool can: Deliver valuable input to understand your organization s exposures to a wide range of risks including financial, regulatory, political, geographical, transportation and contract risks Help ensure that Business Continuity Plans of critical suppliers and customers are assessed Help you understand the potential impact and the cost of recovery from disruptions to your critical suppliers Provide action plans to help reduce or transfer supply chain risks Supply Chain Disruptions Database Zurich has analyzed approximately 2,700 actual disruption events as of 2012 and can provide insights as to the causes of supply chain disruptions. This database shows that it is not just physical damage that causes these disruptions, but other factors such as transportation, IT outages, labor shortages, communication issues and more. This database can help organizations understand trends in prior disruptions to understand actual causes of business interruption, and determine the cost and nature of disruptions in a particular industry or location. Total Risk Profiling (TRP) This proven assessment methodology helps to identify the exposures, triggers, impact consequence and likely frequency of potential supply chain disruption scenarios. TRP can also help determine which suppliers/supplies or customers are most critical to an organization s ongoing business success. (See Appendix B for list of inclusion items on analysis.) Zurich Risk Room (ZRR) This proprietary analysis tool is designed to model country or region-specimc risks and compare these risks to other countries or regions around the world. Multivariety in nature, this tool allows model interactions of up to 60 variables within each country or region. By looking at the interaction of all of these variables, Zurich can provide our customers and brokers with a unique picture of how each region or country compares, including those most relevant to supply chain/bi exposures. 5 Why an effective Contingent Business Interruption (CBI) program is critical

25 Transferring risks to a captive Many organizations find that integrating the management of supply chain risks into a captive offers greater flexibility, savings and control over their cost of risk. Some of the benefits of using a captive include: access to reinsurance capacity, freeing up premium allocation, securitizing supply chain risks, and funding risks assessments. Using transparent and consistent reports that form the captive infrastructure can assist senior executives in having a better understanding about the strategic impact of supply chain disruptions. Structure of the supply chain and profit exposures Business Interruption Modeling Tool This tool deploys Zurich s proprietary modeling software to assess the financial effects of possible interruption scenarios and interdependencies that may threaten business continuity. It provides profit and loss exposure information for various disruptions in a single model to help improve data management and interpretation, especially when coupled with the Supply Chain Risk Assessment Tool. A company can use this model and alter the flow to see if future logistic plans will result in increased or decreased losses. The model can be kept and updated to reflect changing company operations or changes in a company s business model. Supply Chain Profit Accumulation Model This tool enables a company to understand its supply chain profit exposure in terms of a particular location, country or region, transportation node, supply or specific supplier. It helps address and quantify evident and hidden vulnerabilities that could significantly impact a company s business if an interruption were to occur. Conclusion: Balance cost-savings with supply chain risk management An organization must strike a balance between cost-savings within its supply chain and the potential financial exposures from a disruption. The common mistake made by many organizations is focusing solely on finding the lowest procurement costs, without projecting what the total impact could be on revenue and reputation when risks are factored in. Once an organization has its comprehensive list of supply chain risk scenarios and develops a better understanding of potential disruption and recovery costs, it can start to ascribe a Total Cost of Ownership (TOC) to these risks. Too often, a company only evaluates its total costs after a traumatic event like the earthquake in Japan. An organization that has identified, prioritized and managed its risks and costs proactively is one that is well on its way to a more financially sustainable future, helped to a great extent by the appropriate level of CBI coverage for physical risks and Supply Chain Insurance for non-physical exposures. (See sidebar at left, Transferring risks to a captive.) Organizations that deeply understand and better manage their risks can reduce the odds of being hit in profit and cash terms, as well as maintaining customer and shareholder relationships. 6 Why an effective Contingent Business Interruption (CBI) program is critical

26 Zurich s Supply Chain Insurance: All risk coverage Zurich s all risk Supply Chain Insurance can cover named suppliers and supplies that are delayed or not delivered and can even cover the potentially signimcant mnancial impact of extra recovery expenses. Our broad solution differs from typical business interruption and contingent coverages, which only activate as a result of a specified physical incident. Zurich s tailored Supply Chain Insurance can fill coverage gaps and offers a pre-agreed claims process that improves transparency and settlement time. Supply Chain Contingent BI Marine & Marine BI Trade Credit Political Risk Product Liability Supplier insolvency Failure of fuel supply or utilities Communication system failure Transport failures or port blockage Raw materials or component delays Delays caused by supplier s supplier Supplier staff illness or strike Cyber risks, virus Denied access to supplier s premises Physical damage Political risk Expropriation Product quality/recall How secure are your supply chains? Visit A portal to help you better understand the business risks of your changing world. 7 Why an effective Contingent Business Interruption (CBI) program is critical

27 APPENDIX A: Supply Chain Helpful Questions Do you know who your critical suppliers and customers are, and how much their failure would impact your company s promts? Have you fully mapped your critical supply chains upstream to the raw material level and downstream to the customer level? Have you integrated risk management processes into your supply chain management approaches? Do you have routine, timely systems for measuring the mnancial stability of critical suppliers? Do you understand your tier 1 production facilities and logistic hub exposures to natural catastrophes? Is supply chain risk management integrated into your enterprise risk management approach? Do you record the details of supply chain incidents and the actions you have put in place to avoid future incidents? Do your tier 1 suppliers have business continuity plans that have been tested in terms of their viability? Have you provided risk training to your supply chain management team? Is risk on the agenda at performance meetings with your strategic suppliers? Do you routinely use Total Cost of Ownership when making sourcing decisions? Do you accumulate the hidden costs associated with each supplier: travel costs, inventory carrying costs, warranty and rework costs, etc.? 8 Why an effective Contingent Business Interruption (CBI) program is critical

28 APPENDIX B: Total Risk Profile Analysis Inclusion Items Obtaining a picture of your company s Total Risk Promle should ideally include an analysis of exposures such as: Risk of natural disasters: Evaluating the potential foreign country and the locations of your production partners for the expected frequency and severity of natural disasters, such as hurricanes/cyclones, earthquakes, seasonal flooding and tsunami events and volcanoes. Man-made and technological risks: These include quality of electrical power, telephone and other utility systems; water, sanitation and transportation infrastructure; proximity to hazardous waste sites and nuclear power generation stations, etc. Compliance risks: These include the consequences of not meeting accounting, legal, tax, environmental and other regulatory requirements, as well as not complying with ethical standards associated with business practices. Supply chain risks: Protecting your promtability and reputation from breaks in your value chain is a major strategic advantage in the complex world of outsourcing, offshoring and just-in-time sourcing. Insurance risks: Either outsourcing and offshoring production will be concentrated in the areas of adequate coverage and limits for transit and contingent business income (CBI) from dependent premises. CBI can provide worldwide coverage for a manufacturer whose named or unnamed suppliers (depending upon policy terms and conditions) suffer a named property peril resulting in a supply chain disruption that causes a loss to the manufacturer s income from the disrupted production. Political stability of country: Consider factors such as the stability of the country and the region, trade policy challenges such as embargos, and excessive or changing regulatory statutes. Economic stability of suppliers: Risks from raw material dependencies, labor availability, as well as stability of the suppliers suppliers. Lost opportunities: Potential lost orders, lost customers, and slow customer response times if supply chain is disrupted. Product liability non-recovery cost: Companies have limited to no recourse in their ability to collect economic and other damages for breach of contract or in legal suits or subrogation for product liability claims. Quality risks: These include the cost of resourcing parts or reworking products that do not conform to specifications or that need to be withdrawn from the market due to voluntary or forced recalls. Intellectual property risks: Trademark, copyright and patent infringements from counterfeiting and loss of shared knowledge or best practices. Transportation risks: Port strikes, piracy, mishandling and damage during shipment, and the cost of emergency air freight to obtain critical parts. Reputation risks: Damage to your company s brands and corporate reputation and the costs associated with brand and reputation restoration, including crisis management communications and public relations expenses. 9 Why an effective Contingent Business Interruption (CBI) program is critical

29 APPENDIX C: Minimum CBI underwriting requirements Company Name (insured) Identifier (e.g. DUNS No.) NAIC / SIC Code Location(s) referred to below Address Number Street City District County State / Province Postal / ZIP Code Country ISO Country Code Geocoded Latitude Geocoded Longitude Details required on each named customer/supplier for the insured: (It is important that the address is the made in/shipped from or shipped to address [not the Head Ofmce location]) Supplier or Customer Name Supplier or Customer DUNS (where available) Type of Supplier or Customer CBI Limit Address Number Street City District County State / Province Postal / ZIP Code Country ISO Country Code Geocoded Latitude Geocoded Longitude Zurich also welcomes further information around the nature of supplies/goods involved and, as indicated, we have tools to help in this analysis. 10

30 A B (01/13) Zurich 1400 American Lane, Schaumburg, Illinois This is intended as a general description of certain types of insurance and services available to qualified customers through subsidiaries within the Zurich Insurance Group Ltd. including, in the United States, Zurich American Insurance Company, 1400 American Lane, Schaumburg, Illinois 60196, and, in Canada, Zurich Insurance Company Ltd, 400 University Avenue, Toronto, Ontario M5G 1S7, and, outside the U.S. and Canada, Zurich Insurance Plc, Ballsbridge Park, Dublin 4, Ireland, Zurich Insurance Company, Mythenquai 2, 8002 Zurich, Switzerland, Zurich Australian Insurance Limited, 5 Blue Street, North Sydney, NSW 2060, Australia and further legal entities, as may be required by local jurisdiction. Nothing herein should be construed as a solicitation, offer, advice, recommendation, or any other service with regard to any type of insurance product available at Zurich Insurance Group. Zurich does not guarantee a particular outcome and further assumes no liability in connection with the provision of services. In the United States, risk engineering services are provided by Zurich Services Corporation. Zurich Insurance Group Ltd (ZURN) is headquartered in Switzerland and listed on the SIX Swiss Exchange and has a level I American depository Receipt program (ZFSVY) which is traded over-the-counter on QTCQX. Further information is available at Your policy is the contract that specifically and fully describes your coverage. In contrast, the description herein gives a broad overview of coverages and programs and does not revise or amend a policy or program. Certain coverages are not available in all countries or locales. Some coverages in the U.S. may be written on a non-admitted basis through licensed surplus lines brokers Zurich American Insurance Corporation

31 Strategic risk: do not forget your supply chain!

32 Strategic risk: do not forget your supply chain! Extended supply chains are more vulnerable to weather events and other risks.

33 Strategic risk: do not forget your supply chain! 1 Contents Strategic risk: another link in the supply chain 2 Supply chain disruptions increasingly impact financial performance 2 A strong enterprise risk culture can correlate to improved profitability 3 Eyes wide open 4 Opportunities for improvement 5 Lessons learned 8 An integrated approach to corporate strategy 9 By Linda Conrad, Director of Strategic Business Risk at Zurich Global Corporate, and Paul L. Walker, Ph.D., CPA, the James J. Schiro / Zurich Chair in Enterprise Risk Management at St. John s University.

34 2 Strategic risk: do not forget your supply chain! Strategic risk: another link in the supply chain What kills an organization? In a recent board risk oversight project, one board member stated, The risk that kills most companies and why they only last 20 years and why 60 percent are gone after 40 years, is business risk. You need to understand your market and your competitive dynamics There s only a few things that go wrong, right? You were asleep and the market changed. You didn t have the right people. You weren t challenging the people to anticipate around the corner. You weren t bringing in objective information that was contrary to management s viewpoints so that you had a check and balance on how they see the world. It s very simple. It s just hard to do. 1 But how do organizations mismanage business risk? How do organizations assess their strategy and competitive dynamics, and where are organizations asleep? Recent events suggest one answer is that organizations have become exponentially more complex and interrelated. The strategy of a business can no longer fail to take into account critical enterprise issues such as supply chain and business resiliency. Often, this vital link between strategy and supply chain is sadly proven through the significant impact when there is a disruption. Supply chain disruptions increasingly impact financial performance Extensive research looked at thousands of company results, whereby comments in SEC reports were tied back to the stock performance of these companies. As seen in the following graph, the study shows an average 25 percent reduction in share price and an impact which commonly lasts over two years, as a result of supply chain disruptions. 2 Companies can be simultaneously impacted by decreased sales and brand damage, while incurring significant extra expenses during recovery times following a business interruption. Historically, supply chain disruptions can lead to an average of 9 percent lower sales and 11 percent higher costs, and many companies with extended interruptions never recover. 3 These alarming impacts should be of great concern to a firm s Directors and Officers, who are directly responsible for both results and for setting the necessary tone at the top around actively addressing risks to strategy and execution. It is often said that CEOs should be heard talking about risk management as much as they do markets and customers, because both can have a major effect on performance. Turning risk into a competitive advantage requires risk accountability, so you do not inadvertently expose your organization to the blindside of risk, potentially costing you money and preventing you from taking advantage of growth opportunities that build shareholder value. 1 Improving Board Risk Oversight through Best Practices. Walker, Shenkir, and Barton. Institute of Internal Auditors Vinod Singhal, Professor at Georgia Institute of Technology, and Professor Kevin Hendricks, Richard Ivey School of Business, The University of Western Ontario, London, Ontario N6A-3K7, Canada 3 Business Continuity Institute, BCI.org

35 Strategic risk: do not forget your supply chain! 3 Supply chain disruptions impact financial performance Performance First response Initial impact Long term impact 9 30% Shareholder impact Preparation Preparation for recovery Recovery Disruptive event Time of full impact Time A strong enterprise risk culture can correlate to improved profitability Financial results studies provide evidence that a robust risk culture and enterprise process can be the basis for improved profitability and business resilience. Some organizations have implemented an integrated Enterprise Risk Management (or ERM) approach to managing risk, aggressively identifying the biggest risks so they can be proactively addressed in their strategy. A 2012 study by FERMA 4 found that firms with advanced risk management practices exhibited stronger EBITDA and revenue results over the past five years than did those with emerging risk practices. This review of over 800 firms in 20 countries concluded that: 75 percent more firms with advanced risk management practices had EBITDA growth of over 10 percent 62 percent more firms with advanced risk management practices showed revenue growth of 10 percent. The study validates that an active risk practice and culture can directly correlate to stronger financial results, as the entire firm becomes more aware and accountable for the significant obstacles standing in the way of success. This enterprise approach helps management see the connections between the risks, in essence, linking risk management with strategy in their decision-making. Perhaps nowhere is this more important than in supply chain risk management. 4 FERMA article, Risk Management Professional magazine, The Institute of Risk Management, December 2012

36 4 Strategic risk: do not forget your supply chain! Eyes wide open A company s supply chain is the life blood running through its veins and must be seen through a wider, more strategic lens. The aim in supply chains is to lower total costs of ownership. But many companies have not properly considered the risks associated with that approach, and have failed to realize that any action taken to drive cost out can inadvertently drive risk into the business. For example, many organizations fail to identify the increased risks associated with procurement moving to using a single source or a change in sources, often without the knowledge of the risk manager who is tasked with optimizing enterprise exposures. Think about a company that wants to build its product in a different country. This is a potentially good move from a profitability perspective, but what risks are involved with that decision and how does it impact the overall strategy and vision for the future? Without an integrated process supported by top management, companies can fail to anticipate and connect risks on a regular basis. One NYSE-listed manufacturing company had excessive inventory concentration with a primary customer. The company chose to hedge against the likely default of that party; so they managed the financial risk. This is a good approach, but also a siloed approach. In a heated board meeting, the CEO was challenged by a board member to think beyond inventory and consider how the company would survive a loss of that supplier or customer and relationship. What would they do with the employees and the factory? Where would they sell their product? It was not a pleasant conversation. The conclusion is that risks, including supply chain risks, must be seen from an integrated perspective. Consider other recent headlines and the next risk lesson comes into focus supply chain problems are frequently strategic problems. The headlines and stories surrounding an airline s battery issues stated that the problems couldn t be higher. Although one executive stated there was no risk to passengers, another executive correctly saw the issue as strategic when he argued that the issue was safety and confidence in the product, and that it cannot occur again. For boards, executives, and risk professionals, what cannot happen again is failing to understand how the supply chain and its associated risks relate to the business model and strategy of the company. To really create, protect, and enhance shareholder value, this understanding needs to take place up front not after a mistake occurs. One executive recently stated: There are no black swans. All risks are identifiable. Although saying there are no black swans may be a bit optimistic, do not tell that to one high tech executive who last year blamed God for profit drops of 44 percent related to supply chain problems. Roll forward one year and that company s board is taking a more active role. Perhaps frustrated by those supply chain losses and the loss related to a recent acquisition (which was written off), the board has formed an ad hoc committee for directional strategy. Organizations should take ERM more seriously so they can see how strategy and supply chain risk can work in tandem or even move exponentially to create huge losses. For example, a major manufacturer managed supply chain risks in silos and recently suffered a $1 billion write-off partly because of that silo approach. While some in management began to manage specific supply chain price increases through long-term contracts, others managed the risk through hedging. Still others in the company were managing the risks by increasing research and development and finding different manufacturing models (resulting in less use of certain high-priced inputs). An integrated approach to ERM and better communication may have saved a billion. It might be said that: What is chance (or God) to the non-intelligent risk company is not chance to the risk-intelligent company. Companies need to figure that out. Apparently some have. There is one supply company that did not suffer major damages from the earthquake and tsunami in Japan. Credit their ERM process and their ability to shift production and maintain extra inventory in other locations. Still, the firm is updating the potential outcomes in their scenario analysis related to their supply chain. The company appears to be on a neverending effort to improve their risk management efforts. As noted previously, research confirms that companies further along in their ERM processes show higher levels of performance research by Gates, Nicolas, and Walker confirms the reason more advanced ERM companies are usually able to make better decisions, which should lead to enhanced performance. 5 5 ERM: A Process for Enhanced Management and Improved Performance. Gates, Nicolas, and Walker. Management Accounting Quarterly

37 Strategic risk: do not forget your supply chain! 5 Opportunities for improvement When the supply chain function works together with risk management and corporate strategy, the synergy can create a competitive advantage and build resiliency. This can offer an expanded and cooperative role for procurement and risk management as they both seek to improve the successful execution of strategy. There are many tools available that risk managers and procurement can use to better understand the exposures their supply chain strategy can bring to the company. A firm can model its value chain to follow the profit flow to find the greatest pinch points. They can also perform a supply chain risk assessment of key suppliers to determine possible weak links. Learnings can be used to build more robust business continuity plans. There are supply chain risk management best practices available that can help a company in this area. (For more information, please visit the website of the Supply Chain Risk Leadership Council at Surprisingly, only about 8 percent of companies reported having BCP plans with their suppliers. Many companies are running Just in Sequence or Just in Time, but have not planned for what they would do just in case a supplier does not deliver. The answer could be found in a collaborative effort between purchasing and risk financing, producing a more effective balance of risk and reward which is validated through scenario testing. Ideally, companies can establish a combined approach to managing certain exposures and insuring those risks which remain out of control of the procurement team, such as the approximately 40 percent of disruptions which occur below Tier One direct suppliers. Opportunities for improvement in this area abound because negative supply chain disruptions are growing. Figure 1 (below) shows that the number of disruptions is growing. Nearly 85 percent of those surveyed reported suffering from a supplier disruption, and more than 50 percent reported more than one interruption. As seen in Figure 2 (see page 6), some of these disruptions can last for an extended period of time. An analysis of 2500 disruptions shows that almost 500 lasted more than a week, several hundred lasted more than six months, and some lasted over five years. Additional analysis revealed that approximately 20 percent of these disruptions had financial consequences in excess of $500 million. That s a big number to any organization. Figure 1: Supply disruptions per company per year Over 85% suffered a supply disruption in % 1.9% 3.9% 4.4% 5.3% 6.3% 27.7% Over 50% had more than one disruption 7.3% 18.0% 9.7% 13.6% All other responses More than 52 Source: BCI 2012 Annual supply chain Disruption Study