SUPPLY CHAIN RISK MANAGEMENT

Transcription

1 SUPPLY CHAIN RISK MANAGEMENT Quantifying supply chain business interruption exposures 17 June 2015 Bas van Vliet

2 SETTING THE SCENE MARSH RISK CONSULTING

3 BACKGROUND Key observations Our observations on Trends and Developments Insurers Multinationals Marsh/MRC global counterparts Disconnect/no correlation between actual Financials and BI purchase No link to the company P&L Finance always in dispute when verification sought Limited consideration for growth or divestment plans Margin accuracy low confidence Historic Buying Methodology BI only no supply chain link Quantified Financial understanding of BI impacts Complexity of business Interdependencies Value flow through the business BI = Business Interruption (either as interruption of business activities or as Insurance Cover for consequential loss loss of margin - of a material damage event ) MARSH RISK CONSULTING 22 July

4 BACKGROUND Key observations Purchase on pricing or economy of scale Both on indemnity period and sun insured BI Impact Assessment reports significant costs/inconclusive answers Limited scrutiny from stakeholder parties Corporate Governance Credibility or rationale on spend CFO concerns Conflicting strategy between procurement/supply chain and risk management Insurer demands increasing Accuracy of financials Interest in Suppliers and customers Contingent BI named and limits Insurer Eng. reports not considered MARSH RISK CONSULTING 22 July

5 BACKGROUND Purpose Crossroads and decision time on BI future Clients deserve better Strategic value contribution Raise to C-Suite level and value perception Insurer acceptance without question Passive v Active buying MARSH RISK CONSULTING 22 July

6 WHY IMPORTANT TO ASSESS SUPPLY CHAIN RISKS MARSH RISK CONSULTING

7 THE PLACING PERSPECTIVE Risk versus Coverage BI Coverage (example of coverage) Insured locations EUR 100,000,000 What is the basis? and why it is insured? Do we know what this is based upon? and whether sufficient? Manufacturing sites, warehouses, sales offices PD/BI Loss limit EUR 350,000,000 Indemnity period 104 weeks Sub-Limits In addition the following sub-limits are applicable per occurrence (i.e. po) and in the annual aggregate (i.e. po/aa): Debris removal costs EUR 10,000,000 Automatic additional Insurance : New addresses EUR 10,000,000 Existing locations EUR 7,500,000 Suppliers / Customers : Named EUR 25,000,000 Unnamed EUR 10,000,000 MARSH RISK CONSULTING 22 July

8 TRIGGERS IN THE REAL WORLD Requiring insights in supply chain exposures Ashcloud Fires / supplier bankruptcy Hurricanes Superstorm Flooding Strike Conflict Conflict Cyber Earthquake & Tsunami Nationalisation Supply Chains Today Global Events Flooding Typhoon Ebola Just in time Natural Catastrophes Disruption Low cost suppliers single sourcing Competition Lost Revenue Earthquake + = Local control Political Tension Increased Costs IT reliance (cyber) Economic Crisis Profit warnings Increased complexity Property Damage Business failure Piracy Increased Risks Earthquake MARSH RISK CONSULTING

9 SUPPLY CHAIN & INSURANCE VIEW Link between risk and traditional insurance coverage NON-MATERIAL CYBERRISK RECALL TRANSPORT ENVIRONMENTAL (GEO)POLITICAL EVENT / TRIGGER Material Damage caused by covered event Sub limit Utilities / Infra KEY LOCATIONS UTILITIES UTILITIES Suppliers (Tier 2) Suppliers (Tier 1) Customers Suppliers Sub limit Named Unnamed COVERAGE PDBI Interdependencies Indemnity period: Licenses / Permits Rebuilding & reinstatement time Regaining market share Sub limit Named Unnamed NOT IN SCOPE MARSH RISK CONSULTING 22 July

10 LOSS EVENTS FROM THE REAL WORLD WHAT IF IT HAPPENS? Case study 1 Non-physical contingent business interruption due to an earthquake What can we learn? Try to understand who and where your suppliers are The Loss Event Pharmaceutical company (plant A, B & C) sourcing a unique raw material from suppliers X and Y Both suppliers considered to be noncritical representing a low spend and being mutually backed-up Plant A Profit exposure ~$100M Plant C Profit exposure ~$250M An earthquake disabled both suppliers X and Y, exposing the pharmaceutical company to a combined profit loss of ~$400M Plant B Profit exposure ~$50M Supplier Y Supply spend ~$20k Qualification of alternative suppliers Supplier X Supply spend ~$10k The Aftermath Preliminary contingency operations with reduced output until full supplier recovery Main supplier Back-up supplier Source: Marsh, 2013 and Intersys Ltd., 2013 MARSH RISK CONSULTING 9

11 LOSS EVENTS FROM THE REAL WORLD WHAT IF IT HAPPENS? Case study 2 Loss of a material supplier due to political unrest just before start of peak production What can we learn? Anticipate to real-time events & balance inventory Dispute between China and Vietnam over island group Political unrest and some protesters on the street in Bin Duong province with the aim to hot Chinese factories, The Loss Event Resulting in fire in the Desert Boot factory Loss of close to a million pairs, and also loss of specific rubber for sole. In the year of 65 th anniversary of the Desert Boot Loss of season The Aftermath Loss of material for new collection Financial impact not known but substantial Source: NRC Next, 2015 MARSH RISK CONSULTING 10

12 LOSS EVENTS FROM THE REAL WORLD WHAT IF IT HAPPENS Case study 3 Aftermath of the Japan earthquake, tsunami and meltdown What can we learn? Try to understand the flow of the supply chain that your are being part of ,0 magnitude Earthquake of the coast of Japan and devastating tsunami travelled up to 10 km inland causing a Level 7 meltdown of Fukushima reactor. The Loss Event Following weeks 80% of automotive plants suspended production. Nissan s capacity perceived to suffer most: 6 production sites and 50 critical suppliers. Loss of production capacity equivalent to app 270,000 automobiles Nissan s recovery was remarkable: during next 6 months Nissan s Japan production decreased with only 3.8% compared to industry wide decrease of 24,8% The Aftermath Nissan ended 2011 with 9,3% production increase compared to industry wide decrease of 9,3% Nissan focused on early risk identification and response. The company had developed a contingency plan encompassing critical suppliers Management was empowered to take decisions locally A decentralised supply chain with simple production lines Source: Nissan Motor Company Ltd: Building Operational Resiliency: William Schmidt, David Simchi- Levi, MIT Sloan Management, Case Number MARSH RISK CONSULTING 11

13 HOW TO OVERCOME CHALLENGES MARSH RISK CONSULTING

14 SUPPLY CHAIN RISK Conflicting interest and challenges for the business Supply Chain Management Drivers Consolidate vendors Reduce inventory to just-in-time Outsource warehousing services Streamline logistics Lowest cost suppliers Unwind complexity Focused manufacturing / distribution Risk Management Drivers Alternative vendors Build in redundancies Control your inventory Pre-negotiate alternate carriers / routers Quality vendors over low cost Testing suppliers products / ingredients Multiple sources Source: Marsh Risk Consulting (own project experience) MARSH RISK CONSULTING 13

15 THE ROLE OF RISK AND INSURANCE MANAGEMENT Building bridges = Risk Management of Value Networks = Source Inbound Logistics Production Marketing and Sales Outbound Logistics Customer Service Customer Finance and Accounting Human Resources and Legal Technology Procurement Risk Management + Identification Analysis, Assessment and Aggregation Measurement and Investment Monitoring and Controlling + Supply Chain Management Planning Sourcing Making Delivering Returning MARSH RISK CONSULTING 14

16 SPOILT FOR CHOICE WHAT CAN BE DONE? The struggle with where to start and where to go COMMON QUESTIONS HOW DO WE 1 gain visibility through complete value chain? 2. prioritise suppliers and manufacturing sites? 3. identify single points of failure? 4. get to know the facts? 5. anticipate what might go wrong? 6. manage the volume of suppliers? 7. know close to real-time of incidents? 8. assist suppliers (incl contract manufacturers)? Source: Marsh Risk Consulting (client feedback and own project experience) MARSH RISK CONSULTING 15

17 SUPPLY CHAIN RISK MANAGEMENT TOOL MARSH RISK CONSULTING

18 SUPPLY CHAIN RISK Business interruption perspective 1. SUPPLY CHAIN MAPPING 2. BI IMPACT CALCULATION 3. PRIORITIES & IN-DEPTH REVIEW 4. RISK IMPROVEMENT Key products Alpha Beta Gamma Delta Key locations Netherlands Germany Sweden Value filter Revenue Margin Strategic Brand Regulatory Asset # affected products x Ø contribution margin / product x Potential downtime Potential impact Event triggers Risk mitigation Supplier risks (quality, stability, financial) Property Damage Natural hazard Political risks Global risks (FX, technology) Cyber risks 5 Risk Improvement Take / accept Mitigate Transfer Terminate / Strategy USA Suppliers Strategic choices Business continuity plans & options Spread in locations Prevention Insurance Other measures Internal Tier 1 Tier 2 22 July 2015 MARSH RISK CONSULTING 17

19 BENEFITS & CONCLUSION MARSH RISK CONSULTING

20 BENEFITS Results and how peers have used the data INSIGHTS - STRATEGY - INSURANCE - UPDATING - Overview of BI exposures in supply chain Insights support business decisions supply chain Tool generates stakeholder acceptance Easy maintenance simplified declaration process THE USUAL SUSPECTS - OVERCOMING DAILY ISSUES Lack of integrality Ownership across functions Geographical spread Time Budget MARSH RISK CONSULTING 22 July

21 THE RETURN ON RISK INVESTMENTS Focus on the essential HURDLES RECOMMENDED ACTIONS 1 Complexity Simplify by focus through value lens 2 Visibility Both upstream and downstream 3 Accountability Ownership by profit connect with the business 4 Ownership 5 Justification 6 Insurability 7 Relevance Understand your suppliers and customers chains Incorporate supplier risk profiles in purchasing) Business case for investments Based on analytics Optimise existing coverage Beyond physical damage Focus on bottlenecks Get on C-suite agenda Source: Marsh Risk Consulting (own project experience) MARSH RISK CONSULTING 20

22 CONCLUSION & CLOSURE MARSH RISK CONSULTING

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24 ANNEX MARSH RISK CONSULTING

25 SUPPLY CHAIN RISK Supplier management and monitoring Nr. Risk Indicator Operating Procedures Minimal criteria Mitigation Supplier Scorecard 1 Credit rating (D&B) 2 Price Stability 3 Quality SNC vs PY 4 Delivery Performance 5 (Geo)political Exposure Supplier Audit Framework Supplier Score Card System 6 Natural Catastrope Exposure 7 Customisation of components 8 Supplier Categorisation 9 Customer Preference (Kraljic) 10 Supplier Positioning (Kraljic) 11 Contract in Place 12 Specifications in Place Stand alone solutions Integrated cloud solutions 13 Supplier Production Locations (#) 14 Speed of alternative sourcing 15 Supplier Business Continuity 16 Recovery Options 17 Multiple OpCos delivered MARSH RISK CONSULTING 22 July

26 SUPPLY CHAIN RISK Supplier management and monitoring Supplier Audit Framework Supplier Score Card System Stand alone solutions Integrated cloud solutions MARSH RISK CONSULTING 22 July

27 SUPPLY CHAIN RISK What do global leaders see as key challenges? Source: WEF Risk Report; Allianz Risk Barometer 2015) MARSH RISK CONSULTING 22 July

28 LOSS EVENTS FROM THE REAL WORLD WHAT IF IT HAPPENS Case study 4 Non-physical contingent business interruption due to a see route blockade What can we learn? Try to understand the flow of the supply chain that your are being part of Transport of thousands of Sony Playstation II from China to Great Britain via ship Blockade of the Suez Channel for four days due to crude oil vessel run aground (November 2004) Alternative Route The Loss Event Passage blocked for approximately 100 vessels No turning option or call at an alternative harbor possible Risk of a sales collapse for Sony and retailers during Christmas trade Risk of disappointed customers and potential of a reputational damage Leasing of several Russian Antonov AN124 cargo planes (approx. 20 Mio. EUR charter costs) The Aftermath Implementation of an alternative goods transport via air transportation from China to Great Britain, France and Germany Arrival at the respective airports two times per week Playstations per cargo plane Strict secrecy about the number of flights, departure and arrival times as well as transport roads for fear of raids and theft Planned Route Source: The Mirror and BBC, 2004 MARSH RISK CONSULTING 27