Protecting the links in the chain: tools for managing supply chain business interruption risk

Transcription

1 Protecting the links in the chain: tools for managing supply chain business interruption risk Linda Conrad Director of Strategic Business Risk Zurich Insurance

2 Protecting profitability Understanding supply chain business interruption impacts 1. Reviewing recent natural catastrophe impacts 2. Understanding supply chain business interruption exposures 3. Assessing and quantifying your risk of disruption 4. Evaluating mitigation and coverage

3 Annual Share of Business Interruption Claims Annual Annual share Share of BI of Business Total Property Claims Interruption grows by 1.6% p.a. Claims 55% 53% 50% 45% 40% 46% 43% 43% 37% 44% 35% 36% 36% 30% 28% 24% 24% 21% 25% 20% Year Source: Zurich

4 Deconstructing Natural Catastrophe Losses Understanding BI and Supply Chain impact Total global insurance claims from natural catastrophes in 2011 were $107 billion, second only to $120 billion for Katrina in Lloyd's of London reported a loss of $822 million for 2011, including 4.6 billion pounds for CAT, the largest amount in its 324-year history. The March Japanese disaster cost the insurance industry an estimated $35 40 billion, the most expensive earthquake on record. The floods in Thailand cost the insurance industry $12 billion of an estimated $30 billion in losses.

5 Japan: cost of recovery for a tech company The supplier was unable to the supply compasses due to: massive damage to infrastructure (e.g. roads, rails, seaports) on-going power shortages displaced workforce: 20km evacuation zone around Fukushima transportation issues did not incur direct property damage losses Initiate new source/design qualification to minimize business impact Redeployment of resources from future product development work: Skilled Engineering Resources Added contract services where feasible Adjustment of Future Product Development Schedules Six week or greater impact to future product announcements

6 Thailand Floods - Hard Disk Drives (HDD) Around 45% of the world s hard disk drives (HDDs) are from Thailand More than 60 manufacturers HDDs and their components Little appreciation of connections, concentrations and tiers of suppliers Some plants took 2-3 months to resume production after the floods Prices of finished HDDs rose by 20 40% in immediate aftermath Total PC shipments were depressed by about 20% in first quarter of 2012 Source: IHS report for MunichRe, Oct 2011

7 Far East supply linkages hard disk drives KEY Motor Media Head Slider CAL COMP Thailand MIN AIK TEC Thailand SEAGATE Thailand W DIGITAL Thailand SEAGATE Thailand W DIGITAL Thailand SEAGATE W DIGITAL Suspension Actuator arm Other components Supply bottleneck HUTCHINSO N Thailand HUTCHINSO N Non-Thailand SUNCALL Non-Thailand NHK Spring Non-Thailand MINEBEA Thailand FURUKAWA Thailand NIDEC Thailand NIDEC Philippines NIDEC China HITACHI Thailand HITACHI Sarawak HITACHI GST TOSHIBA SAMSUNG SAMSUNG ALPHANA Thailand SEMCO China TDK Thailand TDK Thailand TDK TDK TDK Thailand TDK Non-Thailand

8 Thailand: market share and industry impact Pre-Flood 1. Western Digital 2. Seagate 3. Hitachi 4. Toshiba 5. Samsung Post-Flood 1. Seagate 2. Western Digital 3. Toshiba 4. Hitachi 5. Samsung Current Consolidation Activity 1. Seagate with Samsung 2. Western Digital with Hitachi 3. Toshiba

9 Evolution of Contingent Business Interruption Previously: Not always a very thought-out process by companies or underwriters Common to have blanket coverage for suppliers and / or customers Vague CBI endorsements covering any supplier of goods or services Limits were more arbitrary and not focused on key suppliers Currently: More onus on companies to identify suppliers/customers in their chain More aware of contingent exposures/accumulations Pressure to provide additional data on unnamed/unspecified Coverage should be based on quantification of potential exposure and recovery costs for critical suppliers

10 Innovation: Supply chain insurance Coverage not limited to direct damage but can cover all risks (flexible) Coverage not limited to 1 st tier named suppliers, but extends to sub-tier Designed to fill the gaps around CBI, marine, political risk coverage etc. Triggered by a reduction in output due to a reduction in supply (flexible) Quantifies expected cost of non-delivery and extra expenses to recover

11 Protecting profitability Understanding Business Interruption and supply chain impact 1. Reviewing recent natural catastrophe impacts 2. Understanding BI and supply chain exposures 3. Assessing and quantifying your risk of disruption 4. Evaluating mitigation and coverage

12 View from Davos: Global Risk Report Emerging Global Risks and Resiliency Implications

13 The WEF Global Risk Report highlights three broad-based risks that may affect global development over the coming decade 1 Accelerated interplay between politics and economics An increasingly realpolitik approach to geopolitics shows countries making greater use of economic levers to achieve relative national advantage, which could constrain global economic growth that is already fragile or volatile Risks in focus 2 Consequences of rapid and unplanned urbanization Without strong infrastructure and governance, rapidly growing cities in developing countries will be vulnerable to slow economic growth, public health crises, social instability, and environmental catastrophes 3 Potential misuse of emerging technologies To avoid unintended consequences, better governance is needed to ensure the appropriate development and deployment of radical innovations that could have huge potential across a range of sectors Source: World Economic Forum, Global Risks

14 Impact The survey results evidence heightened concern about the global risks environment versus the 2014 report Risk landscape top 10 movers 5.5 Weapons of mass destruction Spread of infectious diseases Energy price shock Interstate conflict 5.0 Profound social instability Terrorist attacks Food crises State collapse or crisis Man-made environmental catastrophes Natural catastrophes Likelihood Legend Economic Environmental Geopolitical Societal Technological Source: World Economic Forum, Global Risks

15 SC2(V2)Jul/05/10GC/ZCA Understanding the challenges Global sourcing Single sourcing Partnerships/ strategic suppliers Just-in-time manufacturing Market Shortages Increased Complexity Actions taken to drive costs out of the supply chain can drive greater risk in

16 Analysis of nearly 3000 disruptions Accidents Production Problems Labor Unavailability and Shortage of Natural Disasters Sabotage, Terrorism, Crime, and War Financial losses and premiums Demand Variability/Volatility Physical and Regulatory Industry-wide (i.e., Market) Challenges Lawsuits Source: Zurich s supply chain loss event database 16

17 The Headlines: survey from Zurich Nearly 75% of respondents still do NOT have full visibility of their supply chains. At least 80% report at least one instance of supply chain disruption. Half of disruptions originate below the Tier One, direct supplier. The primary sources of disruptions were unplanned IT & telecoms outage, adverse weather and outsourcer service failure. These comprise the top three sources of disruption since % of the world s goods go through 6 ports

18 The Headlines: survey from Zurich The loss of productivity remains as the top consequence of supply chain disruptions for the sixth year running. The increased cost of working and loss of revenue round out the top three. Almost a quarter of respondents (23.6%) report annual cumulative losses of at least 1 million. More have recorded losses of at least 1 million from a single incident (13.2% from 8.6%). 40% of respondents have NOT insured their losses arising from supply chain disruption (through Contingent Business Interruption cover or Zurich s all risk Supply Chain Insurance)

19 Number of Supply Chain Incidents At least 80% report at least one instance of supply chain disruption in the last 12 months.

20 Causes of Supply Chain Disruption *Expressed in %, multiple answers allowed

21 Horizon Scanning Risks to Supply Chains In the next 12 months IT & telecoms outage (57.7%) Adverse weather (48.8%) Outsourcer service failure (41.4%) Cyber attack (37.2%) Data breach (36.3%) In the next 5 years Cyber attack (53.9%) IT & telecoms outage (51.0%) Outsourcer service failure (42.3%) Data breach (38.9%) Adverse weather (38.0%)

22 Consequences of Supply Chain Disruption More than a third of respondents (34.6%) mention reputational damage as a consequence of disruption.

23 Cumulative Losses 1M- 10M 11M- 50M More are reporting losses > 1M compared to last year. *Expressed in %, Don t know responses excluded

24 Insuring Supply Chain Loss Almost 40% do not insure losses from supply chain disruption (through Contingent Business Interruption cover or Zurich s all risk Supply Chain Insurance) *Expressed in %, Don t know responses excluded

25 SC5(V1)Jul/05/10GC/ZCA Supply chain disruptions increasingly impact financial performance 10 30% shareholder impact

26 Protecting profitability Understanding supply chain business interruption impacts 1. Reviewing recent natural catastrophe impacts 2. Understanding supply chain business interruption exposures 3. Assessing and quantifying your risk of disruption 4. Evaluating mitigation and coverage

27 Supply chain risk management self assessment 1. Do you know who your critical suppliers are and how much their failure would impact your company s profits? 2. Have you fully mapped your critical supply chains downstream to the raw material level and upstream to the customer level? 3. Have you integrated risk management processes into your supply chain management approaches? 4. Do you have routine, timely systems for measuring the financial stability of critical suppliers? 5. Do you understand your tier 1 production facilities and logistic hub exposures to natural catastrophes?

28 Supply chain risk management self assessment 6. Is supply chain risk management integrated into your enterprise risk management approaches? 7. Do you record the details of supply chain incidents and the actions you have put in place to avoid further incidents? 8. Do your tier 1 suppliers have business continuity plans that have been tested in terms of their viability? 9. Have you provided risk training to your supply chain management team? 10. Is risk on the agenda at performance meetings with your strategic suppliers?

29 Risk assessment stages 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

30 GCPP31(V1)Aug/17/10GC/ZCA Supply chain grading Risk Factor As is Comments To Be Advice 1 Industry/Supply-Specific - Geographical Exposures B A 2 Industry/Supply-Specific - Economic Exposures. B A 3 Industry/Supply-Specific - Political Exposures. B A 4 Industry/Supply-Specific - Structural Risks B A 5 Supplier Specific - Geographical Exposures B A 6 Supplier Specific - Economic Exposures B A 7 Supplier Specific - Political Exposures B A 8 Supplier Specific - Structural Risks B A 9 Product Management / New Product Development B A 10 Supplier Selection Management B A 11 Supplier Management (Financial Strength) B A 12 Supply Chain Performance B A 13 Internal Risk Management B A 14 Business Continuity Management (BCM) B A 15 Vulnerability To Accidents / Errors B A 16 Vulnerability To Malicious Intervention B A 17 Commercial Contract Management B A 18 Skills And IP Management (Insured) B A 19 Regulatory Issues B A 20 Relationship With Supplier (Influence, Maturity) B A 21 Supplier' s Security Of Supply B A Supplier's Knowledge And Experience Of Providing 22 Required Supplies B A 23 Skills and IP Managament (Supplier) B A 24 Risk Engineering Factor B A OVERALL GRADING = 72 4

31 Zurich Risk Room on the go A simplified, demo version of the full app Contains 7 predefined scenarios on: Macroeconomic Imbalances Political Volatility Nat. Cat. and Disaster Management Supply Chain Disruption Demographic Shifts Sustainable Growth Human Capital Easy to navigate, intuitive interface Provides the ability to model changes in individual risks to see how they impact other, interconnected risks Available free of charge to the general public as part of Zurich s thought leadership innovations and initiatives Visit download a free demo

32 Expose the hidden value chain risks by modeling Tell the story of exposure, values, and potential loss by using Zurich s proprietary software to help visualize and quantify your value chain to: 1. Track profitability. See where you make money and how it flows. 2. Shows bottlenecks, break points, and interdependencies. Where are the biggest issues. How much can it cost you? Are your BI and CBI and SC concerns in the places you normally focus loss control? Do you have appropriate continuity plans in place? 3. Better understand BI and CBI and SC insurance. Are there potential gaps in coverage? Do you have the appropriate limits and BI and CBI values? Are you protected against non-physical damage with SCI?

33 Business Interruption value chain modeling Customer Event Suppliers Sourcing Production Distribution Clients

34 GCPP31(V1)Aug/17/10GC/ZCA BCP grading: ISO, NFPA, BS standards

35 Business Continuity Management (BCM) stress testing December 2009 Eurostar trains caught in tunnel. "A volatile region": internal tensions between military and government. Bomb explodes in hotel where we have employees. Impacts a country where the company has major operations Fire in Headquarters location injuring employees, impacting critical processes and possibly preventing occupancy in location for up to 3-4 months. Los Angeles earthquake Kansas tornado Political demonstration in New York City

36 Protecting profitability Understanding supply chain business interruption impacts 1. Reviewing recent natural catastrophe impacts 2. Understanding supply chain business interruption exposures 3. Assessing and quantifying your risk of disruption 4. Evaluating mitigation and coverage

37 Enterprise Resilience Challenges

38 Time required for share price to recover Source: Deloitte Disarming the Value Killers, 2005

39 Enterprise Risk Management wheel

40 Embedding a positive risk culture Zurich-sponsored 2012 Harvard Business Review Survey: Risk Management in a Time of Global Uncertainty You know when you re really getting good at risk management, when the company does its risk assessment at the project kickoff rather than the end. Angela Herrin, Harvard Business Review Analytics Services

41 Zurich ERM Diagnostic Healthcheck benchmark to ISO and COSO

42 Consider the cost-benefit of mitigation efforts Consider risk in selecting suppliers. Identify and monitor specific risks at each supplier. Identify alternate processes if supply chain breaks. Calculate Internal Rate of Return to mitigate risk. Review risk and risk alternatives with management.

43 Building business resilience YouTube video search Total Risk Profiling

44 Zurich s Supply Chain Insurance Peace of mind through broad coverage

45 SC16(V2)Jul/05/10GC/ZCA Covering risks not covered by other insurance products

46 How does the TRP methodology work? YouTube video search Total Risk Profiling

47 When should Total Risk Profiling methodology be used? early and often

48 Aligning Key Performance and Key Risk Indicators Key Performance Indicators (KPIs) help a firm see how it is performing in relation to its strategic goals and objectives. But they are lagging indicators. Key Risk Indicators (KRIs) are leading indicators of risk to business performance, giving early warning about potential risk event Zurich uses KRIs to monitor risks are in the areas such as: natural catastrophe risks (as % of group shareholder equity) asset-liability matching (duration mismatch) strategic asset allocation (% allowed in investment category) credit risk (weighted average credit rating) projects other risks specific to business or functional areas

49 Key Risk Indicator example ERM Vulnerability: Inability to attract and retain necessary talent, especially in key areas Possible KRI metrics to track risk significance and / or mitigation Personnel turnover, especially in key operational areas Number of declined job offerings Time to fill job openings, especially key spots Client disputes and / or losses Qualitative measures, like feedback obtained from HR personnel

50 Link key risk indicators to business Trigger Vulnerability Key Risk Indicators Endangered asset Consequence or goal

51 Link key performance indicators Vulnerability Trigger(s) Consequence(s) What? Where? Controls If any How? Why? How big? How bad? How much? Strategic Objective When? What? Where? Who? Key Performance Indicator(s) When? What? Where? Who?

52 Link key risk indicators to business Vulnerability Trigger(s) Consequence(s) Strategic Objective Key Perform Indicator(s) Key Risk Indicator(s) What? Where? Controls How? Why? How big? How bad? How much? When? What? Where? Who? When? What? Where? Who? When? What? Where? Who? If any

53 Sample dashboard report: key risk indicators for projects Overall Project Risk Current Key Risk Indicators Report Portfolio: 00_Group large Projects - in flight Updated on: February 18, 2014 Project Name Status Report Review Date Division Previous Month (-2) Previous Month (-1) Current Scope Management Clarity of Business Benefits On-Time Delivery Remaining on Project Budget Stakeholder Engagement Open Issues Approved End Date Revised Approved End Date Project ABC UK Yellow Yellow Yellow Green Yellow Yellow Green Green Yellow Project DEF UK Green Yellow Yellow Green Green Yellow Green Green Yellow Project GGG US Green Green Green Green Green Green Green Green Green Project IT Green Green Green Green Green Green Green Green Green Projected End Date Project Status Open/Approved Open/Approved Open/Approved Assumed Completed Open/Approved Project NA NA NA Green Green Green Green Green Green Green Open/Approved Project delta GC Green Green Green Green Green Green Green Green Green Project Go EU Yellow Yellow Red Green Green Green Red Green Yellow Project M ary FA Green Green Green Green Green Green Green Green Green project Bob FA Green Green Green Green Green Green Green Green Green Project M essy NA Green Green Green Green Green Green Green Green Green Project all ok FA Green Green Green Green Green Green Green Green Green project nothing works UA Green Green Green Green Green Green Green Green Green Hope it works Global Red Red Yellow Green Yellow Green Green Green Yellow Ist all ok GE Green Green Green Green Green Green Green Green Green Noproblems GE Green Green Green Green Green Green Green Green Green Cyclone GE Green Green Green Green Green Green Green Green Green Dubious SW Green Green Green Green Green Green Green Green Yellow Rocket launcher EU Green Green Green Green Green Green Green Green Yellow Open/Approved Open/Approved Open/Approved Open/Approved Open/Approved Open/Approved Open/Approved Open/Approved Open/Approved Open/Approved Open/Approved Open/Approved Abbreviations: YTD = Year-to-Date, FY = Full Year ecard: 00_Group large Projects - in flight as of: February 18, 2014

54 The proof is in the results Using Total Risk Profiling, Zurich moved from an asset-based approach to risk-based approach for operational risk quantification and capital allocation One Zurich business unit reduced operational risk-based capital (RBC) consumption by 21.7 percent The business unit then identified high risk exposures, performed a deeper assessment and developed mitigation They had an additional reduction of 28.9 % in operational RBC consumption Capital not consumed was then available to fund profitable growth for Zurich.

55 Linking risk culture and results FERMA study found firms demonstrating a more mature approach to Risk Management have better financial results EBITDA growth of over 10% was generated by 28% of companies with advanced risk management practices, compared with just 16% of firms with emerging practices Revenue growth of 10% was shown by 29% of companies with advanced practices, compared with 18% of companies with emerging practices Creating an active risk culture is correlated with higher growth, as organization becomes more aware and accountable for risk. Source: 2012 study by Federation of European Risk Management Associations

56 Proof Points for Total Risk Profiling Business Interruption Identified 20-ton machine that could swing into another - cause a plant shutdown and millions in BI. Safety Pipes carrying flammable acetone discovered above office that could be ignited by the lighting fixtures. Operational efficiency Pharmaceutical company developed100 low-cost improvements to a process line. Property damage Water reactive chemical found in sprinklered room. Preventative mitigation done. Business / Supply Resilience Evaluated and mitigated risk scenarios so company is more resilient to supplier disruption or other issues Board-level reporting Better understanding of key risks drivers and more efficient business management. Key strategic decision influenced.

57 Benefits of Supply Chain Resilience Communication is the key to ensure appropriate plans are activated before the impact is felt within the organisation. When our supplier told us they were experiencing issues, we invoked a plan immediately and saved any issues downstream. - Respondent from 2014 survey

58 Benefits of Supply Chain Resilience The loss of a warehouse due to torrential rains and flooding resulted in a 60% loss of stocks... the BC/crisis management response was effective... the level of confidence among the team covering that issue, who manage multiple markets, was notable after the successful incident management. - Respondent from 2014 survey

59 Benefits of Supply Chain Resilience There were multiple occasions where we have rallied to support a client when either third party suppliers... or our own direct suppliers have caused disruption; in most cases our reputation has actually improved as a result of our dedication to resolve issues. - Respondent from 2014 survey

60 Linda Conrad Director of Strategic Business Risk Zurich Global Corporate Zurich Insurance Group Ltd. All rights reserved. The information in this publication and presentation was compiled by Zurich Insurance Group Ltd from sources believed to be reliable. Further, 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 presentation and sample policies and procedures, including any information, methods or safety suggestions contained herein. Moreover, Zurich Insurance Group Ltd 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 publication and presentation is not tied to any specific insurance product nor will adopting these policies and procedures ensure coverage under any insurance policy. 60