WHOLESALE RISK INSIGHT FOCUSSING ON RISK ISSUES IN WHOLESALE, WAREHOUSING AND DISTRIBUTION WHOLESALE Risk Insight
RISK MANAGEMENT IS MORE CRITICAL THAN EVER THAT S WHY WE RE LOOKING SO CLOSELY AT IT The facts Resilience and sustainability of an organisation is critical in fast-paced industries with low margins for error such as wholesale, warehousing and distribution. Faced with increased financial pressures and competition, companies are striving to reduce cost and streamline processes, for example by consolidating locations and buildings into bigger more efficient sites, reducing stock inventories and relying on just-in-time deliveries. However, whilst good for business, these measures often introduce additional risk. The danger A well known UK retail chain had recently closed existing delivery locations and invested heavily in a new distribution centre with the intention of saving the business millions of pounds per year. But due to issues at the new site, deliveries were impacted along with stocks on the shelves. Worse still, this led to a drop in share value, a predicted decline in sales, damage to the brand and even rumours of a potential takeover. The consequences of not being resilient and not being able to cope with emerging risks are stark and should focus the minds of all leaders within a business, not just the risk officer. The solution Fortunately, with a well managed response to disruptions, it doesn t have to be like that. Demonstrating resilience can enhance the brand and reputation of a business, and even contribute to future growth.
WE VE CONSIDERED THE RISKS YOU FACE SO YOU CAN TAKE STEPS TO AVOID THEM Understanding the risks The fast paced environment of warehousing and distribution places a high emphasis on a smooth running supply chain, with products being required of the right quality, in the right place, at the right time and in the right quantity. Disruptions to this supply chain will cause a major impact ranging from a missed delivery, to breach of contract, to missing a seasonal window. Being prepared The ability of critical locations to cope will depend on their preparedness. This in turn will demand that all aspects of risk are addressed, and that appropriate recovery plans are put in place. There are a range of risks or events that can threaten the resilience of warehousing and distribution operations and they range from internal issues to those outside of the business which may be less visible, less predictable and less controllable. The key risks The following list represents a handful of the potential risks faced by warehousing and distribution but there are others as diverse as political change, human error, or even piracy! The key for any business is to understand the potential risks and manage them as effectively as possible. Physical Damage One of the more obvious risks is that of physical damage to a site, for example due to an incident such as a fire. Most businesses will be using good risk management to identify and mitigate this risk, but not all will have a robust continuity plan that will allow activities to carry on following the event. Further still, the incident may not be on your site but near or even next door just ask M&S and McDonald s if they remember Buncefield. Flooding Flooding is also a relatively well understood exposure based largely on historical data but this is an evolving and increasingly more complex risk. Climate change will create some very real threats for business with more frequent extreme weather such as floods and heatwaves currently forecast to increase. However despite a general increase in awareness of the issue not everyone is acting on it. In a recent report the Committee on Climate Change found that very little tangible action had been taken and recommended that organisations should develop business continuity plans based on high-quality climate risk information so that businesses can cope better with disruptions to their supply chains during floods and damage to assets from severe weather Internal Risks Other internal risks in warehousing and distribution can raise questions on the robustness of systems, IT and processes (often the most critical of all business activities), stock management, staffing dependencies, utility supplies, telecommunications and what the response would be if they were disrupted or unavailable. Supply Chain Unfortunately supply disruptions are not entirely within an organisation s control. Although disruptions can be caused locally, they may also have originated elsewhere, affecting other parts of the supply chain such as infrastructure, immediate suppliers or further along where the risk is less transparent. Here are just a few examples of just how frequent and widespread supply chain risks are becoming: On-time port arrivals have reached historic lows, with only 46% of shipments arriving in time in 2007. The Icelandic volcano cloud which brought the air-transportation network in many parts of Europe to a standstill for nearly a week. Similar events such as the Haitian and Chilean earthquakes and regular hurricanes in certain parts of the world all pose credible risks in the globalised supply chain. Industrial action can quickly bring things to a halt. Just think about the UK rail network where the spectre of industrial action is never too far away. Unexpected changes in demand either diverting products away from you or introducing new volumes for which existing layout and logistics are not designed.
NOW WE VE HIGHLIGHTED THE MAIN RISKS LET S TALK ABOUT HOW TO AVOID THEM It s all about managing resilience Having resilience is vital for managing risk effectively in Wholesale, Warehousing and Distribution. To manage resilience it is vital to have certain key strategies in place. A clear understanding of all of these will allow the business to anticipate and proactively manage out risks as well as have piece of mind that should an interruption occur the response is timely and robust and that costs are covered. 1. Good supply chain risk management Supply chain risk management is fundamentally about understanding the whole supply chain and understanding the key risks within it. A business should ask itself: Do we understand who our critical suppliers are and what impact their failure would have on us? Do we understand the risks, weaknesses, failure points within the supply chain? Are we managing the supply chain risks? 2. Effective business continuity management Business continuity is the way a business plans for, responds to, copes with and recovers from a business interruption. Whether caused by an internal issue, external event or even a supply chain failure it is the response that safeguards the business in the short term, so protecting its ultimate future. A business needs a plan that can help take it from the event happening through to business recovery in a timeframe that will meet customer demand. It is more than just the emergency response and must include how the business will continue in the short to medium term. productivity 1 EVENT 2 Willingness of customer to wait 3 4 Every business should consider whether: It understands the risks/interruptions that it may face? It understands which activities or functions should take priority? There is a plan in place for key risks/ interruptions? TIME 1 2 3 4 Normality Emergency Salvage & Restoration Business Recovery with Business Continuity Management Figure 1: Visualisation of a typical business interruption as loss of productivity vs. time. 3. Business interruption support A business interruption, (as well as requiring a business continuity plan response) has the potential to cause a number of negative consequences, one of which is inevitably a financial impact. So understanding the exposures allows us to manage some of the issues and of course put in place the right level of financial contingency, be that risk transfer or not. Given the specific risks faced by organisations involved in warehousing and distribution, Zurich would urge any business in this sector to ask itself fundamental questions about the way it manages business continuity and considers the breadth of internal and supply chain risks that need to be understood are you as resilient as you. For further insight into Wholesale, contact your local Account Executive or visit zurich.co.uk/corporatefocus 1. How well prepared is the UK for climate change? Adaptation Sub-Committee September 2010, Committee on Climate Change 2. Logistics Today, May 27, 2007 Because everyone can benefit from the Value of Insight.
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