Tom Starner

Tom Starner is a freelance business writer and editor. He can be reached at riskletters@lrp.com.

Supply Chain Risks

Securing the Small Business Supply Chain

Small and mid-sized companies underestimate a disruption's potential impact.
By: | December 28, 2015 • 3 min read
supply chain

By its nature, supply chain risk is complex. But it also appears to be misunderstood by small and mid-sized businesses.

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More than half (55 percent) of U.S. SMEs [small to medium-sized enterprises] surveyed do not believe the loss of a main supplier would have a serious impact on their business, according to Zurich’s Third Annual Global SME Survey, which polled SME C-suite executives and managers.

A second study, the 7th Annual Supply Chain Resilience Report – produced by Zurich Insurance in collaboration with the Business Continuity Institute (BCI) – found that 74 percent of organizations suffered at least one supply chain disruption in the past year, and 14 percent suffered losses of well over $1 million.

Linda Conrad, director of strategic business risk, Zurich North America

Linda Conrad, director of strategic business risk, Zurich North America

The top three causes of supply chain disruption were unplanned IT and telecommunications outages (64 percent), cyber attack and data breach (54 percent), and adverse weather (50 percent).

Supply chain resilience has serious implications for businesses of all sizes, said Linda Conrad, director of strategic business risk for Zurich North America.

“Many companies seem to be so focused on managing the bottom line that they don’t look out for these operational risks within their supply chain, which is close to driving blindfolded,” Conrad said.

The data conveys that many small enterprises do not fully understand the level of exposure facing their supply chains — and that overlooking these risks can be extremely costly.

“Due to the increasing complexity of global trade and how goods must travel, it’s not a case of it, but when a supply chain disruption is going to happen,” Conrad said.

She noted that a previous study found that about 40 percent of companies that suffer significant supply chain disruptions fail.

“Dollar values are going up and people are not thinking through in advance how much will cost them.”

And for SMEs, their limited or lack of cash flow cushions and a loss of market share resulting from a disruption can serve as a rough one-two punch.

Good practices can mitigate the worst effects of supply chain disruptions. — Patrick Alcantara, senior research associate, Business Continuity Institute

“SMEs often do not have the tools, support and methodology to quantify what a supplier disruption will do to their business,” she said. “Most SMEs have an ‘all hands on deck’ scenario in trying to be profitable, but no resources to measure potential loss. Yet, the supply chain is their economic lifeblood.”

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Conrad added that Zurich’s database of supply chain disruptions across the globe reflect that many of those losses are not caused by insured occurrences, such as a fire.

For example, a work slowdown at a seaport can wreak havoc with a supply chain but is not specifically covered via insurance.

“Eventually when the goods show up, SMEs are already behind in filling orders,” she said, adding that that the fastest-growing supply chain risk today is often a cyber issue, even more than goods or supplies in transit.

The surveys also found that nearly one in 10 organizations cannot name their key suppliers and seven in 10 do not have visibility over their full supply chain.

Other findings of the report include:

  • Among the top 10 disruptions new to the list this year are a product quality incident (No. 8), a business ethics incident (No. 9) and lack of credit (No. 10).
  • The top five consequences of disruption are loss of productivity (58 percent), customer complaints (40 percent), increased cost of working (39 percent), loss of revenue (38 percent) and impaired service outcomes (36 percent).
  • One-third (33 percent) of respondents report “high” top management commitment to supply chain resilience, increasing from 29 percent last year.
  • More than two-thirds of respondents (68 percent) report having business continuity arrangements in place to deal with supply chain disruptions.

Patrick Alcantara, senior research associate at the BCI and a report author, said that good practices can mitigate the worst effects of supply chain disruptions.

“With findings consistently showing top management commitment as a key enabler of supply chain resilience, we encourage business leaders to take a closer look at their supply chains and champion good practice across their organizations,” he said.

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“Through our work with customers in this area, we’ve found that increasing visibility along supply chains and resilience are major sources of competitive advantage,” added Nick Wildgoose, global supply chain product leader at Zurich Insurance Group.

“Senior management leadership is the key to overcoming silo thinking about supply chains within an organization, regardless of size,” he said.

Tom Starner is a freelance business writer and editor. He can be reached at riskletters@lrp.com.
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Brokers

Dramatic Drop in Optimism

Changing market forces are driving pessimism among independent insurance agencies.
By: | December 15, 2015 • 3 min read
broker survey

The independent P&C agency business is feeling particularly pessimistic about the future.

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The key takeaway from a recent survey, “How Independent P&C Insurance Agencies Thrive in 2015’s Competitive Marketplace,” reveals agencies of all sizes are less optimistic about future growth based on year-over-year results.

The biggest drop in sentiment comes from large agencies, where only 33 percent claim to be “very optimistic,” compared to 70 percent in 2014. For medium-sized agencies, the drop was from 60 percent to 31 percent.

The primary factors driving industry uncertainty include carrier adoption of predictive analytics (59 percent); new, non-traditional entries into the insurance market (54 percent), and the self-directed preferences of millennials (48 percent).

Among small agencies, the number of “very optimistic” agents dropped from 25 to 11 percent, which was not as dramatic a change; they were less optimistic in 2014 as well.

The survey by Vertafore and Aite Group, a software provider and an analyst firm, respectively, questioned 200 U.S.-based P&C independent insurance agencies during September 2015.

The survey found that only 29 percent of all agencies, regardless of size, are now focusing on aggressive growth, compared to 42 percent in 2014. The focus on maintaining current sales levels jumped to 12 percent, up from 5 percent last year.

Why so glum?

Guy Weismantel, vice president of marketing, Vertafore

Guy Weismantel, vice president of marketing, Vertafore

The primary factors driving industry uncertainty include carrier adoption of predictive analytics (59 percent); new, non-traditional entries into the insurance market (54 percent), and the self-directed preferences of millennials (48 percent).

According to Guy Weismantel, vice president of marketing at Vertafore, in Bothell, Wash., the dramatic drop in overall optimism suggests that the ripple effect of the industry’s ongoing digital disruption has permeated the entire independent agent channel.

Of the dominant threats identified in the survey, the predictive analytics worry stems from carriers becoming more self-sufficient, further displacing the independent agent, Weismantel said.

As for emerging competitive threats, examples include companies outside of the P&C industry providing insurance products, such as Walmart and car dealerships, as well as new premium aggregator websites like Google Compare and Zenefits.

“The future of insurance is not about displacing the agent; it’s about strengthening and reinvigorating agent services with technology.” — Guy Weismantel, vice president of marketing, Vertafore

Agents also were also concerned that agencies may not be able to meet the demand for self-directed online insurance purchasing by Gen Xers and millennials.

IT Budgets Increasing

To address key threats, four out of five agencies reported increasing their IT budgets over the last 12 months. Midsize and large agencies said their planned investments in technology are targeted to drive productivity and enhance customer engagement.

The survey identified investments in advanced customer self-service capabilities (47 percent) including websites and IVR, as well as investments in cloud services and solutions (43 percent) as primary drivers for budget spend within the next 12 months.

Samantha Chow, senior analyst, Aite Group Insurance team

Samantha Chow, senior analyst, Aite Group Insurance team

Investments in mobile (40 percent) in the form of mobile-friendly websites and apps also made the list of technology budget priorities.

While the increase in technology budgets are a good strategy to deal with a highly competitive marketplace, Samantha Chow, senior analyst on Aite Group’s Insurance team, said there are other tools P&C agencies should add to boost optimism and keep up with the competition.

“Marketing and brand awareness is necessary to maintain current business and increase retention,” said Boston-based Chow. “It’s apparent that agencies are more focused on this strategy than they have been in the past, but they need to shift the approach.”

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Agents in the survey also said they welcomed the emergence of usage-based insurance policies such as Progressive’s SnapShot, through which consumers receive discounts for good driving behavior.

Half of all agencies feel the introduction of usage-based insurance policies will have a positive impact on their business, with only 11 percent predicting a negative impact.

To address key threats, four out of five agencies reported increasing their IT budgets over the last 12 months.

Agents likely view usage-based insurance policies as a value-add opportunity to more effectively meet customer demands and attract prospects. In fact, the survey found 56 percent of agents have already seen increases in customer inquiries for such policies, and 62 percent expect demand to increase.

“The insurance industry is on the verge of disruption in the way we work and do business,” Weismantel said. “New self-service technologies are popping up daily, contributing to the evolving role and future of the insurance agent.”

He added that rather than shying away from change, the survey shows that agents are embracing and integrating technologies into their operations to enhance the customer experience.

“The future of insurance is not about displacing the agent; it’s about strengthening and reinvigorating agent services with technology,” he said.

Tom Starner is a freelance business writer and editor. He can be reached at riskletters@lrp.com.
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Supply Chain Risks

Modeling the Chain

Complex supply chain risks are prime territory for analytics to close coverage gaps, root out weak or risky suppliers, and ensure business continuity.
By: | October 15, 2015 • 10 min read
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When the massive Tohoku earthquake erupted off Japan’s coast in March 2011, the ensuing tsunami took thousands of lives and more than 125,000 buildings, and caused nuclear meltdowns.

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Tucked inside the death and destruction was an issue that spurred a more focused look at using data analytics in supply chain risk management: a shortage of specialty pigment in Japan. That forced automakers — including Chrysler, Ford, Toyota and GM — to temporarily restrict orders on vehicles in certain shades of black, red and other colors.

The pigment, called Xirallic, at the time was produced at only one factory in the world — the Merck KGaA Onahama plant near the Fukushima-Daiichi nuclear power station. The plant quickly was evacuated and shut down. It took months to restart manufacturing and resume deliveries, according to reports.

In the four-plus years hence, the use of data analytics is starting to get traction due to both improved technology and the risk complexity inherent in the supply chain process — as the Japan paint pigment scenario clearly demonstrated.

“Applying analytics to assess supply chain risk is relatively new,” said Erika Melander, manufacturing industry lead at Travelers. “Of course, the main challenge is trying to predict the future in general.  We can try and make assumptions about what might happen based on historical data and the trends we expect to see going forward, but nothing is guaranteed.”

Travelers, which has a strong book insuring manufacturers, surveys thousands of accounts each year and analyzes claim trends on a regular basis, said Melander. That process helps Travelers understand how it can help insureds protect their brand and reputation, manage their supply chain risks and keep their employees safe, she said.

“The marketplace is constantly changing and it is crucial for manufacturers to be poised for change so that they can adapt to new laws, materials or customer demands,” she said.

“We can try and make assumptions about what might happen based on historical data and the trends we expect to see going forward, but nothing is guaranteed.” — Erika Melander, manufacturing industry lead, Travelers

Marc Paasch, global head of alternative risk transfer solutions with the Willis Group, said the challenge in using predictive analytics for supply chain risk is taking a very granular approach and quantifying it.

He breaks the process down into hazard risks (CATs, political disruption, etc.), operational risks (key suppliers failing to deliver for one reason or another), financial risks (taking a lean stock approach and running out of inventory due to a

Anthony Moraes, managing principal, Integro

Anthony Moraes, managing principal, Integro

supplier issue) and strategic risks (acquisition of a supplier, resilience of supply chain, etc.).

Anthony Moraes, managing principal at Integro Insurance Brokers in San Francisco, noted that predictive analytics for supply chain is becoming a much

larger factor in his business, which mainly focuses on Silicon Valley.

“We are very involved in tech companies that primarily outsource their manufacturing, so they have large, often complicated supply chains,” he said. “Where they can identify and quantify risks, we can place the coverage, take it to the markets.

“If I had to tell a tech company anything about this issue, it’s that we can get better at supply chain risk management using predictive analytics. That’s the good news,” Moraes said. “The bad news is gathering the best data you can to predict your risk.

“It comes down to, do they really know their own supply chain? If so, good. If not, predictive analytics are not going to be much help to you.”

Hurdles to Overcome

It is all about the data, which is not only difficult to get, but can be subjective and hypothetical.

“A supply chain has a lot of people, places and things associated with it,” said Ben Fidlow, global head of core analytics at Willis Group. “The data is out there, but it may be in 20 different places. Getting an organization to collaborate and offer up their information when they have a siloed view is very difficult.”

Apart from up-to-date, usable data, Willis’ Paasch said, another hurdle is insight into the “elasticity of the flow and price of goods.”

For example, any specific incident may change the whole microeconomic view of the prices of goods and services. The end state of the elasticity of the customer might be fine if delayed a week, but the company could lose customer base if that delay stretches to eight or 10 days.

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Organizations need to have someone close to all of the factors so there is a true feel for the potential consequences.

That requires modeling the whole chain, from raw materials to final product. Once the chain is mapped, the organization must focus on every single segment, such as impact on price because of a change in raw materials, impact of delayed transportation or strikes, border issues, and property damage risks.

One large client using a supplier in Indonesia, he said, was discovered to be using children in the production line. It had to close the plant, which created a significant disruption.

Property risks are easier to model, but the impact of compliance risks and unexpected events make modeling supply chains challenging, Paasch said.

“There typically isn’t enough bandwidth or cost justification to be as rigorous with the long tail of other indirect suppliers.” — Kevin Brooks, executive, Ivalua

Kevin Brooks, an executive with Ivalua, an international spend management and procurement solutions provider, cited a study by PricewaterhouseCoopers that found that companies that treat their supply chains as strategic assets achieved 70 percent higher performance in key financial and operation metrics. Yet, the study found, only 45 percent of businesses view their supply chains in this way.

Kevin Brooks, executive, Ivalua

Kevin Brooks, executive, Ivalua

Companies that have experienced a significant supply chain disruption or problem are much more attuned to the issue of supply chain risk than others, he said.

For many, it is a question of both definition and probability, Brooks said. What kind of risk, exactly? Quality? Financial? Performance? And how can the organization adequately assess the likelihood or severity of something happening?

“Most feel they are already capturing some level of risk screening during strategic sourcing, and nearly all manufacturing companies maintain a level of ongoing scorecarding and performance assessment with their top tier suppliers,” he said.

Non-manufacturing companies, however, are less defined about their risk programs unless they are in regulated industries such as health care or banking. And even there, risk assessment happens only with the most strategic tier of suppliers.

“There typically isn’t enough bandwidth or cost justification to be as rigorous with the long tail of other indirect suppliers,” Brooks said.

Solutions Are Improving

Bindiya Vakil, CEO at Resilinc, a cloud-based supplier of supply chain risk and resilience intelligence and analytics, has spent the past decade studying supply chain dynamics. For many companies, she said, supply chain complexity is the No. 1 challenge.

Bindiya Vakil, CEO, Resilinc

Bindiya Vakil, CEO, Resilinc

The first step is to identify the most impactful suppliers and part numbers. So, if a supplier delivers 50 parts across 40 products and the result is a billion dollars in sales, it obviously has a major impact should problems occur. On the flipside, you could have a supplier whose revenue impact is high but risk score is very low (financially healthy, good continuity plans in place, safe locations, etc.). That would lessen their risk profile.

“What we find with supply chain is managing risk has been a core goal, but the problem lies in the inefficient processes that cause information to be sketchy and incomplete,” Vakil said. “They say they do supply chain risk management, but once you peel back the onion you will find they are not doing a very thorough job.”

A thorough job requires reaching out to suppliers, including Tier 2 suppliers and maybe beyond, to get information about global locations, the parts being built, and recovery time should problems occur.

“What we find with supply chain is managing risk has been a core goal, but the problem lies in the inefficient processes that cause information to be sketchy and incomplete.”  — Bindiya Vakil, CEO, Resilinc

Vakil said Resilinc sees supply chain analytics more as a proactive tool than a predictive one.

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“We are not trying to predict the next event, but we can say that’s the right or wrong thing to do should an event happen,” she said. “It’s about discovering where the biggest impact is along the chain and how to manage if something should go wrong.”

At the same time, she added, it’s about being ready to act because there is no way around it: Supply chains are truly risky and the next problem can come from just about anywhere.

“We do an event watch, 24/7 monitoring of the global supply chain with thousands of sources including social media, and anything that can shut down the supply chain,” she said. “No matter what it might be, the issue is: Are you prepared?”

At Travelers, the carrier offers a supply chain pressure test that helps manufacturers identify the links in their supply chain that may be most at risk.

At the end of the test, results are compared to a peer group, and Travelers makes specific resources available based on the test results.  According to Melander, some of the latest advances in using analytics to manage supply chain risk include traceability/tracking, demographics, key performance indicator (KPI) reports and big data.

“I would consider supply chain a function of liability and property risks versus a stand-alone exposure,” she said.

Erika Melander, manufacturing industry lead, Travelers

Erika Melander, manufacturing industry lead, Travelers

“We capture data points that are industry-specific so that we have information that will be helpful to not just food manufacturers, but also at a more granular level, for businesses such as bakeries, dairy product manufacturers or craft breweries,” she said.

“Of course, industries with more complex supply chains will need more analytics.”

Melander cited a large manufacturing insured that used analytics to help identify a weakness in its supply chain with respect to product quality. As a result of tracking warranty claims, the insured noticed that one of its models needed to be serviced more frequently than it would have expected.

While the manufacturer was investigating this, a customer submitted a claim because the product failed and ultimately caused severe bodily injury to one of the customer’s employees.

Because the insured had already identified a potential issue, Travelers’ forensics lab looked at the model in question and identified a specific component that was causing the model to fail.  The supplier it had used for the component was the low-cost option.

The manufacturer then changed suppliers. It cost more up-front, but ultimately saved money from warranty servicing. Additionally, putting a safe product into the marketplace allowed the insured to protect its brand.

“Manufacturers especially should constantly use data to re-evaluate their operations and their supply chain practices,” Melander said. “They should also actively engage with their agent or broker and carrier in order to use data to stay apprised of trends and safety practices that are common in the industry.”

Willis’ Fidlow noted that businesses are crying out for expanded analytics tools to manage supply chain, which by its nature represents serious coverage gaps and has been an underserved market because of the previous limits on technology and predictive analytics.

To that end, Willis has been building a mapping solution that uses layered models to help clients manage supply chain risks over various financial periods.

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“There definitely is no insurance product right now covering everything,” Fidlow said. “Some pieces are well covered and some fall into gaps.

“In the future, we will be trying to combine it all to increase the footprint of our solution. It’s an evolution, and with supply chain risk getting even more complex due to globalization, it’s also a huge opportunity.”

Insurance carriers are often a key resource for up-to-date data, said Travelers’ Melander, noting that larger carriers often will have information targeted to many industries across the United States and even the across the globe.

“If businesses do not use data available to help manage potential weak links in their supply chains, they are then at risk of losing ground to competitors that are using analytics to help with risk management, and not just for cost savings,” Melander said.

Tom Starner is a freelance business writer and editor. He can be reached at riskletters@lrp.com.
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