Supply Chain Risks

Risk Center to Rule the World

A combination of technology and data-centric risk management almost guarantees resilient supply chains.
By: | September 14, 2015 • 6 min read

This is not the story of how an unrelenting flood in faraway Thailand nearly destroyed the business of a Fortune Global 500 company.

Sure, during the Fall 2011 floods in the Southeast Asian country, nearly 50 percent of its landmass was underwater. More than 1,000 factories shut down.

But for the multinational company in question, Flex, formerly known as Flextronics Inc., the Thailand floods were a bit of a success story — albeit a success story with $100 million in resulting lost revenue.


What kind of victory is that? Thailand became proof that lessons had been learned after a previous disaster — the March 11, 2011 Japanese earthquake. It was proof that Flex, one of the world’s largest outsourced electronics manufacturers, was on the right track.

After that earthquake, Flex’s supply chain team in the States scrambled for weeks to understand the disruption’s size. Which of its suppliers were affected and by how much? They shuffled Excel spreadsheets and flipped through outdated Rolodexes.

They found that their path to victory was partly a software solution called Resilinc.

Connecting the Dots

“The database underlying Resilinc maps suppliers’ footprint and part-origin information, and connects this type of supplier information with products and revenue,” wrote MIT Professor Yossi Sheffi, Resilinc founder Bindiya Vakil and Flex supply chain Senior Director Tim Griffin — in a research paper detailing Flex’s experience.

When the Thailand floods came, Resilinc empowered the Flex supply chain team to know when and how suppliers were being hit — and which and how many parts were built at those suppliers — even as those suppliers were keeping quiet publicly.

Flex could prioritize a “high risk” list and plan recovery strategies at a speed that allowed them to minimize revenue and profit loss.

“The main benefits came from the ability to connect all the dots; from supplier name to part numbers, part numbers to inventory and demand positions, from that to specific products and customers,” the MIT report authors wrote.

 Jose Heftye, senior director, global risk management, Flex

Jose Heftye, senior director, global risk management, Flex

Flex’s business recovery success in Thailand was not contingent entirely on a software app. The company with 200,000 employees across 30 countries also avoided serious losses because redundancy built into its supply chain anticipated business interruption for any single-source supplier, said Jose Heftye, senior director, global risk management, at Flex’s San Jose, Calif., office, who was employed elsewhere during the floods.

The nine-figure revenue loss was a victory, thanks to technology and traditional supply chain management, but Flex has since moved to far more dynamic 21st century business recovery processes.

The company now believes it has the ability to accommodate potential physical damage risk to suppliers and essentially become a guarantee to customers — from mobile device makers to automakers.

To do that, the company folds risk management and risk analysis into its day-to-day business. The focus no longer rests solely on mere efficiency.

“Flextronics moved from a traditional supply chain risk management strategy that usually includes building redundancy within the system, procuring insurance and setting up processes to react in the case of a potential disruption, to a real-time risk assessment and risk management strategy,” said Alejandro Marmorek, managing director, Latin America regional sales, and AGCN leader at Aon.


The company, he said, “can follow and analyze specific issues that could potentially disrupt vendors or customers and define mitigation strategies that are executable in real time.”

Or as his colleague Randy Nornes, executive vice president of Aon Risk Solutions, said, “Efficiency and risk are not on the same page.”

Creating a Risk Center

The new business recovery program — which Heftye oversees across business continuity planning and risk treatment strategy, legal, HR, operations, business development and supply chain up through the C-suite — is a so-called “risk center.”

It focuses on three buckets: business continuity, contractual exposure and financial risk.

Here’s how it works: Heftye’s teams conduct internal audits to identify company core processes, their interdependencies across different areas, and their recovery times if they were to go down.

Next, they apply business impact analysis to map the financial and strategic value of each process, calculate how much risk is already in the system and spot where more risks are.

“You go from the very, very granular points, and you take it to a higher level and start to aggregate data and processes. My primary objective is to not buy insurance.” — Jose Heftye, senior director, global risk management, Flex

They bring the results before a steering committee made up of C-suite level leaders across business development, finance, operations and legal — where Heftye’s team recommends ways to eliminate, mitigate or transfer the risk.

“That is pretty much driving all of our activities,” Heftye said. “You go from the very, very granular points, and you take it to a higher level and start to aggregate data and processes.

“My primary objective is to not buy insurance,” he said.

Let’s imagine a scenario where the IT system that manages Flex’s inventory goes down. Heftye and his team evaluate the impact upon their customers, purchase orders, revenue, profitability, etc., if the system were down for X hours at Y facility.


“We can show in hard numbers [what happens] if we don’t have a backup,” he said.

The team quantifies the investments needed to mitigate or eliminate the risk and sits down with the steering committee, which can then comfortably authorize an investment for a redundant IT system and other measures.

They’ve done a similar investigation into key individuals at the company and the potential impact of their departures, then worked with HR to build a talent pipeline to mitigate that risk.

Better Than ERM

Developed by firms like Genentech and Microsoft in the late ’90s, this risk center concept first appeared at companies in a one-off role, such as for a project team to, say, analyze an event that impacted a competitor to see what the ramifications could be for the company. More and more, however, companies are backing the processes into what they do every day.

090152015_20_flextronics_sidebarThis is much more than enterprise risk management (ERM). In Nornes’ view, ERM has evolved into risk identification and control. But once ERM identifies supply chain as a “red risk on a heat map,” said Nornes, it typically fails to provide a granular view and guidance on what to do next. ERM, in essence, has evolved into a compliance checkbox.

And as Heftye has explained, a risk center approach is not limited to supply chain; it allows companies to apply analytical rigor and insert risk management into ROI decisions for any critical risk, like cyber.

“It’s the skill set they are bringing, not the knowledge of that specific risk,” Nornes said.

“It does require a high degree of risk maturity across the organization to collaborate across the various teams, which includes deep partnerships with clients and suppliers,” added Marmorek.

For Heftye, it has earned him a veritable role as rainmaker. At Flex, the risk management function can now contribute to the company’s strategy by providing insight and by partnering with business operations, said Heftye.

Flex’s risk is their customers’ supply chain risk, so having their risk under control, holding to that guarantee of little or no business interruption as a talisman, has become a selling point for Flex.

“It’s given us more tools to sell quality of services and show that we are a long-term solution and not just something that could go away after another Thailand,” Heftye said.

Matthew Brodsky is editor of Wharton Magazine. He can be reached at [email protected]
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Protecting Valuables

Protecting Collectibles from Hurricanes

The fear of powerful winds and storm surge has led to the development of specialty warehouses.
By: | September 4, 2015 • 4 min read
flooding  interior

When renowned art attorney Scott Hodes set out to transfer some artwork from his residence in Chicago to a newly purchased townhouse in Miami, he was surprised to learn that a number of art insurers in South Florida did not offer fine art insurance during the hurricane season.

Scott Hodes, senior counsel, Bryan Cave LLP

Scott Hodes, senior counsel, Bryan Cave LLP

Hodes, senior counsel at Bryan Cave LLP, also learned that the building of well-protected warehouses in the Miami area for high-end objects such as fine art was a booming business.

The warehouses allow collectors to store their valuables during hurricane season before having the art warehouse move the collectibles back to their residences between December 1 and June 1, when hurricanes generally are not a threat.

“The art warehouse business has really taken off in South Florida,” said Hodes.

Melissa Lalka, fine art manager of Chubb Personal Insurance for Chubb Group of Insurance Cos., said that her company “interacts with the growing number of warehouses storing fine art and other valuables in the South Florida market by having a number of specialists … inspecting warehouses.”

Chubb, she said, has a number of loss control features that it considers important when inspecting warehouses that its clients and prospective clients may consider doing business with. The insurer also keeps a database of preferred vendors for clients needing to use such services.

In that way, she said, “the insurer can be very nimble in being able to say what facilities are well protected.”


Also contributing to the growth of art warehouses is an increasing number of collectors who “buy and hold” art as an investment and who may not have the proper facility or the desire to house the art themselves, said Linda Sandell, Huntington T. Block’s chief underwriting officer.

“Most art storage warehouses provide two insurance options,” she said. “Either the warehouse will insure the collection and charge an additional fee, or the insured maintains their own [insurance] and signs a waiver for the warehouse.

“If the warehouse insures the collection, it is important for the collector to review the coverage to confirm that it is adequate for their needs, just as they would when insuring the collection through their own insurer.”

Huntington T. Block’s clients in South Florida include collectors of all sizes, as well as important museums, galleries, artists and conservators. ”With a well-planned executable disaster plan, fine art insurance is generally available and affordable, even in coastal areas, said Sandell.

Jennifer Schipf, senior underwriter, fine art and specie, XL Catlin

Jennifer Schipf, senior underwriter, fine art and specie, XL Catlin

“The important thing for clients,” said Jennifer Schipf, senior underwriter, fine art and specie at XL Catlin, “is that they really do their research to find a warehouse that not only specializes in fine art, and there are several wonderful ones in the South Florida area, but to also do their research among friends and peers to make sure they’re getting good recommendations and good feedback from people who have used the same warehouse they are considering.”

It’s also important to know what type of warehouse facility you are considering, Schipf noted. “If it’s a fine art warehouse, they should have climate control to protect art as much as possible,” she said.

Collectors also need to understand that most warehouses make sure they are not liable for loss of property of more than the required 60 cents per pound of property that they are holding, which only scratches the value of art these days, she said.

“So it’s absolutely critical that if clients expect to have insurance coverage when their artwork is in the warehouse that they secure that coverage themselves,” Schipf added.

Vanessa Amor, business manager for Museo Vault, a state-of-the-art insurance warehouse that stands dramatically against the Miami skyline, said the warehouse was designed to withstand the 200 mph winds generated by even the most powerful hurricanes. Art is also stored at least 35 feet off the ground to protect it from aggressive storm surge.

“Our art facility was built from the ground up four years ago in a state-of-the-art manner to the standards that were required by the insurance industry … to store the fine art and other valuables, such as antique furniture and sports memorabilia, among other things,” she said.

Amor stressed that Museo Vault was not a self-storage facility. It has a robust 24/7 security system. “You name the sensor, we have it,” Amor said.


“You can’t just walk in here to access your valuables,” she said. “Everything is very controlled. You have to have an escort with you at all times.”

Added Amor: “We can provide insurance if a client wants to obtain insurance for a particular work.”

She said that the idea for Museo Vault came after the busy 2005 hurricane season, highlighted by Hurricane Katrina.

In addition to Museo Vault, there are a number of other prominent art warehouses in South Florida.

Fortress Miami, which has been open for 30 years, recently completed an expansion and renovation of its private viewing gallery, which offers several options for displaying art depending on a client’s preference, day or night.

A similar facility, Robo Vault, opened up more recently in South Florida. Robo Vault has an area for storing wine and seven enclosed garages with a robotic arm to store and retrieve exotic and antique automobiles.

Steve Yahn is a freelance writer based in Croton-on-Hudson, NY. He has more than 40 years of financial reporting and editing experience. He can be reached at [email protected]
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Sponsored Content by ACE Group

6 Truths about Predictive Analytics

ACE's predictive analytics tool provides a new way to capture, analyze and leverage structured and unstructured claims data.
By: | October 1, 2015 • 6 min read

Predictive data analytics is coming out of the shadows to change the course of claims management.

But along with the real benefits of this new technology comes a lot of hype and misinformation.

A new approach, ACE 4D, provides the tools and expertise to capture, analyze and leverage both structured and unstructured claims data. The former is what the industry is used to – the traditional line-item views of claims as they progress. The latter, comprises the vital information that does not fit neatly into the rows and columns of a traditional spreadsheet or database, such as claim adjuster notes.

ACE’s recently published whitepaper, “ACE 4D: Power of Predictive Analytics” provides an in-depth perspective on how to leverage predictive analytics to improve claims outcomes.

Below are 6 key insights that are highlighted in the paper:

1) Why is predictive analytics important to claims management?

ACE_SponsoredContentBecause it finds relationships in data that achieve a more complete picture of a claim, guiding better decisions around its management.

The typical workers’ compensation claim involves an enormous volume of disparate data that accumulates as the claim progresses. Making sense of it all for decision-making purposes can be extremely challenging, given the sheer complexity of the data that includes incident descriptions, doctor visits, medications, personal information, medical records, etc.

Predictive analytics alters this paradigm, offering the means to distill and assess all the aforementioned claims information. Such analytical tools can, for instance, identify previously unrecognized potential claims severity and the relevant contributing factors. Having this information in hand early in the claims process, a claims professional can take deliberate actions to more effectively manage the claim and potentially reduce or mitigate the claim exposures.

2) Unstructured data is vital

The industry has long relied on structured data to make business decisions. But, unstructured data like claim adjuster notes can be an equally important source of claims intelligence. The difficulty in the past has been the preparation and analysis of this fast-growing source of information.

Often buried within a claim adjuster’s notes are nuggets of information that can guide better treatment of the claimant or suggest actions that might lower associated claim costs. Adjusters routinely compile these notes from the initial investigation of the claim through subsequent medical reports, legal notifications, and conversations with the employer and claimant. This unstructured data, for example, may indicate that a claimant continually comments about a high level of pain.

With ACE 4D, the model determines the relationship between the number of times the word appears and the likely severity of the claim. Similarly, the notes may disclose a claimant’s diabetic condition (or other health-related issue), unknown at the time of the claim filing but voluntarily disclosed by the claimant in conversation with the adjuster. These insights are vital to evolving management strategies and improving a claim’s outcome.

3) Insights come from careful analysis

ACE_SponsoredContentPredictive analytics will help identify claim characteristics that drive exposure. These characteristics coupled with claims handling experience create the opportunity to change the course of a claim.

To test the efficacy of the actions implemented, a before-after impact assessment serves as a measurement tool. Otherwise, how else can program stakeholders be sure that the actions that were taken actually achieved the desired effects?

Say certain claim management interventions are proposed to reduce the duration of a particular claim. One way to test this hypothesis is to go back in time and evaluate the interventions against previous claim experience. In other words, how does the intervention group of claims compare to the claims that would have been intervened on in the past had the model been in place?

An analogy to this past-present analysis is the insight that a pharmaceutical trial captures through the use of a placebo and an actual drug, but instead of the two approaches running at the same time, the placebo group is based on historical experience.

4) Making data actionable

Information is everything in business. But, unless it is given to applicable decision-makers on a timely basis for purposeful actions, information becomes stale and of little utility. Even worse, it may direct bad decisions.

For claims data to have value as actionable information, it must be accessible to prompt dialogue among those involved in the claims process. Although a model may capture reams of structured and unstructured data, these intricate data sets must be distilled into a comprehensible collection of usable information.

To simplify client understanding, ACE 4D produces a model score illustrating the relative severity of a claim, a percentage chance of a claim breaching a certain financial threshold or retention level depending on the model and program. The tool then documents the top factors feeding into these scores.

5) Balancing action with metrics

ACE_SponsoredContentThe capacity to mine, process, and analyze both structured and unstructured data together enhances the predictability of a model. But, there is risk in not carefully weighing the value and import of each type of data. Overdependence on text, for instance, or undervaluing such structured information as the type of injury or the claimant’s age, can result in inferior deductions.

A major modeling pitfall is measurement as an afterthought. Frequently this is caused by a rush to implement the model, which results in a failure to record relevant data concerning the actions that were taken over time to affect outcomes.

For modeling to be effective, actions must be translated into metrics and then monitored to ensure their consistent application. Prior to implementing the model, insurers need to establish clear processes and metrics as part of planning. Otherwise, they are flying blind, hoping their deliberate actions achieve the desired outcomes.

6) The bottom line

While the science of data analytics continues to improve, predictive modeling is not a replacement for experience. Seasoned claims professionals and risk managers will always be relied upon to evaluate the mathematical conclusions produced by the models, and base their actions on this guidance and their seasoned knowledge.

The reason is – like people – predictive models cannot know everything. There will always be nuances, subtle shifts in direction, or data that has not been captured in the model requiring careful consideration and judgment. People must take the science of predictive data analytics and apply their intellect and imagination to make more informed decisions.

Please download the whitepaper, “ACE 4D: Power of Predictive Analytics” to learn more about how predictive analytics can help you reduce costs and increase efficiencies.


BrandStudioLogoThis article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with ACE Group. The editorial staff of Risk & Insurance had no role in its preparation.

With operations in 54 countries, ACE Group is one of the largest multiline property and casualty insurance companies in the world.
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