Some additional descriptions for the supply chain (Photo credit: Wikipedia)
The earthquake and tsunami in Japan wiped out half the supply of chips for auto safety control systems and air filters for Toyota.
Floods in Thailand knocked several hard disk drive factories out of commission, leading to a global shortage for computer manufacturers and costing Intel a cool $1 billion.
A fire in a single Evonik chemical factory in Germany threatens brake and fuel line supplies to the auto industry across the globe.
Wasn’t anybody paying attention to the vulnerability of critical suppliers?
For the most part, no.
Actually, Zurich does. Starting four years ago, it began developing a set of risk tools to look at supply chain risk in depth.
“We look at 25 different risk areas,” said Nick Wildgoose, supply chain product leader for global corporate, Zurich Financial Services. None of it is rocket science, he is quick to admit, but it does require detailed examination of suppliers.
Take excavating equipment tires as an example. Zurich would look at the geographical locations of plants, see who the competitors offering alternative sources are and then look at factors that could interfere with supply, such as political threats or natural disasters.
Natural disasters are a big concern because climate shifts are making major floods bigger and more frequent, said Wildgoose.
Simon Thompson, director of global business solutions, at Esri, the global mapping company, said the increased risks from flooding are driving more analytics and modeling. A shift of two degrees Celsius is calculated to increase the frequency of large rainfall events. Individual floods like those in Thailand, which were the second most costly natural disaster in history, are 5x to 10x more likely.
Republicans may not believe in global warming, but the people who are paid to pay attention to facts are planning for it.
The potential losses are also growing because of population and settlement trends, he added. Developing countries are experiencing massive urbanization, often in low-lying and coastal areas where land is flat, making it easy to build both homes and factories. Areas along rivers and coasts are also preferred for industrial development because it is so much cheaper to move raw materials and finished goods by ship than by road. If there isn’t a rail system to support dispersion of manufacturing, locating near ports makes sense.
Zurich is working with Esri to develop maps of potential threats including flooding, earthquakes, income disparity and political risk. Two examples:
global storm intensity ranging from 118 to 250 km/hour
Thompson said the mapping company shows major disasters of the past and offers real-time maps of current problems, whether floods or tsunamis.
“We host all of the FEMA flood footprints and receive and map severe weather warnings like hurricanes. A lot of counties supply evacuation links and we provide a service for all those hazard areas. We also have a map online of all the historic tornado touchdown points.”
The World Economic Forum has developed several reports on supply chain risk, available from its website, including natural disasters, conflict and political unrest, sudden demand shocks, export/import restrictions and terrorism.
Contributing to the risks for companies are the global reach of their supply chains and just-in-time production, which means firms don’t have inventory to carry them through a disruption of supplies.
According to a global insurance study, worldwide economic losses from natural disasters in 2010 totaled $194 billion. Disasters can can damage infrastructure, interrupt production and significantly impact private sector financial performance, the insurer said.
An analysis of 15 publicly listed multinational companies indicated that operating profits fell by up to 33 percent in the financial quarter following the 2011 earthquake and tsunami in Japan as a result of supply chain disruption.
During the Egyptian uprising, the EGX fell 16 percent in two days while the Nikkei index dropped 10.6 percent after the tsunami and the S&P lost 11.6 percent in the four days after reopening in 2001 follwing the September 11 attack.
2011 Thailand flooding resulted in more than 500 deaths and disruptions to automobile and technology supply chains and a drop in the country’s GDP forecast from 4.1 percent growth to 1.5 percent.
Finding vulnerabilities in the supply chain is like peeling back an onion, said Zurich’s Wildgoose. During the 2009 financial crisis, many second tier suppliers were near insolvency, sometimes because their customers had pushed them so hard on prices that they didn’t have the margins to survive.
“I picked up the phone to one client and said they should think about supporting a second tier supplier or find an alternative,” he said. With bank credit tight, some companies provided credit to suppliers and changed their policies to pay them quickly.
Wildgoose said he starts with companies by asking them to identify their most profitable products and then deconstruct the bill of materials. For a mobile phone, that could include the parts and other supplies down to sources of necessary rare metals and the location of value-added activity in making the components. As China’s restriction of rare earth exports shows, vulnerabilities can extend deep into the supply chain.
“I am countering the common practices in a number of companies of just knowing who their Tier One suppliers are and not worrying about anyone else who is key in the supply chain,” Wildgoose added. “Some companies are now doing this and using their business continuity planning as a competitive differentiator, but it is not common yet.” In the past, suppliers often would refuse to provide any information about their sources, but that has changed with consumer-driven concerns over social responsibility. Corporations with valuable brands have learned their are vulnerable to charges of child labor or extreme working conditions far from their corporate headquarters, so they are insisting on more information from suppliers.
Zurich is still the only insurer to offer an all-risk insurance policy that covers not just premises but infrastructure around it and supply chain risks as well, said Wildgoose. The company will offer the policy only to clients who have done a risk assessment, either through Zurich or an independent broker or consultant. The assessment is needed, he explained, because the insurer can’t turn to any actuarial table for the risk information.
Wildgoose expects that this sort of coverage will become more common as it is better understood. Zurich is working with Esri on maps to assist in understanding risk. For example, a factory in a flood-prone area might be constructed on fill to elevate it 10 feet as a protective measure.
“I hope that in two or three years, the winners of supply chain awards will be the ones who are not just doing well on cost, quality and delivery but on delivering risk management.”
