Supply Chain Risks

Driving Blindfolded

Many small and mid-size businesses underestimate their exposure to supply chain disruption.
By: | April 4, 2016 • 5 min read

Last November, a global study of 3,000 small and mid-size enterprises (SMEs) found that only one in seven SMEs think their business would be significantly affected if they lost their main supplier.

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Overall, 39 percent of SMEs consider themselves at risk from the loss of their main supplier, yet 55 percent believe it would not influence their day-to-day business.

Meanwhile, the “2015 Supply Chain Resilience Study” by Zurich and the Business Continuity Institute (BCI) found that while 74 percent of companies experienced at least one supply chain disruption in the last year, only half of those disruptions were known to originate from Tier 1 (immediate) suppliers, and 72 percent of respondents admitted they did not have full visibility into their supply chain.

“Supply chain risk is a blind spot for a lot of organizations.” — Karl Bryant, senior vice president at Marsh Risk Consulting

“This makes us believe that SMEs probably underestimate their supply chains risk exposure, and we urge them to reassess this,” said Nick Wildgoose, Zurich’s global supply chain product leader. He added that visibility and resilience along supply chains are major sources of competitive advantage.

BCI warned that organizations could be “driving blindfolded into a disaster.”

Companies at most risk are those reliant on “sole source” suppliers — one-of-a-kind manufacturers whose components are either of unique quality or are unavailable elsewhere in the market.

In today’s lean manufacturing era, fewer companies keep spare inventory, so if a critical component ceases to be available it can quickly prevent a company from producing its core product or service, leading to lost revenue, diminished service, dissatisfied customers and, in extreme cases, business closure.

Lurking Risks

Supply chain risk lurks in many forms. According to the BCI, IT and telecoms outages, adverse weather, and for the first time, cyber attacks/data breaches are

Karl Bryant, senior vice president, Marsh Risk Consulting

Karl Bryant, senior vice president, Marsh Risk Consulting

the top three causes of supply chain disruption. Another emerging risk is “business ethics,” which placed in the top 10 for first time.

“Supply chain risk is a blind spot for a lot of organizations,” said Karl Bryant, senior vice president at Marsh Risk Consulting.

Complacency that suppliers have everything under control can be a problem, said

Ken Katz, property risk control director at Travelers.

“When a risk exists outside your own four walls and you are focusing on your core business there is reduced visibility to the potential destruction it can cause,” Katz said.

To make matters worse for SMEs, smaller companies are likely to feel the effects of a supply shortage first as suppliers will invariably prioritize their biggest accounts if outflow is reduced.

R4-16p64-65_7SME.inddAn obvious risk mitigation strategy is to have a stockpile of spare inventory, but such an approach is not popular in these austere times.

“I’d love to see companies with six months’ supply, or matching supply against their expected downtime and their assets, but that’s a losing battle — no one wants inventory these days,” said Bryant.

Former RIMS President Rick Roberts, director of risk management and employee benefits at Ensign-Bickford Industries (EBI), said supply chain disruption is a “huge issue. People who’ve never had a problem often sit back and don’t pay much attention, but up-front work is critical because when a problem hits it can be major.”

Roberts, whose company is both a customer and supplier, said some of EBI’s customers require his company to keep a number of months’ worth of supply as inventory as part of their agreement. However, few SMEs have the leverage to wield this kind of influence.

Risk Assessment

To fully understand their supply chain exposures, Bryant suggested SMEs conduct a “value segmentation” exercise, identifying mission-critical areas of their

Ken Katz, property risk control director, Travelers

Ken Katz, property risk control director, Travelers

business, such as those that generate the highest margins or growth.

Then, Katz said, they should conduct a “business impact analysis,” simulating the repercussions of vital components being undeliverable.

It is also essential for SMEs to get to know their suppliers’ finances and quality of work as best they can, he said.

Bryant said that companies should compile a matrix of their supply chain in as much detail as possible, including suppliers of suppliers, and if possible, the exposure of suppliers’ plants and operations (as opposed to regional offices) to natural catastrophe such as flood or earthquake.

SMEs should ask all their suppliers what business continuity plans and insurance they have in place, and get clarity on exactly how they will be treated should the supplier run into problems.

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However, warned Bryant: “It can take a lot of man hours to send out questionnaires, follow up on them and pull the information together in a meaningful way, and many smaller companies don’t have the resources to invest in that kind of process.”

Nevertheless, this is information that empowers risk managers to make informed continuity plans. This could include, for example, finding alternative single source suppliers or new methods of production in case a sole source supplier fails to deliver, or even potentially acquire that supplier to ensure it stays in business.

There must also be a communications strategy for dealing with clients and negotiating delays. “You need a good explanation that is more sophisticated than ‘we can’t help you, I’m sorry’,” said Bryant.

Rick Roberts, director of risk management and employee benefits, Ensign-Bickford Industries

Rick Roberts, director of risk management and employee benefits, Ensign-Bickford Industries

Continuity planning, he said, requires a coordinated approach between risk and operational departments to ensure that gathered data is optimally leveraged. According to the BCI, only 54 percent of SMEs currently have a business continuity plan, compared to 74 percent of large organizations.

It also found that nearly six in 10 SMEs don’t insure losses from supply chain disruption, even though contingent business interruption (CBI) insurance would compensate for lost revenues during a supply problem.

This usually applies only to an insured’s first tier of suppliers, and can only be acquired if the SME has business interruption coverage.

Roberts would like to see more insurers extend coverage to second tier suppliers. “It can be expensive, and you can’t always see the benefits of being proactive — but when you get hit with a loss you’ll wish you had been prepared.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Robotics Risk

Rise of the Cobots

Collaborative robots, known as cobots, are rapidly expanding in the workforce due to their versatility. But they bring with them liability concerns.
By: | May 2, 2017 • 5 min read

When the Stanford Shopping Center in Palo Alto hired mobile collaborative robots to bolster security patrols, the goal was to improve costs and safety.

Once the autonomous robotic guards took up their beats — bedecked with alarms, motion sensors, live video streaming and forensics capabilities — no one imagined what would happen next.

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For some reason,  a cobots’ sensors didn’t pick up the movement of a toddler on the sidewalk who was trying to play with the 5-foot-tall, egg-shaped figure.

The 300-pound robot was programmed to stop for shoppers, but it knocked down the child and then ran over his feet while his parents helplessly watched.

Engaged to help, this cobot instead did harm, yet the use of cobots is growing rapidly.

Cobots are the fastest growing segment of the robotics industry, which is projected to hit $135.4 billion in 2019, according to tech research firm IDC.

“Robots are embedding themselves more and more into our lives every day,” said Morgan Kyte, a senior vice president at Marsh.

“Collaborative robots have taken the robotics industry by storm over the past several years,” said Bob Doyle, director of communications at the Robotic Industries Association (RIA).

When traditional robots joined the U.S. workforce in the 1960s, they were often assigned one specific task and put to work safely away from humans in a fenced area.

Today, they are rapidly being deployed in the automotive, plastics, electronics assembly, machine tooling and health care industries due to their ability to function in tandem with human co-workers.

More than 24,000 robots valued at $1.3 billion were ordered from North American companies last year, according to the RIA.

Cobots Rapidly Gain Popularity

Cobots are cheaper, more versatile and lighter, and often have a faster return on investment compared to traditional robots. Some cobots even employ artificial intelligence (AI) so they can adapt to their environment, learn new tasks and improve on their skills.

Bob Doyle, director of communications, Robotic Industry Association

Their software is simple to program, so companies don’t need a computer programmer, called a robotic integrator, to come on site to tweak duties. Most employees can learn how to program them.

While the introduction of cobots into the workplace can bring great productivity gains, it also introduces risk mitigation challenges.

“Where does the problem lie when accidents happen and which insurance covers it?” asked attorney Garry Mathiason, co-chair of the robotics, AI and automation industry group at the law firm Littler Mendelson PC in San Francisco.

“Cobots are still machines and things can go awry in many ways,” Marsh’s Kyte said.

“The robot can fail. A subcomponent can fail. It can draw the wrong conclusions.”

If something goes amiss, exposure may fall to many different parties:  the manufacturer of the cobot, the software developer and/or the purchaser of the cobot, to name a few.

Is it a product defect? Was it an issue in the base code or in the design? Was something done in the cobot’s training? Was it user error?

“Cobots are still machines and things can go awry in many ways.” — Morgan Kyte, senior vice president, Marsh

Is it a workers’ compensation case or a liability issue?

“If you get injured in the workplace, there’s no debate as to liability,” Mathiason said.

But if the employee attributes the injury to a poorly designed or programmed machine and sues the manufacturer of the equipment, that’s not limited by workers’ comp, he added.

Garry Mathiason, co-chair, robotics, AI and automation industry group, Littler Mendelson PC

In the case of a worker killed by a cobot in Grand Rapids, Mich., in 2015, the worker’s spouse filed suit against five of the companies responsible for manufacturing the machine.

“It’s going to be unique each time,” Kyte said.

“The issue that keeps me awake at night is that people are so impressed with what a cobot can do, and so they ask it to do a task that it wasn’t meant to perform,” Mathiason said.

Privacy is another consideration.

If the cobot records what is happening around it, takes pictures of its environment and the people in it, an employee or customer might claim a privacy violation.

A public sign disclosing the cobot’s ability to record video or take pictures may be a simple solution. And yet, it is often overlooked, Mathiason said.

Growing Pains in the Industry

There are going to be growing pains as the industry blossoms in advance of any legal and regulatory systems, Mathiason said.

He suggests companies take several mitigation steps before introducing cobots to the workplace.

First, conduct a safety audit that specifically covers robotics. Make sure to properly investigate the use of the technology and consider all options. Run a pilot program to test it out.

Most importantly, he said, assign someone in the organization to get up to speed on the technology and then continuously follow it for updates and new uses.

The Robotics Industry Association has been working with the government to set up safety standards. One employee can join a cobot member association to receive the latest information on regulations.

“I think there’s a lot of confusion about this technology and people see so many things that could go wrong,” Mathiason said.

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“But if you handle it properly with the safety audit, the robotics audit, and pay attention to what the standards are, it’s going to be the opposite; there will be fewer problems.

“And you might even see in your experience rating that you are going to [get] a better price to the policy,” he added.

Without forethought, coverage may slip through the cracks. General liability, E&O, business interruption, personal injury, cyber and privacy claims can all be involved.

AIG’s Lexington Insurance introduced an insurance product in 2015 to address the gray areas cobots and robots create. The coverage brings together general and products liability, robotics errors and omissions, and risk management services, all three of which are tailored for the robotics industry. Minimum premium is $25,000.

Insurers are using lessons learned from the creation of cyber liability policies and are applying it to robotics coverage, Kyte said.

“The robotics industry has been very safe for the last 30 years,” RIA’s Doyle said. “It really does have a good track record and we want that to continue.” &

Juliann Walsh is a staff writer at Risk & Insurance. She can be reached at [email protected]