Risk Scenario

Missed Signals

Conflict in a foreign supplier's country exposes holes in one company's risk management strategy.
By: | June 2, 2014 • 7 min read
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

An Act of Violence

Alex Block settled down on a sunny afternoon in May of 2015 at the counter of Presto, a regionally famous sandwich shop in Pittsburgh, and hungrily eyed the pastrami sandwich on his plate.

Scenario_MissedSignals

Thick slices of white Italian bread stuffed with French fries, coleslaw and sweet-spicy, aromatic meat shaved super-thin. This was not the time to second-guess on the calories. This moment called for just diving right in.

Block’s self-indulgence felt justified. Three years ago, he’d returned to this former mill town, his bank accounts bulging with cash from a 14-year career as a Wall Street investment banker.

What he did with about $4 million of that cash got tongues wagging. It even got him a headline on the front page of the local business paper.

Block invested in his grandfather’s former aluminum fabrication company in nearby Lawrenceville with the idea of bringing it back as an aluminum decking company, dubbed Sarachelle Decking, Inc. The first word of the company name was a combination of the names of Alex’s two daughters, Sara and Rochelle.

Some online commentators greeted the news with ridicule. Block’s business looked to some like a bone-headed move spurred by nostalgia.

“This ain’t the Steel City no more, buddy,” grumbled an out-of-work ironworker, commenting on the online news story about the launch of this small to mid-sized company. Many in the Pittsburgh manufacturing community thought that Block would never make it in manufacturing.

Scenario Partner

Scenario Partner

But Block was no bonehead. He put his Wharton MBA and his curiosity to good use, researching South American bauxite production to identify lesser known suppliers who would give him a price advantage over larger companies.

It was in Guyana that he found the bauxite producer that made the whole thing click for his company. He added to that advantage by lining up a local smelter that he found through his business school contacts.

Now, three years later, the glimmer of real gold was appearing. Just this spring, Force-Tek, one of the publicly traded railroad and highway infrastructure companies, picked up his product in a seven-figure contract. Who was laughing now?

What better way to toast his success than with a stuffed sandwich at Presto’s? That form of celebration was a personal tradition that dated back to his high school days when Alex’s father would proudly treat him when he won wrestling matches.

Block made short work of the French fry-stuffed pastrami sandwich. As he finished off his diet cream soda, his eyes settled on the television set above the lunch counter. A news report showed footage of Venezuelan troops pouring over the Guyanese border. A long-simmering border dispute was erupting into armed conflict.

The operation providing Block’s bauxite was located a mere 200 miles to the east of the Venezuelan border incursion. The image of the Venezuelan troops stopped Block cold.

In an instant Block’s mind ran through the possibilities.

The degree to which the bauxite plant itself was threatened was one area of concern. But Block’s Guyanese producer was also heavily dependent on labor from the neighboring country of Suriname.

Even if the bauxite plant wasn’t captured or otherwise affected, it could suffer business interruption if its labor supply was blocked.

“How long the dispute will last and to what degree it will embroil neighboring Suriname are unknowns,” said the British-accented broadcaster.

“But one thing is certain,” he continued. “Business and personal travel in this area of the world will be inadvisable for weeks, possibly months to come.”

“No kidding,” Block said out loud to himself, eliciting a sharp, critical glance from a co-ed sitting on the next stool, apparently peeved that Block had interrupted her concentration as she thumbed through her iPhone.

In one afternoon, Alex Block’s bright business prospects darkened considerably. The pastrami sandwich that he’d rationalized as an earned indulgence now sat heavy in his stomach.

[poll id=”112″]

Outflanked

The Venezuelan incursion accomplished just what Block feared it would do.

Scenario_MissedSignals

Officials in Suriname tightened down their borders, blocking the movement of workers into Guyana for three months.

A months-long military border dispute between Venezuela and Guyana claimed dozens of lives per week. The fighting never escalated to a country-wide engagement, but the damage to the sustainability of Sarachelle Decking was done. Block’s Guyanese bauxite producer was forced to cease production until the situation stabilized.

Block moved quickly to identify another bauxite producer but he was outflanked.

He was forced to compete with larger aluminum makers and fabricators for bauxite from their existing suppliers. The higher price from those bauxite producers erased a key business advantage.

In a meeting with his CFO, Block faced the music.

“We’ve got margin erosion here that worries me greatly,” said the CFO, Kristian Moorehead.

The company was meeting its production obligations to Force-Tek and other key customers, but it was looking at an operating loss within one more quarter if it couldn’t cut costs.

Even with a full order book, Block did what he felt he had to do and laid off a shift. Maybe the layoff was too much too soon, an over-reaction, but Block was Wall Street trained. You didn’t wait, you acted.

Scenario_MissedSignals

The news sent ripples through the Pittsburgh manufacturing community and was gleefully picked up on by Block’s competitors.

“They’re not going to be around long,” was what a salesmen for one of the company’s competitors told a customer in the Midwest, where Sarachelle Decking did most of its business.

“Why do you say that?” said the customer.

“For one, they source from Guyana, which is under attack from Venezuela if you haven’t noticed,” the salesman said.

“Secondly, they’ve only been in business four years and they just laid off an entire shift last month,” the salesman said.

“I think you better ask yourself what it’s going to do to your business if you buy from them and they go under,” he added.

“I guess I’ll have to take that under advisement,” the customer said.

***

Alex Block was not an insurance naïf. His due diligence work as an investment banker gave him more than a passing acquaintance with products such as property insurance, D&O insurance, workers’ compensation, environmental insurance and other coverages.

As he scrambled to save his company and the prolonged Guyana-Venezuela strife played out, Block and his CFO examined their coverages to see if they could find relief.

They did not find relief. What they found were gaps, not only in their coverage but in their risk management strategy.

[poll id=”113″]

Back to the Drawing Board

As an event beyond his control, Alex Block couldn’t help but think that the conflict in South America that deprived him of a key supplier should have been compensable from an insurance standpoint.

Scenario_MissedSignals

After all, wasn’t it comparable to a storm or flood knocking out his factory for a few weeks or even longer? The answer was that it was, and it wasn’t.

Supply-chain insurance that would have provided a payout on the clear supply-chain disruption that Sarachelle Decking suffered wasn’t in place.

On the risk mitigation end, Block was so enamored of the business advantage his Guyanese bauxite supplier gave him that he didn’t look at the flip side. He failed to imagine what losing it would do to him and failed to arrange for back-up low-cost suppliers.

Over drinks with a pal from his Wharton days, Block got the lowdown on what he should have known and done going in.

“I mean the supply chain cover is something you arguably might not have been able to get to begin with,” his friend said between sips of his vodka martini.

“It’s not like there’s that much coverage out there and with your limits the carriers that handle that might have passed on you,” he said.

“But the supply chain analysis, you should have done and could have done,” he said. “It would have pointed out that your strength and your weakness were both coming from the same supplier,” he said.

“And a contingency plan?” his friend said.

“If I’d known …” Alex began.

“If you’d known. But good to have in any event,” his friend said.

With no end to the South American conflict in sight, Sarachelle Decking was locked into a bauxite price that gradually undermined its ability to compete.

The company was able to function for a full two years beyond the day that Block first axed one of the production shifts.

But in 2017, the day came when Alex Block’s dream of resurrecting his grandfather’s company came to an end. The same reporter that wrote a front page business journal story on him in 2012 visited him to write the epitaph on Sarachelle Decking.

In the five years he’d been in Pittsburgh, Alex Block had gotten used to the feel of a smaller town. His New York days seemed like a distant memory. This was his hometown after all.

But something told him he’d be back in that rat race before long.

[poll id=”114″]

[poll id=”115″]

Bar-Lessons-Learned---Partner's-Content-V1b

Risk & Insurance partnered with the Society of Actuaries (SOA) to produce this scenario. Below are perspectives from an actuary on ways to prevent losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance.

1. Analyze and prioritize risks: All business prospects need to be analyzed for potential pitfalls, as the business owner in the scenario did not prepare for unexpected events, such as labor shortages from regional instability or the unavailability of a critical supply point that impacted his entire supply chain.

The 2014 Emerging Risks Survey from the Joint Risk Management Section, of which the SOA is a sponsor, identifies emerging risks ranging from environmental to geopolitical. Key geopolitical risks can include:

  • Interstate and civil wars
  • Failed and failing states
  • Regional instability
  • International terrorism
  • Retrenchment from globalization

The businessperson in the scenario should have considered various geopolitical risks, among other risks that impact the company. Another set of emerging risks to consider include societal:

  • Pandemics and infectious disease
  • Regime liability and regulatory framework issues
  • Demographic shifts

2. Create relevant and actionable contingency plans: While it is important to research and identify potential shortfalls or risks presented from working with suppliers, vendors or other partners, it is also necessary to take action with this information. The loss of a key supplier, such as in this scenario, must be met with immediate action or dire consequences can occur. Planning ahead is necessary, so backup suppliers and sources of materials should be in place for the company. It is also vital to understand what risks may affect the suppliers’ business, which can ultimately impact the company too. For example, there are currency risks when dealing with suppliers based in another country, such as fluctuations in the economy, changes with the interest rates or issues with foreign exchanges.

3. Understand coverages: The risk exposures, a company’s appetite for risk and several other factors should weigh in to the decision of insurance coverage. Even if a company doesn’t have a chief risk officer, who that responsibility lies with needs to be identified and their knowledge of coverages and coverage limitations needs to be comprehensive.

4. Harness your consultants’ knowledge: The businessperson in this scenario depended too much on his own knowledge and did not seek counsel from insurance consultants or an insurance carrier, which was a vast oversight on his part. It is important to have a clear understanding of coverages and risk mitigation processes through tapping into the valuable insights of available resources and experts.

Partner Resources

For more information about SOA, please visit www.soa.org/impact



Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Workers' Comp

Keeping Workers on Their Feet

Slip and fall prevention programs must interweave all of the factors contributing to the risk.
By: | July 6, 2017 • 11 min read

If you peruse the last decade’s worth of literature from the CDC, NIOSH, or numerous other agencies or organizations, you’re bound to come across the “good news” that slips, trips and falls are largely preventable.

Advertisement




So it’s frustrating, then, that slip, trip and fall injuries consistently account for more than a quarter of all nonfatal occupational injuries, and at least 65 percent of those injuries happen on same-level walking surfaces. And those figures just don’t budge all that much from year to year.

According to the “2016 Liberty Mutual Workplace Safety Index,” falls on same level currently rank as the second highest cause of disabling injuries in the U.S., with direct costs of $10.17 billion, accounting for 16.4 percent of the total national injury burden.

“Not only are they still happening often, but they tend to be very significant injuries,” said Mike Lampl, director of research at the Ohio Bureau of Workers’ Compensation.

“We’ve seen these trends grow over the years,” said Wayne Maynard, product director, risk control, with Liberty Mutual. “Bottom line is, it’s a real, real big problem.”

So why are preventable falls so hard to prevent? This stubborn status quo, say experts, is that the causes of slips and trips are typically far more complex than they seem. There are nearly always multiple factors in play, from footwear and flooring and the interplay of both, to cleaning procedures, lighting, housekeeping, weather, and workers’ mental or physical conditions as well as overall awareness.

And all of these factors are being exacerbated by the fact that incidents often go unreported.

“Slips, falls — people get up, move on, they don’t report it,” said Maynard.

“When somebody’s injured and files a claim — in the workers’ arena, how many are behind the scenes that may have happened that are not reportable? …. The unreported number is considerable in my opinion.”

The key to making any headway in reducing slips and falls on the same surface, say experts, is to have a comprehensive fall prevention plan that addresses all possible factors. No small task.

Engineering Solutions

Flooring conditions are often the most obvious starting point. Ideally, said Maynard, all the right choices are made at the planning and design stage. But sometimes mistakes are made, and in other cases, a business may be inheriting an older space with floor chosen for a different purpose.

Patricia Showerman, senior loss control consultant, Arthur J. Gallagher & Co.

So even flooring in good condition may be the wrong type of material and may not have the necessary coefficient of friction (slip resistance) needed for the work being done.

If companies want to drill down into all the details of the surfaces in their facilities, a friction coefficient study is always an option, said Patricia Showerman, senior loss control consultant at Arthur J. Gallagher & Co.

But if a company doesn’t want to take that step, she said, it may be a simpler matter of saying, “Let’s look at what you’ve got. Let’s look at your floor surfaces and how you’re maintaining them.”

A lot of people want that “shiny grocery store glam look,” she said. “And if you can do it properly, and maintain it properly and keep that coefficient of friction and have the shiny look, that’s great. That’s what everybody wants but how do they get there?”

Certain surfaces may start out with an adequate coefficient of friction when they’re clean and dry. But add even an invisible layer of dust or debris, “and it’s like microscopic little BBs that you slide across,” said Showerman. “So if you have dust on your floor, you are dramatically reducing your slip coefficient.”

For companies that do have flooring surfaces in need of improvement, ripping up the floor and replacing it isn’t typically a feasible option. Fortunately there are more budget-friendly ways to get the maximum slip resistance from existing flooring, such as coatings and etchings.

A coating adds a microscopic layer on top of the flooring that creates a grip surface while maintaining the shine. Showerman likened the effect to the way that Velcro fasteners work.

“You want that hook effect … sharp points are going to microscopically stick into the soles of your shoes, rather than rolling off the top.”

Etching can work in a similar way, chemically altering the existing surface to make it imperceptibly gritty. Etching can also be used to create pores in an existing surface, which is useful for areas such as machine shops, she said.

Be Smart With Surfactants

While keeping floor surfaces clean is one of the best ways to remove slip and fall hazards, cleaning them the wrong way can actually do more harm than good.

Failure to follow appropriate cleaning procedures can severely diminish a surface’s coefficient of friction.

Experts suggest that companies engage with their chemical suppliers, and discuss their flooring as well as the types of dirt or grease removal and disinfectant needs. Detergents – which can contain different types of surfactants — aren’t a one size fits all solution.

Advertisement




Sometimes purchasers might be inclined to try to cover all their bases by buying the strongest product on the market, but that might mean adding unnecessary surfactants that make surfaces less slip resistant.

“Clearly identify the types of surfaces you’re using it for, the type of oil or dirt or debris you have, and whether or not you need a sanitizing step,” said Showerman.

“You’ve got to find the right balance.”

But that’s only half the battle. A significant problem experts see time and time again is that companies don’t understand how their flooring is being maintained on a day-to-day basis by front-line employees. Failure to follow appropriate cleaning procedures can severely diminish a surface’s coefficient of friction.

“This is where you’re seeing someone with a mop and bucket and they are just re-smearing that grease from one place to another. They put the dirty mop in the dirty bucket, the mop gets full of that emulsified grease and you’re smearing it across the room. In high grease areas, you have to replace with clean water consistently.”

In other cases, a worker without the proper training may grab the first detergent he finds, even if it’s meant for the equipment rather than the floor. Or perhaps he mixes equal parts detergent and water when he was supposed to only use 8 oz. of detergent for every five gallons of water.
Sometimes people will even over-concentrate the detergent on purpose, she added.

Peter Koch, safety management specialist, The MEMIC Group

“I see that in the food industry frequently,” said Showerman. “They find that the more detergent they leave on the floor, the easier it is to clean up next time … but then everyone’s slipping and falling like in a cartoon.”

A company could invest a significant amount in flooring improvements, only to have the benefits undone by improper detergent use or failure to follow recommended rinsing procedures.

It’s incumbent upon safety managers to reinforce that maintaining floor surfaces isn’t just a matter of housekeeping, but a key part of the company’s workplace safety program.

The Human Factor

When you’ve done everything possible to address hazards in the physical work environment, workers themselves remain the wildcard. Most employers routinely include slip and fall hazards in their safety awareness training or toolbox talk programs. But that training should go well beyond a general “watch where you walk” message, say experts.

“One of the most overlooked parts for employee safety is actually employee training,” said Peter Koch, safety management specialist at  The MEMIC Group.

“How do you train an employee to not slip and fall? I think many times that is wrapped in a “you have to be more careful” message, which is valid but nebulous and not very helpful — it means something different to everyone based on your risk tolerance as an individual.”

Koch’s employee training regimen revolves around four elements: surfaces, awareness, footwear and environment (SAFE).

Advertisement




The first goal of the surface portion is just to get employees to start thinking about the different types of surfaces they walk on and how it can change throughout the work day. Koch said he likes to ask: “How many different types of surfaces did you have to walk on the get to this training room?”

The footwear piece of it is the most straightforward. Are your shoes designed for the work that you’re doing and the surfaces you’re walking on? Are they in good condition? Are the soles worn out?

There is no ASTM standard for measuring the performance of slip-resistant footwear, added Gallagher’s Showerman. So workers should be reminded that wearing the right shoe isn’t a guarantee — it’s just one piece of the solution.

Awareness, said Koch, may be the most challenging piece of the puzzle — helping people to think about their gait, what they’re carrying, what they’re doing, and simply where their heads are at any given moment.

“If you’re thinking about 15 things you have to get done by the end of the day, or you have a particularly challenging employee interaction coming up that day, or you had a fight with your girlfriend last night— or whatever it is — you’re not focused. Then you take that step through the icy patch, and now it relies completely on your athletic ability and luck to stay upright.”

Workers may not necessarily make the connection between personal factors and fall risk. Someone who has an ear infection or is taking certain medications, for example, may not even be aware that their balance might be compromised, putting them at higher risk for a fall.

Employees also should be reminded of how even normal daily stressors can contribute to risk. Everyone is under pressure to deliver more in less time. Everyone is rushing, everyone is stretched to their limits. Add the ever-present cellphone beeping and buzzing and demanding our attention and perhaps it’s a wonder slips and falls don’t happen even more often than they already do.

We’re so conditioned to react when the vibration goes off or the tone chimes in our pockets that we just grab it without thinking, Koch said.

“If you knowingly put yourself at risk by knowingly going quickly through an area with slip and fall exposures, it’s just Russian roulette – at some point you’re going to get broken.” — Peter Koch, safety management specialist, The MEMIC Group.

“Even that, in certain conditions, is going to be enough to put you on the ground.”

Awareness of environmental factors should also be part of the training, Koch said, especially in terms of what workers can’t control, like inclement weather.  He said the main thing he tries to impress upon people is to slow down in a high-risk environment.

“If you knowingly put yourself at risk by knowingly going quickly through an area with slip and fall exposures, it’s just Russian roulette – at some point you’re going to get broken.”

Koch says that getting people to put all of these facets of awareness together is where the training can really click.

The goal is that when they approach an area with a higher-risk surface, employees are thinking “for those few seconds or minutes that I’m going to be walking through it, I need to have a greater sense of awareness, I need to put away the mental [distractions] and focus on what I’m doing – don’t answer your phone, don’t answer your texts.”

Some employers are looking to address the human piece of the slip and fall puzzle by using training that goes far beyond hazard awareness. Active slip-prevention training focuses on body mechanics and teaches workers how to respond when they feel themselves begin to slip.

One such program revolves around the Slip Simulator, technology born of a research partnership between Virginia Tech researchers and UPS. The simulator that creates slippery and hazardous conditions in a controlled environment while participants walk in a harness so they can slip safely. An instructor offers real-time guidance on how to alter their movements to avoid falling.

Advertisement




After mastering the initial technique, trainees face additional challenges related to their specific work environments, such as walking up ramps or turning wheels. A New Mexico security team practiced drawing firearms while standing on the simulator, which led to a change in how they wear their weapons. Workers at an Ohio refinery practiced stepping over pipes and turning large valves.

Clients of the program are reporting 60 to 80 percent reductions in accident rates.

The Road Ahead

A comprehensive slip and fall prevention plan is a must for employers, experts agreed, with clear, consistent procedures that empower employees to be a part of the solution.

“Employees play a very critical role,” said Liberty Mutual’s Maynard. “If they see a slip risk or a slipperiness issue, they need to be able to report it and they need to be able to get that corrected immediately. They have an important role in maintaining a safe facility and reducing risk themselves — be proactive, don’t walk by, clean it up.

“Any time you can involve the employee in solutions …. the likelihood of success of that intervention is higher.”

Maynard added that the best prevention plans will also be forward-looking.

“Understand where current safety performance is. Then make a roadmap to get better,” he said. “Emphasize where you’re doing well,” then identify opportunities to effect improvement, now and over the next three, four or five years.

“Prevention is too often reactive,” Maynard said. “We’ve got an issue and now what do we do? The goal is for companies to be proactive.” &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]