Supply Chain

Analytics in Supply Chain Risk Management

A recent supplier snafu saw KFC’s UK outlets run out of chicken. The growing use of analytics address supply chain and distribution vulnerabilities.
By: | April 9, 2018 • 5 min read

It was Colonel Sanders’ worst nightmare. In February, more than half of KFC’s 900 stores in the UK temporarily closed after the fast food chain ran out of chicken. The shortage came days after the company switched its delivery contract to DHL, which blamed “operational issues.”

Advertisement




The episode proved that even in today’s tech-driven business environment supply chains remain vulnerable to disruption. Tech firm Resilinic reported that U.S. corporates were hit hard in 2017, with supply chain incidents nearly doubling from the previous year to impact nearly one in three S&P 500 companies.

Natural disasters, such as the hurricane trio Harvey, Irma and Maria, wrought heavy damage. Around 10 percent of drugs prescribed in the U.S. and produced in Puerto Rico were in short supply after Maria.

Supply chains were also disrupted by factory fires and explosions, as well as corporate M&As, business sales, spin-offs and plant shutdowns.

However, last year’s losses didn’t rank with the two ‘watershed moments’ of the past decade for supply chain management, suggests Josh Green, CEO and founder of trade data company Panjiva, recently acquired by S&P Global.

“During the first half of 2009, when the global economy was in a tailspin, virtually everyone realized that they had too little visibility into the financial health of their suppliers,” he said.

Mike Manzo, director, property risk consulting group, Aon

“As a result, a tremendous amount of effort was put into gathering data and developing methodologies for assessing supplier health. Then the March 2011 tsunami in Japan forced managers to look at the risks associated with geographic concentration of their supply chains. The result was geographic diversification.

“More recent weather-related events have been less impactful and, if anything, have demonstrated how resilient global supply chains have become. This is not to diminish the impact of these events on the impacted communities, but supply chains have bounced back or flexed quite quickly.”

The 2011 tsunami heralded a ‘perfect storm’ for several industries, noted Patrick Daley, head of large property, The Hartford. Auto manufacturers lost production due to the unavailability of spare parts — Toyota, previously the industry’s biggest producer, temporarily fell to third place. Monsoon floods in Thailand disrupted production by the leading manufacturer of hard disk drives, Western Digital Corporation, and impacted the PC market.

By contrast, the Kumamoto quake in April 2016 hit Toyota, Sony and Honda. But this time the companies identified which suppliers were impacted and managed to source from an alternative supplier quickly.

Striking A Balance

Extended supply chains inevitably create more weakness: “For decades, supply chain managers stretched their supply chains around the globe in search of lower costs,” said Green. “In recent years, they have increasingly looked closer to home in search of shorter lead times — and therefore better responsiveness to changes in customer demand.”

Rising wage rates in previously low-cost regions and quality issues with some products produced abroad saw some corporates consider reshoring and switching to local suppliers. This is now being accompanied by the option of ‘nearshoring’ — sourcing from a location nearer home than halfway across the globe.

“There’s a growing acceptance by corporates that what were once-in-a-lifetime events are becoming more frequent and potentially more severe,” said Mike Manzo, a director of Aon’s property risk consulting group.

“More recent weather-related events have been less impactful and, if anything, have demonstrated how resilient global supply chains have become.” — Josh Green, CEO and founder, Panjiva

“At the same time, while technology and automation is helping companies as they push to drive down costs, they’re also helping to create more risk.

Advertisement




“So today a company might be dependent on a handful of suppliers when as recently as only five years ago it would have had, say, as many as 50. That’s great from a cost standpoint but not when disruption occurs.”

Daley noted supply chain challenges present opportunities for insurers to provide solutions, but the industry can’t respond to all potential scenarios.

“With an increasing number of companies focusing on greater supply chain visibility, many are identifying alternative suppliers should their main source be disrupted,” he added.

“However, there is no going back to the time when many kept their warehouses full of inventory.”

Analytics To The Rescue

Fortunately, analytics is an increasingly effective tool in addressing supply chain vulnerabilities. Green highlighted two recent “leaps forward.”

“The first was simply awareness — supply chain managers began to understand they could and should make use of data, just as so many other business functions have,” he said.

“The second was the rise of machine learning as a tool for organizing data. There is a lot of insight to be gleaned from data, but the problem is that supply chain data is, generally speaking, a mess. Machine learning techniques put us in a better position to organize data, so that we have a better shot at finding the useful insights.”

According to tech research group Gartner, eight emerging strategic technology trends are set to determine the future of supply chains. They are:

  • Artificial intelligence, to enhance and automate decision making;
  • Advanced analytics, enabling companies to proactively take advantage of future opportunities while mitigating adverse events;
  • the Internet of Things, integrated by the air and defense industry in end-to-end supply chain processes;
  • Intelligent things, such as autonomous mobile robots and vehicles;
  • Conversational systems, of which virtual personal assistants and chatbots are best known;
  • Robotic process automation, which provides a range of cost reductions and system efficiencies;
  • Immersive technologies, such as virtual reality and augmented reality for enhanced employee and customer digital experiences;
  • and Blockchain, identified as best suited to highly decentralized supply chain management functions such as smart contracts or traceability and authentication.

The Hackett Group singled out advanced supply chain analytics as crucially important for companies’ operations in the years ahead. Bill DeMartino, North America general manager, riskmethods, a developer of cloud-based risk management software, which partners with Hackett, said both are “keenly aware” of the opportunity advanced analytics presents to enterprise supply chains.

Advertisement




“The term is used to cover many facets of analytics, which is a good thing, as folks tend to confuse analytics with a simple application of analytic algorithms,” said DeMartino.

“Key elements derived by the application of advanced analytics to supply chain include visibility and agility — these are critical elements for supply chain risk.”

Specifically, he noted, for leveraging the ever-growing pool of information available. Suppliers need access to information in a timely manner.

Add to this the ability to leverage past disruption cycles to better predict potential future threats, and tomorrow’s supply chains should prove more resilient to the worst the elements can throw at them. &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

Advertisement




Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

Advertisement




We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

Advertisement




Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

Advertisement




Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

Advertisement




More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]