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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.”

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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.

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“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.

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“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

Cyber Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.

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In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.

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Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”

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How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.

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One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]