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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

Risk Focus: Workers' Comp

Do You Have Employees or Gig Workers?

The number of gig economy workers is growing in the U.S. But their classification as contractors leaves many without workers’ comp, unemployment protection or other benefits.
By: and | July 30, 2018 • 5 min read

A growing number of Americans earn their living in the gig economy without employer-provided benefits and protections such as workers’ compensation.

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With the proliferation of on-demand services powered by digital platforms, questions surrounding who does and does not actually work in the gig economy continue to vex stakeholders. Courts and legislators are being asked to decide what constitutes an employee and what constitutes an independent contractor, or gig worker.

The issues are how the worker is paid and who controls the work process, said Bobby Bollinger, a North Carolina attorney specializing in workers’ compensation law with a client roster in the trucking industry.

The common law test, he said, the same one the IRS uses, considers “whose tools and whose materials are used. Whether the employer is telling the worker how to do the job on a minute-to-minute basis. Whether the worker is paid by the hour or by the job. Whether he’s free to work for someone else.”

Legal challenges have occurred, starting with lawsuits against transportation network companies (TNCs) like Uber and Lyft. Several court cases in recent years have come down on the side of allowing such companies to continue classifying drivers as independent contractors.

Those decisions are significant for TNCs, because the gig model relies on the lower labor cost of independent contractors. Classification as an employee adds at least 30 percent to labor costs.

The issues lie with how a worker is paid and who controls the work process. — Bobby Bollinger, a North Carolina attorney

However, a March 2018 California Supreme Court ruling in a case involving delivery drivers for Dynamex went the other way. The Dynamex decision places heavy emphasis on whether the worker is performing a core function of the business.

Under the Dynamex court’s standard, an electrician called to fix a wiring problem at an Uber office would be considered a general contractor. But a driver providing rides to customers would be part of the company’s central mission and therefore an employee.

Despite the California ruling, a Philadelphia court a month later declined to follow suit, ruling that Uber’s limousine drivers are independent contractors, not employees. So a definitive answer remains elusive.

A Legislative Movement

Misclassification of workers as independent contractors introduces risks to both employers and workers, said Matt Zender, vice president, workers’ compensation product manager, AmTrust.

“My concern is for individuals who believe they’re covered under workers’ compensation, have an injury, try to file a claim and find they’re not covered.”

Misclassifying workers opens a “Pandora’s box” for employers, said Richard R. Meneghello, partner, Fisher Phillips.

Issues include tax liabilities, claims for minimum wage and overtime violations, workers’ comp benefits, civil labor law rights and wrongful termination suits.

The motive for companies seeking the contractor definition is clear: They don’t have to pay for benefits, said Meneghello. “But from a legal perspective, it’s not so easy to turn the workforce into contractors.”

“My concern is for individuals who believe they’re covered under workers’ compensation, have an injury, try to file a claim and find they’re not covered in the eyes of the state.” — Matt Zender, vice president, workers’ compensation product manager, AmTrust

It’s about to get easier, however. In 2016, Handy — which is being sued in five states for misclassification of workers — drafted a N.Y. bill to establish a program where gig-economy companies would pay 2.5 percent of workers’ income into individual health savings accounts, yet would classify them as independent contractors.

Unions and worker advocacy groups argue the program would rob workers of rights and protections. So Handy moved on to eight other states where it would be more likely to win.

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So far, the Handy bills have passed one house of the legislature in Georgia and Colorado; passed both houses in Iowa and Tennessee; and been signed into law in Kentucky, Utah and Indiana. A similar bill was also introduced in Alabama.

The bills’ language says all workers who find jobs through a website or mobile app are independent contractors, as long as the company running the digital platform does not control schedules, prohibit them from working elsewhere and meets other criteria. Two bills exclude transportation network companies such as Uber.

These laws could have far-reaching consequences. Traditional service companies will struggle to compete with start-ups paying minimal labor costs.

Opponents warn that the Handy bills are so broad that a service company need only launch an app for customers to contract services, and they’d be free to re-classify their employees as independent contractors — leaving workers without social security, health insurance or the protections of unemployment insurance or workers’ comp.

That could destabilize social safety nets as well as shrink available workers’ comp premiums.

A New Classification

Independent contractors need to buy their own insurance, including workers’ compensation. But many don’t, said Hart Brown, executive vice president, COO, Firestorm. They may not realize that in the case of an accident, their personal car and health insurance won’t engage, Brown said.

Matt Zender, vice president, workers’ compensation product manager, AmTrust

Workers’ compensation for gig workers can be hard to find. Some state-sponsored funds provide self-employed contractors’ coverage.  Policies can be expensive though in some high-risk occupations, such as roofing, said Bollinger.

The gig system, where a worker does several different jobs for several different companies, breaks down without portable benefits, said Brown. Portable benefits would follow workers from one workplace engagement to another.

What a portable benefits program would look like is unclear, he said, but some combination of employers, independent contractors and intermediaries (such as a digital platform business or staffing agency) would contribute to the program based on a percentage of each transaction.

There is movement toward portable benefits legislation. The Aspen Institute proposed portable benefits where companies contribute to workers’ benefits based on how much an employee works for them. Uber and SEI together proposed a portable benefits bill to the Washington State Legislature.

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Senator Mark Warner (D. VA) introduced the Portable Benefits for Independent Workers Pilot Program Act for the study of portable benefits, and Congresswoman Suzan DelBene (D. WA) introduced a House companion bill.

Meneghello is skeptical of portable benefits as a long-term solution. “They’re a good first step,” he said, “but they paper over the problem. We need a new category of workers.”

A portable benefits model would open opportunities for the growing Insurtech market. Brad Smith, CEO, Intuit, estimates the gig economy to be about 34 percent of the workforce in 2018, growing to 43 percent by 2020.

The insurance industry reinvented itself from a risk transfer mechanism to a risk management mechanism, Brown said, and now it’s reinventing itself again as risk educator to a new hybrid market. &

Susannah Levine writes about health care, education and technology. She can be reached at [email protected] Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]