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

Insurtech

Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”

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“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.

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“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?

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“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

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