Supply Chain Risks

The Risks of Reshoring

Manufacturing’s return will require re-evaluating insurance programs, challenging underwriters to analyze new risks.
By: | April 7, 2017 • 6 min read

President Donald Trump pledged to create millions of jobs in the American economy. To achieve this goal he wants to convince companies to bring back the bulk of their supply chains to the United States.

But promoting the reshoring of manufacturing will be a hard task and, in order to accelerate this process, Trump looks set to experiment with policy measures that should have significant effect on the operations of multinational companies. The government can, for instance, implement tax reforms to reward companies that invest in America, or impose punitive tariffs on goods imported from suppliers located abroad.

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Trump can also use his well-known persuasion skills to shame firms into creating jobs at home, rather than elsewhere in the world. The latter strategy may already have borne fruit earlier this year with the likes of Ford Motor Co. and Carrier, which shelved plans to expand their production lines in Mexico, opting to invest in Michigan and Indiana instead.

Either way, the government appears to mean business.

“It does the American economy no long-term good to only keep the big box factories where we are now assembling ‘American’ products that are composed primarily of foreign components,” Peter Navarro, the head of the White House National Trade Council, told the “Financial Times” in January. “We need to manufacture those components in a robust domestic supply chain that will spur job and wage growth.”

“Costs have gone up significantly since the big outsourcing wave started some 15 years ago, and the economic advantages have narrowed.” – J. Paul Dittmann, executive director, Global Supply Chain Institute at the University of Tennessee

If the administration manages to deliver on its promises, companies will have to review the way they deal with supply chain risks. Experts have warned, for example, that workers’ compensation issues could become a more important factor across their supply chain, and insurance programs could become more expensive as insurance coverages tend to be more comprehensive, and premiums higher, in America than in developing nations. But opportunities could also arise, for example in terms of lower transportation costs and proximity to the final consumer.

In fact, although the subject has gained plenty of attention due to the Trump government’s protectionist views, the reversal of the globalization of supply chains has been going on for some time already, said J. Paul Dittmann, the executive director at the Global Supply Chain Institute at the University of Tennessee.

“It is a trend that is already very strong and seems to be growing,” he said. The reasons for this movement are manifold. Higher geopolitical risks have increased the threat of disruption of supply chains around the world in ways that companies did not anticipate some years ago. Dealing with corrupt authorities in the developing world involves plenty of risks of falling afoul with American courts, and economies like China offer less of a cost advantage these days, as income and wage expectations are beginning to catch up with developed economies.

“Costs have gone up significantly since the big outsourcing wave started some 15 years ago, and the economic advantages have narrowed,” Dittmann said. “Many companies have been over-optimistic in their cost analysis, and they often do not fully understand the inventory impact of long distance outsourcing.”

Restructuring Supply Chains

SCM, a think-tank that publishes an annual study on the subject, observed that local-for-local supply chain management strategies have gained popularity among companies since 2012.
Furthermore, the argument that focuses on jobs creation was also played by the Barack Obama administration, and the Economic Development Agency has funded reshoring initiatives for several years already.

That said, Dittmann warned that the movement back to the United States must be a natural one, driven by economic factors, and not by government arm-twisting.

If the authorities want to give the phenomenon a boost, it should address tax and regulatory constraints to the operation of companies in the country, he said.

“To force supply chains into a certain region does not make a lot of sense, and it could put American companies into a position of disadvantage,” he said.

Protective measures could drive production costs up, as wages in America remain much higher than in countries that are vital supply chain markets, such as Mexico or China.

Experts have stressed that industries like consumer electronics, high tech and footwear could suffer considerable impact if restrictive actions are taken against China, while the automotive sector is exposed to any new tariffs on imports from Mexico.

Furthermore, tit-for-tat reactions from foreign governments could restrict the access of American companies to export markets, and retaliation from China would be bad news, for example, for the aerospace industry.

The rise of protectionism, not only in the U.S., but also in Europe and other parts of the world has actually been highlighted by the latest annual report on the matter by the Chartered Institute of Procurement & Supply as a major factor behind an increase in supply chain risks.

Logan Payne, assistant vice president, global client services group, Lockton

The moving of supply chain links from emerging economies to the U.S. should also have a significant effect on the insurance programs of international companies.

It will require them to restructure their programs in order to reflect a broader American footprint, replacing local coverages purchased in foreign markets with others purchased in the U.S., and sometimes acquiring policies that are not really needed in other markets.

That’s the case, for example, with workers’ compensation policies, said Logan Payne, the assistant vice president in Lockton’s global client services group. “In some countries, workers’ compensation is covered by social security systems, while here it is necessary to purchase a separate insurance policy,” he said.

Working mostly in the United States also means that a higher share of a company’s activities will be exposed to a legal system where jury awards are much higher than elsewhere. Therefore, liability programs could become more expensive as local policies purchased abroad are replaced with American ones, Payne said.

The concentration of the supply chain in a single region also means a concentration of business interruption risks. As such, it increases the risk that production will suffer major disruption, if a large event hits one of the supply chain’s links.

On the other hand, risks linked to the shipment and transportation of goods and raw materials should be less of a worry, Payne said.

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“With a more regionalized supply chain, where supplies are much closer and there is less need for transoceanic cargo shipment, transportation is one area where insurance costs should be reduced,” he said.

An additional complication is that decisions about supply chains, more than ever, now entail a significant level of reputational risk.

“The basic message is to be more national, don’t just be global,” Richard Edelman, CEO of marketing firm Edelman, told Reuters during the World Economic Forum in Davos.

“Let’s try and pre-empt that tweet by having a long-term discussion about the supply chain.” &

Rodrigo Amaral is a freelance writer specializing in Latin American and European risk management and insurance markets. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Robotics Risk

Rise of the Cobots

Collaborative robots, known as cobots, are rapidly expanding in the workforce due to their versatility. But they bring with them liability concerns.
By: | May 2, 2017 • 5 min read

When the Stanford Shopping Center in Palo Alto hired mobile collaborative robots to bolster security patrols, the goal was to improve costs and safety.

Once the autonomous robotic guards took up their beats — bedecked with alarms, motion sensors, live video streaming and forensics capabilities — no one imagined what would happen next.

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For some reason,  a cobots’ sensors didn’t pick up the movement of a toddler on the sidewalk who was trying to play with the 5-foot-tall, egg-shaped figure.

The 300-pound robot was programmed to stop for shoppers, but it knocked down the child and then ran over his feet while his parents helplessly watched.

Engaged to help, this cobot instead did harm, yet the use of cobots is growing rapidly.

Cobots are the fastest growing segment of the robotics industry, which is projected to hit $135.4 billion in 2019, according to tech research firm IDC.

“Robots are embedding themselves more and more into our lives every day,” said Morgan Kyte, a senior vice president at Marsh.

“Collaborative robots have taken the robotics industry by storm over the past several years,” said Bob Doyle, director of communications at the Robotic Industries Association (RIA).

When traditional robots joined the U.S. workforce in the 1960s, they were often assigned one specific task and put to work safely away from humans in a fenced area.

Today, they are rapidly being deployed in the automotive, plastics, electronics assembly, machine tooling and health care industries due to their ability to function in tandem with human co-workers.

More than 24,000 robots valued at $1.3 billion were ordered from North American companies last year, according to the RIA.

Cobots Rapidly Gain Popularity

Cobots are cheaper, more versatile and lighter, and often have a faster return on investment compared to traditional robots. Some cobots even employ artificial intelligence (AI) so they can adapt to their environment, learn new tasks and improve on their skills.

Bob Doyle, director of communications, Robotic Industry Association

Their software is simple to program, so companies don’t need a computer programmer, called a robotic integrator, to come on site to tweak duties. Most employees can learn how to program them.

While the introduction of cobots into the workplace can bring great productivity gains, it also introduces risk mitigation challenges.

“Where does the problem lie when accidents happen and which insurance covers it?” asked attorney Garry Mathiason, co-chair of the robotics, AI and automation industry group at the law firm Littler Mendelson PC in San Francisco.

“Cobots are still machines and things can go awry in many ways,” Marsh’s Kyte said.

“The robot can fail. A subcomponent can fail. It can draw the wrong conclusions.”

If something goes amiss, exposure may fall to many different parties:  the manufacturer of the cobot, the software developer and/or the purchaser of the cobot, to name a few.

Is it a product defect? Was it an issue in the base code or in the design? Was something done in the cobot’s training? Was it user error?

“Cobots are still machines and things can go awry in many ways.” — Morgan Kyte, senior vice president, Marsh

Is it a workers’ compensation case or a liability issue?

“If you get injured in the workplace, there’s no debate as to liability,” Mathiason said.

But if the employee attributes the injury to a poorly designed or programmed machine and sues the manufacturer of the equipment, that’s not limited by workers’ comp, he added.

Garry Mathiason, co-chair, robotics, AI and automation industry group, Littler Mendelson PC

In the case of a worker killed by a cobot in Grand Rapids, Mich., in 2015, the worker’s spouse filed suit against five of the companies responsible for manufacturing the machine.

“It’s going to be unique each time,” Kyte said.

“The issue that keeps me awake at night is that people are so impressed with what a cobot can do, and so they ask it to do a task that it wasn’t meant to perform,” Mathiason said.

Privacy is another consideration.

If the cobot records what is happening around it, takes pictures of its environment and the people in it, an employee or customer might claim a privacy violation.

A public sign disclosing the cobot’s ability to record video or take pictures may be a simple solution. And yet, it is often overlooked, Mathiason said.

Growing Pains in the Industry

There are going to be growing pains as the industry blossoms in advance of any legal and regulatory systems, Mathiason said.

He suggests companies take several mitigation steps before introducing cobots to the workplace.

First, conduct a safety audit that specifically covers robotics. Make sure to properly investigate the use of the technology and consider all options. Run a pilot program to test it out.

Most importantly, he said, assign someone in the organization to get up to speed on the technology and then continuously follow it for updates and new uses.

The Robotics Industry Association has been working with the government to set up safety standards. One employee can join a cobot member association to receive the latest information on regulations.

“I think there’s a lot of confusion about this technology and people see so many things that could go wrong,” Mathiason said.

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“But if you handle it properly with the safety audit, the robotics audit, and pay attention to what the standards are, it’s going to be the opposite; there will be fewer problems.

“And you might even see in your experience rating that you are going to [get] a better price to the policy,” he added.

Without forethought, coverage may slip through the cracks. General liability, E&O, business interruption, personal injury, cyber and privacy claims can all be involved.

AIG’s Lexington Insurance introduced an insurance product in 2015 to address the gray areas cobots and robots create. The coverage brings together general and products liability, robotics errors and omissions, and risk management services, all three of which are tailored for the robotics industry. Minimum premium is $25,000.

Insurers are using lessons learned from the creation of cyber liability policies and are applying it to robotics coverage, Kyte said.

“The robotics industry has been very safe for the last 30 years,” RIA’s Doyle said. “It really does have a good track record and we want that to continue.” &

Juliann Walsh is a staff writer at Risk & Insurance. She can be reached at [email protected]