Risk Scenario

Don’t Break the Chain

A risk manager for a manufacturing company argues for a supply chain assessment. Will stakeholders agree it's the right move?
By: | June 11, 2013 • 10 min read
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

Part One

The sailboats gliding in San Diego Harbor as seen through the board room window were distracting, but business is business.

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To help her focus on the meeting she was in, Jennifer Gage, the risk manager for Charing Corp., a San Diego-based plastics manufacturer, raised her warm, almost full paper coffee cup and inhaled deeply.

Then Mark Lacy, the director of operations, said something that negated her need for caffeine.

“With the current profusion of new oil production sources domestically and globally, we think we can find feedstock cost savings out there. Substantial amounts, we think,” Lacy said.

Lacy added that his department was well on its way to identifying low-cost oil alternatives on a number of continents.

Jennifer got it. So did everyone else in the room. In its battle to stay competitive, Charing Corp., which used petroleum as a feedstock to manufacture plastic housings for household appliances, had to keep a sharp eye on the cost of raw materials.

But as Mark Lacy discussed different global sourcing locations, Jennifer started making notes.

Under the word risks, underlined three times boldly on her notepad, she started a list:

1) Reputational – What threats did any new suppliers represent from a reputational perspective? Human rights, etc.

2) Political – Where were these countries on the political spectrum? How impacted were they by recent political unrest for example? Run this down.

3) Logistical – What ocean passages or other transportation networks were these potential new suppliers dependent on? What recent geopolitical events made some channels more at risk than others? Bottom line, where were the bottlenecks? Which suppliers were more likely to suffer an event that would disrupt the flow of feedstock?

4) Nat/CAT – Which of the potential new suppliers were more exposed from a natural catastrophe perspective? Storm surges, coastal locations, etc.  Anything Gulf of Mexico-related.

As Lacy talked about locations in Southeast Asia, Latin America, the United States and Europe, Jennifer wrote, “Shorten the chain, strengthen the chain,” under her list of risks.

Later on, Mark Lacy was heading down the corridor away from the board meeting and Jennifer set off after him. He looked like he had places to be going, but so did everybody.

“Hey Mark,” Jennifer said. “You got a couple of minutes?”

Mark smiled.

“Sure, what’s up?”

“I wanted to talk to you about your feedstock sourcing plan, just wanted to go over a few things,” she said.

“Sure thing. I’ve got a little chunk of time before my next meeting,” Mark said affably.

In Mark’s office, Jennifer laid her cards right on the table. She and Mark had a good working relationship, so she had no need to hedge her comments.

“Looks like you’ve got a lot of support for your cost-cutting move,” she said.

“If I can pull it off,” he said.

“I think you can pull it off. But I want to work with you on it,” Jennifer said.

“What do you mean?” Mark said.

Scenario Partner

Scenario Partner

Jennifer laid out the plan that had started forming in her brain during the meeting.

Jennifer had done her reading. She knew that it was almost a “classic” supply chain risk management challenge to convince company stakeholders to conduct a supply chain risk assessment.

The cynics said it was just too tough to convince other executives to do it. The risk was so vast and hard to understand. Even if you were successful in convincing your team to conduct one, there was still the matter of convincing second and third-tier suppliers to tell you enough about their operations to assess the risk. Not too many of them were apt to do that.

The worst fight was usually between procurement and risk management. Procurement thrives on low cost and speed. Risk management urges caution; not exactly a good mix.

But here, with Mark and Jennifer, procurement and risk management were in the same room already. There was no place for cynicism here. This was a time to take advantage of an opportunity.

“I think our insurance carrier can help us with a risk assessment of the locations you’re considering,” she told Mark.

“Straight-up raw materials cost is one thing, and it’s a big thing, I’m not underestimating that,” she said.

“But if we can show Brad (the CFO) and Dax (the CEO) a risk benefit analysis that can establish a metric between the cost of the feedstock and the risks involved in procuring it, then we’re adding value, identifying the true upside of whatever move you make,” she said.

“This is a bottom line issue, not a top line issue,” she said.

“It is. But we’ve never done this before,” Mark said.

“But we should do it, shouldn’t we?” Jennifer asked.

“Yes, I think we should,” Mark said.

“The problem is we don’t have tons of time.”

Part Two

Jennifer gets in touch with her insurance carrier, based in New York.

Scenario_DontBreakTheChainWith the carrier, Charing Corp. has a property policy. Given the potential supplier changes, the carrier recommends that Charing Corp reconsider the existing contingent business interruption (CBI) coverage to make sure it’s adequate given any potential developing risks. The carrier agrees that a supply chain risk assessment would provide the necessary insight.

The carrier’s internal risk engineering team, led by Harry Reynolds, is on the same page. Harry agrees a comprehensive assessment will have great value. He explains that a supply chain risk assessment can not only identify the client’s supply chain exposures but also recommend risk mitigation strategies and actually help the carrier assess the risk, structure and price the CBI cover for the client. He also agrees with her in terms of the factors that will need to be studied to assess the supply chain risk presented by any new suppliers.

“Reputation is a big one,” he says. “This building collapse in Bangladesh has got everyone’s attention. When it comes to suppliers, it’s getting just like a retail real estate purchase out there. Everybody’s talking location, location, location. And its connection to reputation,” he said.

“Price is one thing,” he says. “But these days, with rampant Internet commentary, who can afford the reputation hit?”

Reynolds said his team can visit the most exposed supplier locations and assess their vulnerability to natural catastrophe exposures, conduct an assessment of any transportation bottlenecks those locations could face and the political and reputational risks for each location.

Depending on how much cooperation they can get from perspective suppliers, the carrier can also work with Charing Corp. to develop risk management plans which could include helping to identifying alternate trade routes and using engineering to strengthen production locations against natural catastrophe exposures.

It takes a few days, but Harry is able to drum up an estimate for what the risk assessment would cost.

Mark Lacy has been given six months to come to a decision on his new suppliers. Now, he and Jennifer need to make the case to the CFO and then the board, that a supply chain risk assessment should be conducted before that decision should be reached.

In the office of Brad Parks, the CFO, Jennifer and Mark make their case, together with Harry and the insurance carrier’s team.

“You think we can get this assessment done and still come to a decision in six months? I’d hate to push this decision back,” Parks said.

“I think we can get it done,” Mark says.

“As it stands we’ve got four new locations that we’re looking at,” he said. “They are in South East Asia, Latin America and the US,” he said.

On a price per unit standpoint, the supplier in South East Asia seems to be the most cost effective, with Latin America second. But a full risk assessment will tell Charing Corp. at what potential cost.

“This is such a hard thing to get a handle on,” Brad Parks said. “You never know where or how a supply chain is going to get hit.”

“But you have to look at it,” Jennifer said. “Here’s what happens if you don’t look at it.”

Jennifer hands Brad an article that showed what major auto manufacturers went through after the Tohoku earthquake in Japan on March 11, 2011. That April, Honda’s production was reduced by 81 percent, Toyota’s was down 78 percent and Nissan’s was down 49 percent.

The numbers speak volumes.

As events in Japan showed, a lot of the big auto manufacturers did not have sufficient insight into their supply chain exposures and it really cost them. Then that industry and others got hit again when flooding ravaged Thailand later that year.

Parks doesn’t need to pick up a calculator to see how the costs of those kinds of production losses at Charing Corp..

“I don’t think we can afford not to do this,” Mark says.

“Then do it,” Brad says.

Part Three

Nothing well done is easy, and even with the expert work done by Harry and his team, Charing Corp. still had some tough decisions to make.

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The risk assessment analysis from the insurance carrier’s engineering group indicated that increased storm surge levels in the Pacific basin meant that there was a material chance of the South East Asian oil producer suffering a storm-related business interruption in the next five years.

Other countries had their own problems. Unstable political environments in other locales, as an example, made relatively cheap oil look like a questionable bargain.

Closer to home, the factories located along the Gulf of Mexico represented substantial hurricane risk. But those suppliers had the advantage of being closer to Charing Corp’s operations in Southern California.

There was less to worry about there from a logistics standpoint.

In addition, working together with the carrier, Charing Corp. had identified alternate suppliers and suggested a timeline and process for switching suppliers in the event of any business interruption events.

It looked like the Gulf of Mexico suppliers were the best bets from a supply chain risk management standpoint. And the price of oil Charing Corp. would get from these suppliers was 7 percent less than their current suppliers; But the South East Asian and Latin American suppliers were even more cost effective on a per unit basis.

Even more research would be required if the board was going to be convinced to go in a different direction. Jennifer did some more reading and came up with the idea of researching the supply chains of two of Charing Corp’s toughest competitors to try and find the weak spots. This is something private equity investment companies do to identify supply chain weaknesses when betting against the market.

The carrier was willing to advise here, based on their market knowledge. As it turned out, Charing Corp’s competitors were using South East Asian and Latin American suppliers.

This analysis of the broader market’s supply chain risk exposures, along with the detailed supply chain risk management plan from the insurance carrier is what carried the day with the board. Based on the research done by Jennifer, Mark and the insurance carrier’s engineering team, the board backed the switch to suppliers in Latin America and the Gulf of Mexico, and agreed to enhance the CBI cover for additional protection.

It was three months after Charing Corp. had made the switch that a typhoon struck South East Asia. Two of Charing Corp’s biggest competitors suffered three weeks of contingent business interruption.

Adding to the competitor’s difficulties was that the South East Asia supplier wasn’t very transparent about how badly it had been impacted. This lack of transparency delayed the competitor’s finding alternate suppliers.

As its competitors struggled, Charing Corp picked up two lucrative contracts that were going unfilled due to their suppliers’ difficulties.

“I guess we got a little lucky,” Jennifer told Mark as they left a meeting where Dax Baxter, the Charing Corp. CEO, had led the room in applauding them for a job well done.

“We got lucky because we planned,” Mark said.

“Lunch is on me, needless to say,” he added.

Summary

A manufacturer based in Southern California realizes some significant business advantages by conducting a supply chain risk assessment before making a key procurement decision.

1. Know your subject: The lessons of the Tohoku quake in Japan in 2011 have been fairly well documented. Selling the need for a supply chain risk management assessment to stakeholders within your company should be accompanied by cold hard data about what your company can lose if it is not prepared for a business interruption event.

2. It’s not just about logistics: Supply chain risk management involves much more than just a study of transportation or supply flow charts. Studying such things as political risk, reputational risk and the impacts of natural catastrophes on contingent business interruption are all part of the to-do list in this discipline.

3. Ask for more from your carrier: Insureds should work closely with their insurance carriers who usually offer great expertise in terms of technical experience in supply chain risk management.

4. Ask for more from your suppliers: If your suppliers aren’t willing to work with you to help you make the most informed risk management decisions when it comes to your supply chain, then you may want to consider alternatives. Transparency all the way down the line is what will create business opportunities here.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]