Supply Chain Risks

Risk Center to Rule the World

A combination of technology and data-centric risk management almost guarantees resilient supply chains.
By: | September 14, 2015 • 6 min read

This is not the story of how an unrelenting flood in faraway Thailand nearly destroyed the business of a Fortune Global 500 company.

Sure, during the Fall 2011 floods in the Southeast Asian country, nearly 50 percent of its landmass was underwater. More than 1,000 factories shut down.

But for the multinational company in question, Flex, formerly known as Flextronics Inc., the Thailand floods were a bit of a success story — albeit a success story with $100 million in resulting lost revenue.

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What kind of victory is that? Thailand became proof that lessons had been learned after a previous disaster — the March 11, 2011 Japanese earthquake. It was proof that Flex, one of the world’s largest outsourced electronics manufacturers, was on the right track.

After that earthquake, Flex’s supply chain team in the States scrambled for weeks to understand the disruption’s size. Which of its suppliers were affected and by how much? They shuffled Excel spreadsheets and flipped through outdated Rolodexes.

They found that their path to victory was partly a software solution called Resilinc.

Connecting the Dots

“The database underlying Resilinc maps suppliers’ footprint and part-origin information, and connects this type of supplier information with products and revenue,” wrote MIT Professor Yossi Sheffi, Resilinc founder Bindiya Vakil and Flex supply chain Senior Director Tim Griffin — in a research paper detailing Flex’s experience.

When the Thailand floods came, Resilinc empowered the Flex supply chain team to know when and how suppliers were being hit — and which and how many parts were built at those suppliers — even as those suppliers were keeping quiet publicly.

Flex could prioritize a “high risk” list and plan recovery strategies at a speed that allowed them to minimize revenue and profit loss.

“The main benefits came from the ability to connect all the dots; from supplier name to part numbers, part numbers to inventory and demand positions, from that to specific products and customers,” the MIT report authors wrote.

 Jose Heftye, senior director, global risk management, Flex

Jose Heftye, senior director, global risk management, Flex

Flex’s business recovery success in Thailand was not contingent entirely on a software app. The company with 200,000 employees across 30 countries also avoided serious losses because redundancy built into its supply chain anticipated business interruption for any single-source supplier, said Jose Heftye, senior director, global risk management, at Flex’s San Jose, Calif., office, who was employed elsewhere during the floods.

The nine-figure revenue loss was a victory, thanks to technology and traditional supply chain management, but Flex has since moved to far more dynamic 21st century business recovery processes.

The company now believes it has the ability to accommodate potential physical damage risk to suppliers and essentially become a guarantee to customers — from mobile device makers to automakers.

To do that, the company folds risk management and risk analysis into its day-to-day business. The focus no longer rests solely on mere efficiency.

“Flextronics moved from a traditional supply chain risk management strategy that usually includes building redundancy within the system, procuring insurance and setting up processes to react in the case of a potential disruption, to a real-time risk assessment and risk management strategy,” said Alejandro Marmorek, managing director, Latin America regional sales, and AGCN leader at Aon.

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The company, he said, “can follow and analyze specific issues that could potentially disrupt vendors or customers and define mitigation strategies that are executable in real time.”

Or as his colleague Randy Nornes, executive vice president of Aon Risk Solutions, said, “Efficiency and risk are not on the same page.”

Creating a Risk Center

The new business recovery program — which Heftye oversees across business continuity planning and risk treatment strategy, legal, HR, operations, business development and supply chain up through the C-suite — is a so-called “risk center.”

It focuses on three buckets: business continuity, contractual exposure and financial risk.

Here’s how it works: Heftye’s teams conduct internal audits to identify company core processes, their interdependencies across different areas, and their recovery times if they were to go down.

Next, they apply business impact analysis to map the financial and strategic value of each process, calculate how much risk is already in the system and spot where more risks are.

“You go from the very, very granular points, and you take it to a higher level and start to aggregate data and processes. My primary objective is to not buy insurance.” — Jose Heftye, senior director, global risk management, Flex

They bring the results before a steering committee made up of C-suite level leaders across business development, finance, operations and legal — where Heftye’s team recommends ways to eliminate, mitigate or transfer the risk.

“That is pretty much driving all of our activities,” Heftye said. “You go from the very, very granular points, and you take it to a higher level and start to aggregate data and processes.

“My primary objective is to not buy insurance,” he said.

Let’s imagine a scenario where the IT system that manages Flex’s inventory goes down. Heftye and his team evaluate the impact upon their customers, purchase orders, revenue, profitability, etc., if the system were down for X hours at Y facility.

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“We can show in hard numbers [what happens] if we don’t have a backup,” he said.

The team quantifies the investments needed to mitigate or eliminate the risk and sits down with the steering committee, which can then comfortably authorize an investment for a redundant IT system and other measures.

They’ve done a similar investigation into key individuals at the company and the potential impact of their departures, then worked with HR to build a talent pipeline to mitigate that risk.

Better Than ERM

Developed by firms like Genentech and Microsoft in the late ’90s, this risk center concept first appeared at companies in a one-off role, such as for a project team to, say, analyze an event that impacted a competitor to see what the ramifications could be for the company. More and more, however, companies are backing the processes into what they do every day.

090152015_20_flextronics_sidebarThis is much more than enterprise risk management (ERM). In Nornes’ view, ERM has evolved into risk identification and control. But once ERM identifies supply chain as a “red risk on a heat map,” said Nornes, it typically fails to provide a granular view and guidance on what to do next. ERM, in essence, has evolved into a compliance checkbox.

And as Heftye has explained, a risk center approach is not limited to supply chain; it allows companies to apply analytical rigor and insert risk management into ROI decisions for any critical risk, like cyber.

“It’s the skill set they are bringing, not the knowledge of that specific risk,” Nornes said.

“It does require a high degree of risk maturity across the organization to collaborate across the various teams, which includes deep partnerships with clients and suppliers,” added Marmorek.

For Heftye, it has earned him a veritable role as rainmaker. At Flex, the risk management function can now contribute to the company’s strategy by providing insight and by partnering with business operations, said Heftye.

Flex’s risk is their customers’ supply chain risk, so having their risk under control, holding to that guarantee of little or no business interruption as a talisman, has become a selling point for Flex.

“It’s given us more tools to sell quality of services and show that we are a long-term solution and not just something that could go away after another Thailand,” Heftye said.

Matthew Brodsky is editor of Wharton Magazine. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]