Risk Insider: Jonathan Hall

Out of Sight, Out of Mind

By: | February 10, 2015

Jonathan W. Hall is chief operating officer at FM Global. He oversees FM Global’s insurance operations and insurance staff functions, as well as the FM Global Resilience Index, a data driven resource that ranks the business resilience of 130 countries and regions. He can be reached at [email protected]

“Out of sight, out of mind.” That phrase is a useful reminder of the vulnerabilities many organizations unknowingly face when it comes to their far-flung supply chains.

Following some quiet years where natural catastrophes and supply chain disruption issues aren’t front page news, management often turns to seemingly more pressing matters.

However, low risk quality at one’s key facilities, or that of their suppliers and customers, can leave unprepared organizations susceptible to business disruption. Two often overlooked aspects warrant consideration: The first is an organization’s exposure to natural hazards on a country-by-country basis, given that all nations have particular vulnerabilities to one or more perils like earthquake, windstorm or flood.

While mega-catastrophes often spring to mind as a major contributor to supply chain disruption, outwardly smaller weather events can wreak fiscal havoc too.

The second aspect is a country’s level of commitment to addressing natural hazards (i.e., whether local building codes and standards exist, are robust and enforced).

Yet, lower costs and higher productivity often entice businesses, with little consideration of the supply chains consequences, into less resilient countries — regions where economies are emerging, labor is cheap, facilities are built in natural hazard-prone locations and risk management practices are weaker than more developed nations.

While mega-catastrophes often spring to mind as a major contributor to supply chain disruption, outwardly smaller weather events can wreak fiscal havoc too.

Last year, in a poll of the U.S. workforce, more than one in four employees said their company had been hit financially as a result of the winter weather and didn’t have an emergency plan to keep business going during such scenarios.

All told, since 2000, the economic losses globally from natural disasters are estimated to be approximately $2.5 trillion, according to the United Nations Office for Disaster Risk Reduction.

When you can’t make savvy decisions about the resilience of your supply chain to disruption, the chance of it disentangling increases. Under such circumstances, it can take two years or more for companies to recover from a supply chain failure, research finds.

Yet, despite those statistics, 90 percent of companies still do not quantify supply chain risk when outsourcing production, according to a recent study by the Global Supply Chain Institute.

Certainly, the need to continually gauge Mother Nature is just as important as assessing ongoing macroeconomic and geopolitical factors within each country where one’s supply chain extends. For example, what if a key supplier is located in a region with robust building codes and standards that adequately address local natural hazards, but the region’s economy is destabilizing by political upheaval?

By factoring suppliers’ differing risk profiles on a country-by-country basis and which firms could most affect revenue growth and profitability, a buying organization can make sounder choices.

The most resilient companies take pains to identify, analyze, quantify and correlate these various physical threats with other key factors that can jeopardize the timely flow of supplies from across the world.

Only after a comprehensive analysis of such data can organizations be in a position to soundly prioritize supply chain and risk management efforts to ensure their business continuity, competitiveness and reputation.

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