Since pioneers like Henry Ford, manufacturers have helped blaze the industrial innovation trail. But as production becomes leaner, supply chains are longer, more complex, and highly interdependent on things seemingly outside the risk manager’s control. How can businesses build more resilient and reliable supply chains in order to mitigate risk?
- Complexity in production drives risk with possible business interruption scenarios.
- Effective supply chain management reduces vulnerabilities – but pay heed to early warning signs.
- Test every link in the supply chain to pinpoint exposures and vulnerabilities.
- Insurers can help strengthen supply chains by analyzing risks, applying big data analytics, and advising solutions
In 1913 Henry Ford brought motoring to the masses with the production of the Model T in a new purpose built factory in Detroit, Michigan. Ford’s genius was to simplify and speed up production and in doing so he helped change manufacturing and supply chain management forever.
Model T production started with a bare chassis, which moved along the line through a series of workstations until a complete car was driven off under its own power at the end of the line. Feeder lines along the route were synchronized to supply the right parts at the right time.
Ford’s moving assembly line enabled the company to cut production times by a multiple of four – at its peak, one Model T rolled off the Detroit production line every 10 seconds of every working day. The company eventually produced over 15 million Model Ts over an almost 20 year period, making it one of the bestselling models of all time.[i]
Complexity drives risk
Much like other consumer goods, cars are today manufactured in far greater numbers. The industry has also gone global. Volkswagen produces automobiles from 119 production plants in over 30 countries.[ii]
In line with other consumer products, automobiles today are much more complex. While the 1913 Model T had several thousand parts, over 30,000 components go into the average Toyota.[iii]
Manufacturing has changed in other ways. As manufacturers have sought efficiencies, many have moved from being part-makers to assemblers. Ford now purchases some $100bn of parts each year, 80% from its 100 largest suppliers.[iv]
However, the increased complexity of supply chains, as well as their global reach and concentration on a small group of specialist suppliers, has created new business interruption risks for manufacturers.
The risk of supply chain disruption in the automotive industry, for example, was brought into sharp focus following the Japan earthquake and Thailand flooding in 2011. The industry suffered a shortage of certain paint pigments and microprocessors produced in the two affected regions.
"From sourcing raw materials to delivering the finished product to consumers, every part of the supply chain is vulnerable to disruption," explains Volker Muench, AGCS Global Property Practice Group Leader. "And it’s not just earthquakes, floods and fires that can cause disruption, but political violence, civil unrest, strikes, port closures, infectious disease outbreaks and cyber-attacks as well," he says.
“As companies have gone down the route of reducing cost, complexity has increased.”
Given the potential efficiency savings, manufacturing and supply chains will continue to become more and more complex, but this can be handled by appropriate supply chain management, believes Muench.
Business continuity plans tend to be developed with an historical event or predicted scenario in mind, such as a storm or a strike. “But it is the overarching supply chain management that makes for a robust supply chain network.”
The “picture book” supply chain management organization does not exist in reality. Each company’s supply chain management will reflect its own set of circumstance and operating environment. However, there are a number of factors companies can look for when assessing the resilience of supply chains and suppliers. For example, many large manufacturers monitor suppliers to watch for early warning signals, such as changes in their management, fluctuations in production quality, trends at competitors and commodity prices.
“Credit ratings are useful, but organizations need to look for early warning signals and tackle emerging issues before they get into crisis mode,” advises Muench. A company’s supply chain leadership, its resources and reporting structure are other useful indicators of resilience. “The higher up supply chain management sits in the organization the better the chances are of detecting a problem early.”
Another early indicator is knowing the supplier’s suppliers, especially beyond the first supply tier. “We can use big data to identify knots of suppliers right down to the third, fourth or fifth tier,” according to Muench.
Test every link in the chain
Managing the supply chain is challenging enough in mature markets. But global business realities and cost reduction pressures inevitably take supply chains to countries with less developed infrastructures, where risk management and asset protection are less mature.
“It’s important to analyze all points of the supply chain,” says Allianz Senior Risk Consultant Marine, Björn von Diepenbrock.
“That means looking at the transport infrastructure, condition and characteristics of transport routes, duration and climatic influences. How is the communication infrastructure? Are there sufficient safety standards in place? How secure is the social and political situation and how might disturbances affect the supply chain?” Transportation, packaging and load securing is a major issue, partly as there are no common international standards for quality.
“Whether on the road or at sea, it’s a problem that can lead to significant damage to parts and products, which can also disrupt other parts of the supply chain,” adds Diepenbrock.
In order to address these risks, companies must work with their forwarding companies as closely as possible. Insurance providers can also help.
"Insurance can’t take away the risk of supply chain disruption, but it can help make businesses more robust," according to Muench. "Supply chain insurance and business interruption insurance cover property damage and resulting business interruption, including ongoing costs and lost profits. Other insurance coverages, including trade credit, product recall, cyber insurance, cargo insurance and political risk coverage also provide some protection.
"But insurance is more than just a policy. It is also a bundle of services like risk analysis, benchmarking and mitigation advice that can help analyze supply chain quality and resilience," says Muench.
For example, insurers have natural perils expertise and sophisticated catastrophe modelling capabilities to assess exposures to floods, storms and earthquakes. Such knowledge can help clients assess natural perils risks in their supply chains and at their suppliers’ premises.
Insurers have also developed natural catastrophe early warning systems which can be used by clients to anticipate disruptions, such as modeling the potential impact of an approaching storm on suppliers and the supply chain.
Similarly, insurers can use the business continuity planning and supply management system knowledge and expertise to review plans and test them to breaking point.
Insurers are developing tools that should help organizations better manage their supply chain disruption risks in the future. For example, Allianz has been using “big data” to map suppliers to various industries and organizations, and hopes to make a service available to clients next year.
“We can provide company specific scoring for suppliers location and benchmark this for a given industry,” says Muench. “This is already the case in property risk, where insurers assess building standards, sprinklers etc, but it is equally important to know the quality of suppliers.”
Over time, such developments should help insurers offer greater limits. “The more information we have, the broader we can go. The more we can bring supply chains down to locations, the better we can model and monitor exposures. And only then are you in a position to offer higher limits,” says Muench. And in those areas where the infrastructure is questionable, insurers can offer risk engineering expertise.
“Where we can, we send surveyors to check the condition of trucks, ships, loading and unloading points,” explains Diepenbrock. “We have tracking devices to monitor transportation, gathering data such as location, accelerations, vibrations and temperature. Based on this, clients can carry out analysis and testing to make changes, whether in packaging, unloading equipment or even the transport route.”
The growing automation and digitalization of supply chains raises cyber risks. “If an algorithm is wrong or the IT system goes down, the supply chain could be severely disrupted,” says Muench. Cyber is often thought of in terms of hacking and theft of personal data. Production facilities work on industrial control systems where the main focus is in production stability and less on data security. As such they often use old software versions that have not been patched.
“Supply chains are prone to technical failings, internally or with suppliers, as well as through internet access,” Muench concludes.