Risk managers urged to prepare for unthinkable supply chain scenarios

Risk managers need to think the unthinkable to get a better grip on supply chain risk, which hasn’t been well managed by many business continuity plans that simply weren’t fit for purpose, according to a panel debate at Airmic’s annual conference. The past two years have seen unprecedented global supply chain disruption as the pandemic combined with extreme weather events and fires to cause widespread delays and shortages of key components and raw materials. Unsurprisingly, supply chain disruption has risen up the risk agenda and was ranked the second most concerning threat in this year’s Airmic and Ferma member surveys. “Brexit, Covid, Russia-Ukraine conflict, inflation, economic uncertainty – these are all significant challenges that our business and supply chains have had to overcome. Supply chain disruption is more likely than ever before,” said Richard James, head of risk and insurance at Nuclear Transport Systems, who moderated the panel debate at the Airmic Conference 2022 in Liverpool. Supply chain risk is keeping risk managers “awake at night”, according to Xavier Mutzig, group insurance and insurable risk director at Johnson Matthey, and Ferma board member. Companies need to consider risks across their entire value chain, and disruption among customers and suppliers, he explained. Companies must “think the unthinkable” and prepare for unexpected events, according to Mutzig. “Recent events have demonstrated that anything can happen. When you work on a business continuity plan, you need to prepare for the unpredictable and the consequences on the supply chain,” he said. Many companies were “caught out” by the “velocity” at which Covid-related risks spread and impacted their supply chains, according to Tom Teixeira, partner at Arthur D Little. Many also found that their business continuity plans were “not fit for purpose”, he added. But the challenge facing risk managers is understanding supply chain exposure, said Teixeira. In particular, they need to improve supply chain risk visibility, accountability and governance, he said. “What we see more and more are challenges from boards and executive committees that say: ‘We have supply chain as one of our key risks, but what does it really mean to us? It’s quite generic in nature and we don’t have enough assurance that we really understand the risk, where it originates and the impact,’” said Teixeira. The past two years have seen a number of supply chain scenarios play out and highlighted huge exposure concentrations and complex interconnectivities, according to the panel. The Texas big freeze in February last year resulted in widespread power outages that shut down manufacturing and production facilities for weeks on end, while the historic floods in Germany during that summer also caused massive business disruption. Such events have highlighted the problem of establishing what a credible supply chain scenario looks like, according to Adrian Oxley, principal engineer for semiconductors and digital at FM Global. “What is a credible scenario? We see time and time again, it’s not the first scenario that causes the problem but the following one. It wasn’t the Texas freeze that caused the damage but the power supply failure and lack of gas that caused the big incidents where we had no power to factories, which meant they were down for some time,” he said. “In many cases, it’s the secondary event that causes the maximum damage. So, when looking at contingency plans, you have to go one step further. You always take it to the edge of not being credible but believe me, anything is credible. In the insurance world, we see the most bizarre things happen time and time again,” he added. The Texas big freeze and two fires at semiconductor plants in Japan at a time of increased demand for microchips created a “perfect storm” that trickled down to many industries, said Oxley. “The supply chain is so inextricably linked these days. As an insurer, I get numerous bits of paper come across my desk each day for claims related to a supply chain loss for an incident that happened a year and a half ago, and from a company that you would think has nothing to do with a semiconductor company in Japan. The key is to understand where the components in the supply chain are from,” he said. The experience of the semiconductor industry has also highlighted the growing role of geopolitical risk, according to Oxley. Many companies are beginning to look at concentrated supply chain exposures in certain countries, such as China or Taiwan, where there is a threat of future conflict. As a result, supply chains are redistributing, with governments and companies investing in semiconductor manufacturing across the US and Europe. Supply chains also face new challenges from climate change and efforts to cut costs at companies, according to the panellists. Teixeira said companies are looking to build resilience at the same time as seeking financial efficiencies and implementing net-zero and sustainability programmes. “The biggest challenge organisations have in taking these initiatives forward is to get a balance between sustainability and efficiency, while also maintaining a resilient supply chain,” he said. Climate change is likely to create new stresses for supply chains, agreed Sharon Palmer, head of the analytics centre of excellence at WTW. For example, companies that rely on water resources in their supply chain and manufacturing processes could experience future disruption. But Mutzig said sustainability can be a positive for supply chain management. Since January last year, UK listed companies must assess their own climate risks throughout their value chain under mandatory reporting aligned with the Task Force on Climate-Related Financial Disclosures. This process helped Johnson Matthey gain a better understanding of its supply chain resilience, said the company’s risk manager. Teixeira stressed that supply chain risk management needs to become more forward-looking. “Senior management want more assurance that the right controls and risk management measures are in place. There is this need to be more forward-looking and proactive to get an early warning – to find the signals that there might be problems within the supply chain. It’s about the correct application of key risk indicators (KRI). Where we have seen organisations successfully manage their supply chains is with the greater use of forward-looking KRIs,” he said. Caroline Woolley, a forensic accountant and practice leader at Meaden & Moore, suggested companies take an “inside-out” approach by first assessing the impact of an undefined supply chain disruption before then looking at the events. “It’s about trying to quantify those exposures for resource allocation. If you can put a value to an exposure, not just the exposure itself but also the mitigated exposure, that is where the value comes in. By giving the mitigated value, the business continuity team will love you for ever,” she said.

Risk managers urged to prepare for unthinkable supply chain scenarios

Many continuity plans ‘not fit for purpose’

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