Supply chain risk management needs improvement says Zurich

“Companies do not pay enough attention to risk assessment of their supply chains,” said Zurich board member Christoph Willi during a workshop on supply chain risk supported by the German risk managers’ association DVS.

The comments come as a survey of companies, conducted by the insurer with the University of Manchester, shows that many companies are not closely examining the risk. A poll of 2,400 companies that recently suffered a supply chain interruption found that 41% do not record, measure and report on performance that affect supply chain disruptions.

Because of the eruption of Iceland’s volcano Eyjafjallajökull last year and the earthquake and tsunami in Japan this year, supply chain risks have become a hot topic for German risk managers. Many companies suffered business interruptions because suppliers were not able to deliver goods. The consequences can be severe.

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“The longer a business interruption lasts, the more expensive it gets for companies,” said Mr Willi. Twenty percent of the companies that took part in Zurich’s survey had suffered a supply chain interruption of longer than nine months. “The result doesn’t have to be a complete black-out of production, but these interruptions may lead to considerable extra expenses or drop of earnings in one product line,” added Mr Willi.

As a result the company’s share price may decline and it may suffer damage to reputation. Companies run the danger that its clients will move to a competitor.

Some 58% of the companies in the Zurich survey said they had suffered losses exceeding $10m as a result of interruption of supply chain. “For a big company like Daimler this may not be a high sum, but for a medium-sized enterprise the earnings for several years may be gone,” Mr Willi said.

A proper risk assessment is the first important step for a company, he said. This enables the risk manager to analyse the impact a default at each supplier may have on a company and estimate how likely such an event is to occur.

Weak points can be identified and then countered. This can be done by enlarging storage capacity, for example, or by abandoning single sourcing policies.

In many industries companies receive discounts when they obtain all goods from a single supplier. “When a company only has one supplier for a specific item, it has to see if there is another from whom it can get the things it needs,” said Mr Willi.

However, lots of companies fail to do this. “The risk awareness is there, but often it lacks communication between the risk management and the purchase department,” said Rüdiger Auras, underwriting expert at Zurich.

The fact that Zurich is encouraging improved management of supply chain risk is no coincidence. Currently the insurer is busy conducting risk assessments at about a hundred companies to sell its new business interruption policy.

German risk managers had complained heavily about the lack of business interruption policies that respond without a preceding property loss. Besides Zurich, Allianz is working on such a concept and a couple of niche players have also brought such policies on the market.

Broker Willis has developed a special product for medium-sized suppliers from the motor industry and insurer ACE provides a policy for aviation risks.

Björn Müller, managing director of Lloyd’s Register Quality Assurance Germany (LRQA), agrees with Zurich on the topic supply chain risk management. LQRA provides auditing and certification for management systems. “Many companies make it look as if they care for supply chain risks but are internally not ready for that,” he said. “Companies are demanding that insurers be innovative. When the insurers try this, then the companies have to do their part and provide proper risk management.”

Philipp Andreae, managing director of DVS, opposes the view that companies do not give enough attention to supply chain management. “The German aviation and motor industries are quite advanced when it comes to management of supply chain risks,” he said. “Also in other industries the topic is taken seriously.” He stressed that even some small companies carry out intense risk assessment. “Germany would not be export world champion if its producers were not reliable,” he said.