Print Page   |   Contact Us   |   Sign In   |   Apply online
Community Search
Calendar
IRMSA Insight
Blog Home All Blogs
Search all posts for:   

 

View all (38) posts »
 

IRMSAInsight

Posted By IRMSAInsight, 19 May 2015

RiskSA: Contingent Business Interruption feature

 

Question 1: Right now, what contingent BI losses are South African companies most exposed to? (What are the greatest global supply chain risks for SA companies?)

 

Volker von Widdern (Managing Director of Marsh Risk Consulting):

 

I would tend to speak about a range or dimensions of exposures, rather than a list of the supply chain risks. The insurance process includes a risk ranking exercise that primarily considers upstream risks, but the downstream issues are a large contingent that may be left out. The upstream risks are more easily identified, as they relate to production and hazard factors. Downstream risks consider the likes of customer retention or loss, brand image and possible financial penalties, which are more difficult to evaluate.

 

A company’s suppliers are a variety of ‘dimensions’ away, which means that they will go through various steps to get their product to the company. These include design (with elements like IP and regulation), the manufacturing process itself (see tier factors below), quality assurance (QA) and the logistics processes.

 

It is the manufacturing process that is taken into greatest consideration by supply chain insurance as this is where most asset events, or hazards and BI triggers, tend to occur. However, the broader dimensions should also be considered from a risk perspective. The QA process, although not a hazard – rather, a dimension – can have an effect. For example, product recalls have highly negative implications and financial impacts. The logistics functions comprise a range of dimensions too, from the physical logistics to less tangible things like customs and duties. Goods may be happily en route, but cannot be delivered due to paperwork issues. These are external elements – dimensions – to the supply chain that need to be understood.

 

Then there are the supply chain tiers. Raw materials come from a variety of sources and go through successive primary producers that create the core product elements and then there’s the final assembly and finishing. It’s necessary to understand the tiers embedded in the value chain, and to understand how far back to assess those tiers for risk considerations and ask what the critical elements are. And what are the dimensions (as discussed above) of those tiers? And what are the critical elements, the dependencies or delay and risk factors of the contingents? A critical part of the product may not be sourced from the largest supplier – how much of an impact will the production of certain parts has on the entire production? Will it create a significant delay or upset the whole process and possibly create a cash-flow issue?

 

The supply chain is also influenced by external factors. The biggest of these is weather, then other natural catastrophes, disease, contagion, regulatory issues, IT/cyber problems and then social unrest. These broader external drivers lead to contingents too, which cannot be ignored.

 

 

Question 2: Insurance should be the last resort, there needs to be more upfront risk mitigation. Proper risk analysis and identification is key. Please comment from an SA perspective.

 

Volker von Widdern (Managing Director of Marsh Risk Consulting):

It is imperative to understand the supply chain network; insurance applies to hazard events, but one needs to understand the processes and contexts. It comes back to the process of supply chain mapping and looking at internal and external factors. Mapping tends to be done from the perspective of the company’s own assets (container, ship, etc.) rather than from an external or qualitative risk perspective. Risk and exposure should be considered on the basis that a key service is not available through external factors. For example, harbour blockage could be caused by the ship in front of yours sinking, or key external haulage equipment malfunctioning. How do you insure against a customs official not stamping your customs paperwork? The risks need to be mapped and analysed properly and if there are potential exposures that result in delays or damage, to what extent do they exceed your risk appetite? This is where alternative risk strategies need to be developed and an understanding of where risk transfer is the best option.

 

From a South African perspective, contingent BIs should be looked at in terms of specific industry inputs and outputs. Where is there a higher concentration of supply chain issues? Our motor industry, the coal export sector or perhaps our fruit and wine markets face high levels of dependencies within their supply chains.

 

 

 

RiskSA: Managing Risk section

Question: What are the top 10 most common risks South African businesses tend to neglect or forget?

 

Volker von Widdern (Managing Director of Marsh Risk Consulting):

Specifically with SMEs, what is often forgotten is the negative impact on cash-flow during the time that the risk is being evaluated and dealt with. There is an absence of capital during the risk aftermath, which may have a consequential impact on reputation and on customers, simply by being absent from the market for that period. This is more of a strategic, downstream view, but one which should not be neglected.

 

Another risk would be that of human capital. A company insures a staff member for x-amount of their salary, for example, but what is not considered is the IP value of that person. The value of the relationship that the employee has with a certain client is also underestimated. The business dependency on critical talent is often not understood or properly valued.

 

The risk in IT is that only the costs of computers themselves are insured, but not the actual revenue base they may contain. For example, if a company’s data is hacked, it may be necessary to provide customers with free access to services to regain trust. And the reputational damage is enormous in those instances too.

 

There is physical risk relating to a neighbour’s activity is often inadequately assessed. For example, if your premises are in a factory complex and the unit next to yours burns down, there may be a transmission of risk to your own premises.

 

Deliberate fraud and corruption can pose an enormous internal risk. This could lead to the inability to pay suppliers or staff and creates a serious breakdown of controls.

 

There tends to be inadequate modeling of the business climate, which can disturb the balance of supply and demand within a company’s production. This is a risk that is also often neglected.

 

By: Volker von Widdern (Managing Director of Marsh Risk Consulting)

This post has not been tagged.

Share |
Permalink | Comments (0)
 
Sign In


Forgot your password?

Click here to join IRMSA