Take the High Road

By Frank J. Coyne

Are businesses prepared to cope with today’s world?

cover imageTo paraphrase Lewis Carroll: If you don’t know where you’re going, any road will get you there. But the opposite is true as well: If you know where you’re going, some roads are better than others. And you need to figure out which ones are best.

In the current business environment, with its ever-increasing complexity and growing interdependence, knowing where you’re going is the only way to cope — and ultimately thrive. Therefore, the more thoroughly companies understand potential risks to their supply chain, the more likely they will meet or exceed financial and strategic goals.

A comprehensive supply chain risk management strategy must be a central component of any successful business and needs to extend beyond the supply chain itself to encompass all major operations of the organization. Modern predictive analytics is fast becoming a critical tool in recognizing key trends, patterns, and potential disruptions within supply chains. In turn, by creating sophisticated risk mitigation models, enterprises possess a means to protect their most valuable assets.

All kinds of disruptive forces can happen daily: ongoing consequences of the economic downturn; fluctuations in oil prices; changes to compliance with environmental health and safety (EH&S) requirements; difficulties in suppliers’ supply chains — not to mention climate- and weather-related catastrophes. And each has the potential to affect businesses for years to come both locally and globally.

When the Cat’s at Play

Organizations that employ innovative weather intelligence can mitigate the costly effects of weather-related events. Additionally, companies already addressing high-level supply chain issues are now becoming more aware of their exposure to disruptions in their suppliers’ supply chains. Just last year, car and computer hardware manufacturers suffered from the repercussions when microchip production in Japan was interrupted following the earthquake and tsunami. Thailand and Australia experienced extensive flooding. Mexico and parts of the United States endured severe drought. Weather-related catastrophes made 2011 the costliest year ever in terms of catastrophe losses, totaling about $380 billion, according to Munich Re. Such events highlight how secondary dependencies can affect primary relationships.

Understanding both the upstream and downstream components of the supply chain network enables companies to clearly identify network vulnerabilities as well as the potential impact of catastrophes to their supply chain and, ultimately, to their business. Equipped with this insight, corporations can undertake various physical, financial, or operational mitigation measures to improve supply chain resiliency.

The same initiative is critical when businesses are assessing the ramifications of an unforeseen attack — whether due to politics or profit. With billion-dollar consequences, terrorism, theft, and fraud are now often factored in as a matter of when, not if. For example, companies can apply predictive analytics to historical cargo theft data to plan the safest routes for the transport of goods.

Risk managers need to determine the potential for interruption at each intermediate point along the supply chain. Those points will differ based on the type of business but often include warehouses, distribution centers, container terminals, port terminals, cross-dock operations, trans-load facilities, trucking terminals, rail terminals, and truck stops and rest areas.

In the current business environment, with its ever-increasing complexity and growing interdependence, knowing where you’re going is the only way to cope — and ultimately thrive.

Depending on the nature and location of the operation, disruptive risk can vary widely. For example, labor unrest may be growing at port terminals within the supply chain network. Congestion continues to pose a significant risk for shipment delays around major port complexes nationwide. Volume flexibility is often an issue for intermediary points, particularly distribution centers and cross-docks. Risk managers need to identify whether those situations could negatively affect their supply chain when volume increases. In addition, they should have redundancy plans in place to reroute shipments around bottlenecks.

Risk managers also need to know who maintains operational control at logistics touch points in the supply chain. Much of the time, it will be a third-party logistics service provider (LSP), trucking company, or rail carrier. Given the risk at logistics touch points, many enterprises may discover that their LSP relationships require a new level of interaction and collaboration. Companies should ask their LSPs for detailed information about what they’re doing to mitigate risk.

Hazard Management

Natural and man-made disruptions aside, predictive algorithms can alert supply chain managers to major issues in operations and processes. For instance, they can help manage EH&S regulatory compliance, sustainability across supply chains, and product life cycles. EH&S analytic tools present a comprehensive view of relevant trends, and the resulting business insight enables more effective management of product stewardship and workplace safety. With requirements constantly changing and product inventories in motion, EH&S professionals must track hundreds of regulations in numerous jurisdictions as they apply to thousands of products.

For example, housing substance-specific data in a centralized electronic system is becoming a best practice for modern integrated EH&S management. Streamlining operations through automation and centralization of paper-based systems yields immediate return on investment. Such a tool, especially when fueled by accurate and up-to-date regulatory data and content, can be invaluable in implementing initiatives of the Globally Harmonized System of Classification and Labelling of Chemicals, or GHS, across the enterprise. Developed by a United Nations committee of experts, GHS seeks to improve the overall clarity of available hazard information and facilitate international trade through standardized classification and labeling of chemicals.

Beyond risk assessment, mitigation, and emergency response planning, analytics can facilitate decisions regarding insurance coverage. Business interruption coverage has long addressed loss from covered perils associated with supply chain disruption, focusing primarily on known suppliers (and recipients) who deal directly with the insured business. New endorsements are available that extend dependent property coverage when a supplier is unable to deliver products or services because of an interruption in the business of an entity upon which the supplier depends. Disruptions such as this occurred as a result of last year’s disaster in Japan. New coverage options for supply and recipient properties provide for losses associated with this additional level in the supply chain when the loss event is a covered peril, including earthquake and tsunami (flood) if endorsed to or otherwise made a part of the policy

Supply “Network”

The notion of the supply chain has frequently been thought of as a series of links interconnected along a continuum with one origin point and one end point. This hardly describes the actual supply chain for most modern-day businesses.

Today’s supply chains often contain multiple origins increasingly removed from numerous destinations that are tenuously connected through any number of intermediary points by an increasingly unpredictable logistics system. In this scenario, even a minor disruption within any connecting process can cause a dramatically negative impact on company results.

A more appropriate way to view the supply chain is as an interdependent and complex network similar to a computer network. Much the way a computer network links individual devices through cable or wireless technology, in supply chains, the components are manufacturing facilities, distribution centers, and stores; the cable is the transportation system.

Viewing the supply chain as a network, perhaps a next step would be to create some smaller units that are more agile and more adaptable to complexity and unpredictability. In this way, it may be easier to envision and determine how to handle various scenarios.

Additionally, risk managers need to encourage CEO involvement in actively developing supply chain strategy and working hands-on to execute it. Beyond establishing an enterprisewide risk management mind-set, the CEO can help resolve internal cross-functional issues that hinder collaboration.

A necessary link in supply chain success is participation and cooperation among all stakeholders. Another important link is aligning critical data resources with sophisticated predictive modeling tools. The combination suggests that when a company takes the high road, business will grow and prosper — a reassuring thought in a changing world.

Frank J. Coyne is chairman and chief executive officer of Verisk Analytics, a leading source of information about risk.