Risk in an Interconnected World Enhancing risk awareness and resilience to disruptions
Corporate customers
Strategic Risk Management Solutions Urban Land Institute Real Estate conference on Risk and Resilience in Coastal Regions
Linda Conrad Director of Strategic Business Risk Zurich Global Corporate Discussion topics
1. Business Interruption, Contingent Business Interruption and the Value Chain 2. Business Resilience 3. Enterprise Risk Management
Understanding disruption impact
Japan Tohoku Earthquake (03/2011) •Total economic loss estimate of $210 - 300 billion •Total projected insured loss estimate of over $35 - 40 billion •Initial report of estimated CBI loss between $5 - 15 billion •Many supply chain losses were uninsured (electric outages etc.)
Thailand Floods (4th Quarter 2011) •Total economic losses of almost $50 billion - Thailand's costliest •Total insured losses already at $15 billion but could surpass $20 billion •Portion of CBI insured losses still far from being settled •Many supply chain losses were uninsured Peeling the Onion in Thailand
SEAGATE SEAGATE Thailand KEY CAL COMP Thailand Thailand Motor MIN AIK W DIGITAL SEAGATE TEC Thailand Media Thailand Head W DIGITAL W DIGITAL Thailand Slider
MINEBEA Suspension HUTCHINSO Thailand HITACHI GST N Actuator arm ThailandHUTCHINSO FURUKAWA Other N Thailand components Non-Thailand NIDEC TOSHIBA SUNCALL Supply Thailand bottleneck Non-Thailand NIDEC NHK Spring Philippines Non-Thailand HITACHI HITACHI NIDEC SAMSUNG China Thailand Sarawak
SAMSUNG TDK ALPHANA TDK Thailand Thailand SEMCO China TDK Thailand
TDK TDK Thailand TDK Non-Thailand Market share impact
Pre-Flood Post-Flood 1. Western Digital 1. Seagate 2. Seagate 2. Western Digital 3. Hitachi 3. Toshiba 4. Toshiba 4. Hitachi 5. Samsung 5. Samsung
Current Consolidation Activity 1. Seagate with Samsung 2. Western Digital with Hitachi 3. Toshiba Analysis of over 2500 disruptions
Accidents Production Problems Labor Unavailability and Shortage of… Natural Disasters Sabotage, Terrorism, Crime, and War Financial losses and premiums Demand Variability/Volatility Physical and Regulatory Industry-wide (i.e., Market) Challenges Lawsuits
Source – Manchester Business School 0 100 200 300 400 500
185 Impacts of disruptions
Financial cost
Economic losses
Corporate image cost
Human cost
Environmental
0% 20% 40% 60% 80% 100% Source: Zurich‘s supply chain loss event database
186 Financial Consequences
19% 20% < 1M 1-10M 11-100M 14% 101- 500M 22% >500M
25%
Source: Zurich‘s supply chain loss event database
187 Matching Duration and Impact
>$500 M
$100 - 500 M
<1 week 1 Wk - 1 Mth $10 - 100 M 1 mnth - 1 yr 1 - 5 yr >5 year $1 - 10 M
< $1M
0% 20% 40% 60% 80% 100%
18 8 Supply chain disruptions increasingly impact financial performance
20-30% shareholder value impact
SC5(V1)Jul/05/10GC/ZCA Discussion topics
1. Business Interruption, Contingent Business Interruption and the Value Chain 2. Business Resilience 3. Enterprise Risk Management Challenges to enterprise resilience
191 Zurich’s family of Supply Chain risk tools Risk
Room Provides macro country insights, e.g. political stability, economic status, labor situation Total NatCat - Risk Location
Structured approachProfiling to riskProvides exposure information defining risk appetite and for supplier locations in prioritisation for dealing with respect of e.g. floods, risks in the supply chain earthquakes, windstorm, related transport infrastructure
Risk Supply Profit Chain Risk assessme understandi risk ng exposur nt Enables a company to eunderstand its total supply chain profit exposure in Formalised assessment of terms of a particular location, relevant areas which are part country or region of the due diligence process within the sourcing activity Business Disruption interrupti understan on ding
analysis Helps in the understanding of the level Helps a company model and nature of disruptions in the its relevant BI exposures particular industry or a particular location from a unique database 192 Supply chain disruptions are more frequent
Nearly 85% Over 50% had more suffered a supply than one disruption disruption in 2012
Zurich-sponsored BCI.org survey Supply chain loss events – Auto disruptions
Zurich’s proprietary loss event database
Actions taken to drive costs out of the supply chain can often drive greater risk in 194 Risk assessment stages
Determine those suppliers most critical to protecting profitability
Develop a supply chain/value chain map
Gather key supply/supplier details
Evaluate risk factor information
Define and evaluate risk scenarios
Develop risk grading
Determine risk strategies Supply chain insurance can close coverage gaps Top down approach to Business Interruption modeling Reduction of total cost of risk at improved protection
Customer
High High protection protection High protection
Suppliers Sourcing ProductionDistribution Clients
197 Business interruption modelling software
Map Locations, buildings Group of products Customer/groups Suppliers Warehouses Interdependencies Scenarios Calculation of effects Risk report Zurich Risk Room
http://www.zurich.com/riskroom.htm Discussion topics
1. Business Interruption, Contingent Business Interruption and the Value Chain 2. Business Resilience 3. Enterprise Risk Management Enterprise Risk Wheel: the challenge Where are the challenges in your risk landscape? Scenario Planning
Process of visualizing: 1. what future conditions or events are probable, 2. what their consequences or effects would be like, and 3. how to respond to, or benefit from, them.
“what if…”
203 REP12(V2)Mar/03/10GC/ZCA Total Risk Profiling
Outline summary of key risks arising from discussions (for further consideration) d Impact Risk Vulnerability Trigger Consequence Likelihoo No1 One solution to the threat of both Supply shortage generates need for re- Contract delays and B 3 supply constraints and obsolescence i sourcings and engineering change. penalties to re-engineer components or re- Protracted approval process results in source. However, this may involve delays. engineering changes requiring approval and this can be a protracted OEMCo insists that EngCo purchases direct Cost increases D 4 2 EngCoprocess. generally does not buy any or puts pressure on the others not to replacement components directly supply EngCo’s requirements at a from OEMCo and deals primarily with competitiver price. a sourcesnumber of intermediaries, and othe 3 Over the years, EngCo has made Supply change enforced, for example back Quality deterioration, E 4 various enhancements to parts. Some to OEMCo penalties of these have been made without engineering change agreements and so there is little or no visibility outside EngCo
Structured approach to defining risk appetite and prioritisation of risk scenarios
204 A deeper dive
1. Identify critical assets and business drivers – profit, sharevalue, funding, production, etc. 2. Identify Impact - manufacturing facilities, production line (s), number of product (s), interdependencies etc. 3. Identify key suppliers - single source, IP, logistic nodes, critical parts / process / machinery etc. 4. Identify financial impact – Gross margin (BI and CBI worksheet) – Weeks of available production – Manufacturing schedule and make-up capacity – Demand (margin, balance of sale, market share, competition) – How long to replace and current inventory (safety stock) – Increased cost to acquire (shipping, tooling, molds, redesign, IP) 5. Disaster Recovery, Business Continuity Plan and other mitigation 6. Supply Chain Risk Assessment and insurance for key suppliers Scenario analysis
BI Loss, production alternatives
20 Zurich Velocity ERM software manages mitigation Context
Triggers Vulnerability Categories Risk
Sub-category Consequences Risk Tolerance
Correction Controls • Risk financing • Risk transfer Prevention Mitigation • Outsourcing Effectiveness • Controls Assmnt. Controls • etc
Mitigation Effectiveness Enhancing your organization’s risk awareness and resilience
Strategic Risk Management Services
Corporate customers Linda Conrad Director of Strategic Business Risk +1 410 664 5207 [email protected]
Thank you www.ZurichERM.com www.SupplyChainRiskInsights.com http://www.zurich.com/riskroom.htm https://itunes.apple.com/app/zurich-risk-room/id513235624?mt=8 https://play.google.com/store/apps/details?id=ch.zurich.zrr&feature=searc h_result#?t=W10. The information in this publication was compiled by Zurich Services Corporation from sources believed to be reliable. We do not guarantee the accuracy of this information or any results and further assume no liability in connection with this publication, including any information, methods or safety suggestions contained herein. Moreover, Zurich Services Corporation reminds you that this publication cannot be assumed to contain every acceptable safety and compliance procedure or that additional procedures might not be appropriate under the circumstances. The subject matter of this publication as well as any of the examples, which are given for pure illustrative purpose, therein are not tied to any specific insurance product nor will adopting these procedures insure coverage under any insurance policy. ©2012 Zurich Services Corporation
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