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ARC: HOW TO CONTEND WITH EMERGING RISKS AS THE ECONOMY CONTINUES TO RECOVER

Strategy, data and workforce mitigate risks associated with growing a business

Business Growth Risks

As companies restructure processes to ramp up production of existing products and introduce new ones as the economy improves, innovation is essential to address unexpected risks. Expansion of products and services can stress supply chains, which can lead to a host of risks.

Good quality data and analysis of an organization's supply chain and key suppliers is critical in providing innovative solutions in an improving economy, said Tom Teixeira, London-based partner in the global solutions consulting group for Willis Group Holdings P.L.C.

“If a company as a result of demand, as a result of the changing economy wants to produce a new product, clearly they need to get the parts from somewhere,” Mr. Teixeira said.

Software and databases can provide suppliers' addresses, geocoordinates of the manufacturing site and part numbers.

“That really is going to facilitate and improve the quality of the risk assessment within the supply chain, particularly around natural catastrophe events,” Mr. Teixeira said.

Once an organization discerns exact locations of critical suppliers, the data can be mapped to reflect potential property and nonproperty damage and focus on which suppliers can jeopardize the supply chain, he said.

Detailed supplier information also can help secure adequate insurance coverage for organizations, said Eric Jones, Dallas-based assistant vice president at FM Global's business risk consulting group.

“More capacity can be made available” for risks that are better “identified and understood because there's more confidence on the underwriting side,” he said.

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Mr. Jones said software tools can help track and monitor supply chain risks, and then help tie that to profitability so organizations can make informed decisions, he said.

“There is an improvement in the tools that are in place, but again, the trick is you've got to have the data to populate them,” Mr. Jones said.

Successful innovation requires aligning risks with a business' growth and value goals, said Gary S. Lynch, managing director and global leader of risk intelligence and supply chain resiliency solutions at Marsh Inc's risk consulting practice in New York.

“I can manage risk all I want, but if I don't have a business and I don't have growth and I don't have value, I have no risks to manage,” Mr. Lynch said. “Therefore, a conversation that I have to have has to be really in the context of growth and value.”

C-suite executives and board members are asking risk managers to demonstrate how the organization is handling risks, he said.

But the first thing they ask is, “"How do you tie this into what's most important to use from how we create value or how we grow the business?'” Mr. Lynch said. “We're seeing more of that pressure from the board ... asking, independent from what vehicles you're using — risk mitigation, hedging, transfer,'How are you dealing with this risk, how are we protecting brand and how are we protecting revenue stream?'”

Richard J. Coyle, executive director of the Emerging Markets Institute at the Samuel Curtis Johnson Graduate School of Management at Cornell University in Ithaca, N.Y., said some organizations are using radio frequency identification chips in manufacturing.

Radio frequency identification device technology can monitor supply chain assets throughout various tiers and suppliers.

In recent years, Wal-Mart has used RFID chips to track and manage assets along its supply chain, said Mr. Coyle, who formerly was senior director for international corporate affairs at Bentonville, Ark.-based Wal-Mart Stores Inc.

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Typically, RFID chips work best with shorter supply chains, Mr. Coyle said, noting such efforts to handle supply chain risks can be costly.

“As you go down the stream in the manufacturing process, you get to less and less sophisticated suppliers and the idea of using RFID chips, which in essence produces 100% accountability, may or may not be in their interest,” Mr. Coyle said. “The real key is to make it work with larger supply chains that have multiple players.”

On a separate front, companies taking advantage of an improving economy to introduce products face several risks.

A primary risk is the competition for innovation and ideas, said Anand Rao, partner in the insurance advisory practice at PricewaterhouseCoopers L.L.P. in Boston.

A major risk is that a company advances an idea it thinks is innovative only to bring it to market and see half a dozen other companies with the same idea, he said.

“To manage that risk, it's the execution of that idea and how fast you go about executing that idea,” Mr. Rao said, noting that companies need to be aware that if the innovative product is successful, they'll need sufficient human and financial resources to grow production if they wish to capitalize on that success.

Senior Editor Rodd Zolkos contributed to this story.

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