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Catastrophes break critical links in supply chains

Risk managers review strategies to limit supplier disruptions

Catastrophes break critical links in supply chains

VANCOUVER, British Columbia—Supply chain risks are having their day in the sun due to a series of catastrophes that exposed complex vulnerabilities that companies face if a supplier is unable to provide goods or materials.

Risk managers are far more aware of their supply chain exposures as disasters, such as the earthquake and tsunami in Japan, have caused some companies to cut back operations because supplies were cut off, said experts who attended the Risk & Insurance Management Society Inc.'s Annual Conference & Exhibition.

“Two events, more than anything else, have brought (supply chain exposures) a lot of attention,” said Doug Strohl, executive vp of Willis Insurance Services of Georgia Inc. in Atlanta. “The most recent one was in Japan and the one before that was the Icelandic volcano,” which spewed ash and disrupted air travel, he said during an interview.

Both proved “that you never know what is going to interrupt your supply chain. It is clearly an area that is getting much more attention,” Mr. Strohl said.

The Japan catastrophe has shown that “some of the best-managed companies in the world have supply chain issues,” said Jon Hall, executive vp at Johnston, R.I.-based Factory Mutual Insurance Co., which does business as FM Global.

Large automakers based in Japan with operations in other parts of the world are “very, very fine companies and they have struggled with supply chain issues,” Mr. Hall said.

The ripple effect of supply chain disruptions is important to companies of all sizes, according to Nancy Sher Cohen, a partner with law firm Proskauer Rose L.L.P. in Los Angeles.

“It is clear now that businesses are global, even if they are based in small-town America,” Ms. Cohen said. “Whatever business you have has a global reach. Couple that with the fact that there are natural disasters we can expect over time, and you can see the ripple effect over the world economy.”

The risk has grown in recent years as economies have become globalized and companies have relied on just-in-time inventories and outsourcing as they strive to become as efficient as possible, sources said.

Companies gain efficiencies by using such methods, “but the downside of it, obviously, is that you don't have control of the whole process anymore; it's not vertically integrated like it might have been several decades ago,” Mr. Strohl said.

As the supply chain exposure has gotten more attention, companies have grappled with how to cover it, experts said.

A lot of companies are under the impression that as long as their contracts with suppliers provide some protection against supply chain disruptions, “they don't have an issue,” said Randy L. Nornes, executive vp with Aon Risk Solutions in Chicago. But, as recent catastrophes have shown, it may be “the supplier of your supplier” where a disruption originates, he said.

The disruption could occur “even further down” the supply chain, said Nancy A. Green, Chicago-based executive vp, strategic account management at Aon Risk Solutions. Companies in many cases have not considered “how far down they need to manage the process,” she said.

In the aftermath of recent catastrophes, some companies have changed their approach to the supply chain exposure, sources said.

Many are reconsidering whether they should consolidate suppliers as a way to streamline their operations, said Gary S. Lynch, managing director and global leader of Marsh USA Inc.'s international trade and supply chain risk practice in Morristown, N.J. “There is definitely a reassessment of the speed at which they are moving to a kind of lean operation,” he said.

“It's great to take out inventory, synchronize the vendors and reduce the number of vendors,” he said, but those moves “complicate resiliency” when it comes to the supply chain.

As for consolidating suppliers, companies “are really thinking twice about that now” as the risks involved have come to the fore, Mr. Lynch said.

Risk managers often are not in a position to manage the risk. While most companies are aware of supply chain risks, “no one owns it” in many cases, Aon's Mr. Nornes said. “Nobody is really able to invest the time to actually look at it from an overall perspective.”

“Risk management is a great place to do that because they have the skill set to think about it that way,” he said.

But that generally is not the case, Willis' Mr. Strohl said. “It really hasn't been in their purview,” he said of risk managers. Instead, the responsibility generally has gone to “the people in the company who are responsible for sourcing product” because they are the ones establishing supplier relationships, he said.

“If you did this in a perfect world, what you would want is someone to project-manage the supply chain risk issue,” said Mr. Nornes. “This is where you need someone to raise their hand and say, "I'll run point on it, I'll meet with all the people who are connected—head of supply chain, logistics, operations, whatever the pieces are in a given company'” to manage the risk, he said.

Holly Daley, director, global risk management at Hitachi Data Systems Corp. in Santa Clara, Calif., said during a session at the conference that she has spent the past several years doing just that.

She said she has involved legal, tax, logistics and other departments “to bring the team together” to understand the supply chain exposure and its potential impact on Hitachi Data Systems.