The Right Tools for the Job

A business can gain competitive advantage by having the right risk tools to select and manage its strategic suppliers. However, assessing supply chain risk can result in too much data, but not enough relevant information.

The vast scope of today’s supply chains can imply that it’s hard to get a simple answer to questions like: Where does this part come from?

“Sometimes this is not simple to answer,” says Dr. Otto Kocsis, global head of technical centre business resilience and the principal engineer of business interruption/business resilience at Zurich Insurance Co. in Zurich. “If you’re looking at two sites, one supplying the other, it’s not always obvious how interconnected these two sites are, even if they are in the same group. It might be necessary to go into more detail.”

For example, a Canadian business might buy a part from a British supplier with a factory in China that is supplied by components from other countries. The complexity can be daunting. “It’s not often that organizations would look specifically at supply chain risk as a topic to audit and understand,” observes Tim Astley, regional practice leader for strategic risk and business resilience at Zurich, based in Birmingham, United Kingdom.

A number of tools are available for helping businesses tame the data and draw a clear picture of their supply chain risks. For instance, business impact analysis takes an in-depth look at the consequences of losing a critical process or supplier, taking into account the severity and frequency of the potential exposure. Other tools might overlay risks on a map of the world; use flow charts to show tiers of interdependence; or illustrate degrees of risks with heat maps. Some insurers look at as many as 25 supply chain risk factors to understand the breadth of management control and the extent to which a business is exposed to each factor.

Kocsis says customers, oftentimes high-end customers, are stepping up their demands for these tools. “They don’t have the tools or experience,” he says. “We [as insurers] are many times farther ahead on this than the customers, since we face these questions as part of our business.”

Mapping the Supply Chain

Other proprietary tools exist to help map a customer’s risk, including a tool to model business interruptions and present the disruptions graphically so they are easier to understand and provide quantitative supply chain exposures. “We go through all the different scenarios,” from losing a major customer to fires, storms or strikes, Kocsis says. “We calculate the effect on the balance sheet not only to the site, but to the group. We provide the list of top exposures with respect to business interruption.”

The first step is to model the value chain. The next step involves identifying risk scenarios with respect to both severity and impact. The last step is to analyze the effect of those scenarios on the balance sheet. Scenarios encompass many kinds of risks – including internal risks, such as fires or machinery breakdowns, and external risks such as geopolitical risk, natural catastrophes or economic problems like high inflation. One approach is to look at a wide range of country-level risks around the world and present them in a visual format to help make sense of layers of data and their connections.

Models can be updated with live data from social media or real-time news feeds to assess instantly the consequences of an unfolding scenario and to act as quickly as possible. “A business can gain a competitive advantage by getting to a supplier first and securing supplies that may soon be hard to get,” Astley says.

A good quantity and quality of information can give sharper definition to risks. “Robust, comprehensive data capture is really key,” says Keesup Choe, chief executive of PI Benchmark, a London-based company that develops risk tools and procurement decision support solutions. The data goes into models to assess risks and highlight exposures in the supply chain.

Identifying and mapping all nodes of a supply chain, and decomposing each component into the most granular bits, can help to highlight concentrations of exposures. This would allow a company, for example, to see that its suppliers’ suppliers’ factories are mostly located in Thailand, where flooding recently led to the disrupted production of hard disks.

Services exist to send alerts to companies when disasters like earthquakes occur anywhere in the world. The problem is, many of the alerts don’t take into account if the company or its suppliers even have a factory near the catastrophe zone, says Patrick Brennan, chief executive of Supply Risk Solutions, a Redwood City, California provider of supply chain risk solutions. That makes for a flood of useless alerts that can obscure truly significant events.