Supply Chains: Growing Risk, Less Preparedness

Stephen DeAngelis

May 21, 2013

In spite of the numerous supply chain disruptions that have occurred over the past several years, results from “the 2013 Aon Global Risk Management Survey points to a significant decline in risk readiness among many of the survey respondents. On average, reported readiness for the top 10 risks dropped a material 7 percent (from 66 to 59 percent) from the 2011 survey and reported loss of income increased 14 percent.” [“Worrying trend emerges from 2013 Aon Global Risk Management Survey,” PR Newswire, 22 April 2013] Not all industry sectors were found in retreat, “Of the 28 industries defined in the report, only three industries – pharmaceutical and biotechnology, non-aviation transportation manufacturing and agribusiness – reported the same or improved levels of readiness this year.” A decline in risk readiness is a bit surprising since risk awareness has never been higher. This was underscored by the fact that the number of respondents to the 2013 survey was 47 percent higher than the number who responded to the 2011 survey.

 

Stephen Cross, chairman of Aon Global Risk Consulting, stated, “One possible explanation of the decline in risk readiness could be that the prolonged economic recovery has strained organizations’ resources, thus hampering the abilities to mitigate many of these risks. Our survey revealed that, despite diverse geographies, companies across the globe shared surprisingly similar views on the risks we are facing today – whether or not they feel prepared.” Another possible explanation for the decline in risk readiness might be the result of increased risk awareness. Executives are no longer living in blissful ignorance when it comes to risks and, therefore, their sense of readiness may have declined.

 

Below is the Top Ten list of risks identified by respondents.

 

Risk Description Risk rank – 2013     Risk rank  – projected 2016
Economic slowdown/slow recovery               1                         1
Regulatory/legislative changes               2                         2
Increasing competition               3                         3
Damage to reputation/brand               4                         8
Failure to attract or retain top talent               5                         5
Failure to innovate/meet customer needs               6                         4
Business interruption               7                       11
Commodity price risk               8                         7
Cash flow/liquidity risk               9                       10
Political risk/uncertainties             10                         6

 

Judging from the top three risks (which aren’t predicted to change over the next few years), respondents seem convinced that economic recovery is going to be sluggish even as competition increases. Kenneth Rapoza notes that those risks “are largely uninsurable,” which may account for their high priority. [“What Keeps Business Leaders Up At Night?Forbes, 23 April 2013] Cross told Rapoza, “The [insurance] industry globally should wake up and think that these are the risks and concerns their clients worry about most.” Thinking about it and being able to do something about it are two different things. As Rapoza asserts, “It’s one thing to insure an oil spill or lost cargo deep in the Pacific Ocean. But how does a German nuclear power company insure against legislative risk?”

 

The press release notes, “Political risk/uncertainties broke into the top 10 risks for the first time in 2013. Due to the increasing civil wars and social and political conflicts around the world, this risk is projected to move up to number six in the 2016 survey.” In what was the biggest surprise to me, weather/natural disasters did not make the Top Ten list for 2013. It ranked number 16 (although it is “projected to jump into the top 10 list at number nine” by 2016). Most of the significant supply chain disruptions that have occurred over the past five years have been related to weather or natural disasters. Aon Global Risk Consulting analysts don’t anticipate this will change “given the unusual climate patterns worldwide and an unprecedented increase in natural disasters and weather events.” Rowan Douglas, Chairman of the Willis Research Network (WRN), asserts, “[The] breadth and impact of natural disasters in recent years, coupled with growing concern about the emerging effects of climate change on assets and business operations, have driven resilience to natural hazards high up the corporate risk agenda.” [“Willis Report Warns of Growing Risks from Natural Catastrophe Exposures,” Insurance Journal, 23 April 2013]

 

The next 10 risks on the survey list were:

 

11. Exchange rate risk
12. Technological failure
13. Third party liability
14. Supply chain failure
15. Corporate credit risk
16. Natural disasters
17. Property damage
18. Cybercrime
19. Compliance
20. Counterparty credit risk

 

A list of the Top 50 risks can be found by clicking on the following link. The Aon Global Risk Consulting analysts “uncovered several significant risks to watch, as these are perceived to be underrated risks.” Those risks include: Computer crimes/hacking/viruses/malicious codes; Counter party credit risk; Loss of intellectual property/data; Social media; and Pension scheme funding. Norman Marks, who was a chief audit executive and chief risk officer at major global corporations for more than 20 years, believes there are other “massive risks that are faced … by a majority of organizations and, even if they are recognized, are often accepted instead of corrected.” [“The Important Risks That Are Overlooked but Should Come First,” Marks on Governance, 23 April 2013] His list includes:

 

  • The board and top management setting organizational objectives and monitoring performance without sufficient information. …
  • A failure to consider risks when establishing strategies and objectives. …
  • Executives making business decisions without adequate, current, timely, and reliable information. …
  • A failure to consider risk when making day-to-day business decisions. …
  • An inability to monitor risk as it changes, which is very often at least daily. …
  • A failure to communicate and explain the personal relevancy of organizational strategies to every manager and decision-maker. …
  • Putting cost considerations ahead of the quality of the management team and the workforce in general. …
  • Processes and systems that cannot move and adapt – a lack of agility. …
  • A board that is unable to provide effective oversight. …
  • A conflict between the personal interests of the executive team (short-term results, bonuses, stock appreciation) and the long-term interests of the organization as a whole. …

 

Javier Gimeno, a professor in international risk and strategic management at INSEAD, agrees with Marks that corporate boards need to be more involved in risk management. “As part of the board’s responsibility to endorse and monitor strategy,” he states in the press release, “directors should gain an intimate understanding of the major strategic risks, possible scenarios and how the appropriate strategy allows the exploration of uncertainties and mitigation of strategic risks.”

 

One thing that most analysts seem to agree upon is that because the world is more connected it is more difficult for companies to isolate themselves from catastrophes. Cross told Rapoza, “There’s an inter-connectivity of global risk. What happens overseas can impact you anywhere.” Phil Ellis, CEO of Willis Global Solutions Consulting Group, agrees, “Major catastrophes – so called ‘black swans’ – are not the rare risks they once seemed. Population density, urbanization, globalization and climate change make the world increasingly interconnected. A catastrophe in a far-off locale is no longer a remote risk; it could have an immediate impact on a company’s operations. Risk modeling can help companies understand, quantify and articulate threats to the bottom line, which in turn helps them plan and prepare for these scenarios.”

 

The Strategic Sourceror concludes, “Organizations that understand risk management is not just part of the business but a means to improve the organization can drive their bottom line. … Early risk identification can be a method for minimizing the impacts of changes to a supply chain.” [“Companies are less prepared for risk,” 23 April 2013] A good place to start identifying potential risks to your business is the list generated in the 2013 Aon Global Risk Management Survey.