Focus on cost savings alone will not help produce a robust supply chain

RIMS Canada Conference 2013 – Current supply chains may offer lower costs and higher efficiencies, but may not be as robust and able to smoothly respond to failures or stoppages, Darren Meyler, property branch manager for central Canada at AIG, suggested Tuesday during the RIMS Canada Conference in Victoria, B.C.

“A supply chain that’s purpose-built for your needs in terms of cost savings may not be the most robust supply chain,” Meyler told attendees of a session on navigating catastrophic supply chain events. “I think as a risk manager, for peace of mind, we’d very much like our supply chain to look a little bit more robust.”

It used to be that supply chain was based on simple sourcing logistics and delivery, usually relying on local rather than global suppliers, Meyler noted. But that has evolved “to the current state where it’s a recognized driver of company margins,” he said.

“People look at supply chain now not just as a method of getting supplies to them and products out the door. Companies that are very good at supply chain management actually use it as a competitive advantage against their competitors,” Meyler said.

“Thirty years ago, if you had a manufacturing plant and went into a warehouse, you’d see a warehouse full of spares and full of extra materials to make the product. Nowadays, companies pride themselves on not needing that because of the cost saving. The challenge is that once you have a bump in the road or a stoppage in the supply of your product, you’ve got nowhere to turn to, you’ve got no spares, no redundancy,” Myler cautioned.

“The concept of waste elimination has drove down costs and it’s left us in a space where we often rely on just in time or just enough deliveries,” he said.

Leszek Bialy, vice president and head of customer and distribution management for Zurich Canada, noted that from 2008 to 2012, the top 10 countries that Canada imported from saw imports increase approximately 6%. For countries such as China, Mexico and Japan, collectively the increase was about 20%.

“We’re seeing a growing trend to those countries, where we know there’s natural catastrophes occurring on a greater basis,” Bialy said. “So there’s a multiplier effect happening over the short term and obviously into the future as well with those countries,” he added.

“As your organizations as well as Canadian multinational organizations expand globally, they expand their footprint, they’re going to source to those suppliers within the natural catastrophe areas,” Bialy said.

Citing events in Japan and Thailand, these have produced more scrutiny by insurers and brokers and demand that companies to have desired information at hand.

“Understanding the components of a supply chain risk and how it’s approached and underwritten within your organization will depend on how responsible you are and how connected you are to that process,” Bialy said. “It’s no longer that you’re being given supplements from unnamed locations as you were before those events,” he reported.

“Definitely, there’s more scrutiny from the standpoint of insurers and reinsurers, there’s more responsibility on your parts in terms of capturing that information. If you’re not capturing that information, if you haven’t already seen, you may see that you’re going to struggle in terms of securing the same limits and supplements you were for contingent business interruption as you were before those events took place.”

Meyers noted that the principal reasons for supply chain failures and major losses relate mostly to a handful of issues, including outsourcing of product to volatile or vulnerable locations (typically, this relates to cat perils), limited redundancy and failure to identify exposures.

Bialy suggested that things to consider when looking at, for example, an organization’s top five suppliers are the supplies, the location of the supplies, how the supplies are being sourced, availability of the suppliers and the end product.

“How you value those supplies and suppliers is going to vary based on the criticality of that component, the cost in terms of the expense of sourcing that supply, what is the value improvement of that supply into the final product, as well as the sourcing of the individual supply,” he said.

“We understand the realities of business are such that you cannot dictate to your companies to spend an awful lot of money to build a supply chain if it’s going to take away from their competitive edge,” Meyler acknowledged. As such, it is necessary to consider issues that are frequent causes of loss in a supply chain and to respond by building in protective measures.