Controlling risk in a connected world

Posted on 26 Jul 2012 by The Manufacturer

Taking a look at the topic of risk management, Martin Fessey, a VP at commercial insurer FM Global, unpicks the intricacies of continuity planning.

An article published in The Manufacturer magazine back in May titled: ‘What’s the Worst that Could Happen?’ looked into the importance of aligning business continuity with maintenance in manufacturing companies. It explained that a good business continuity plan should expect the unexpected and avoid the potentially damaging consequences of operational disruption. This point is extremely important, especially in today’s business environment where risks that companies face have become more complex and their impact can be more profound.

The article emphasised that having a robust business continuity plan in place is particularly relevant in situations where plant or asset maintenance is outsourced. The article highlighted the erroneous assumption of companies thatby transferring some of the workload, they are relieved of the risks of that activity not being carried out correctly.

The concept of having a business continuity plan in place that allows you to manage risks beyond your own operations is a particularly relevant when it comes to managing increasingly complex and large supply chains. It is important that companies acknowledge that being connected to a greater number of supplier plants and facilities across the world can also increase the chances of them facing business disruption.

To avoid this, a wiserule for companies to follow is to work with their full network of suppliers to ensure business resilience is consistently implemented across all operations. Companies that don’t develop relationships with suppliers will often find themselves becoming unstuck by severe supply chain disruption.

For example, a Japanese manufacturer’s largest supplier suffered a devastating fire that resulted in the loss of hundreds of critical machines and tools. Since the supplier provided 90% of the manufacturer’s cost-efficient brake proportioning valves, the incident halted production across eighteen of the company’s automotive plants within hours. The impact of this fire loss could be seen up and down the supply chain, with hundreds of utility and trucking companies majorly disrupted as well. Ultimately, it caused an estimated one-per cent per-day loss to the country’s industrial output, with an overall loss estimated at US$195 million and 70,000 units of production.

Following a disaster such as this, the consequences of a supply chain loss can extend to months or even years after the incident took place.

PricewaterhouseCoopers recently carried out a study that compared the overall performance of 600 US Public companies that announced supply chain disruptions from 1998 to 2007 with that of benchmark groups. On average, affected companies’ share price dropped 9% below the benchmark group immediately upon announcement of the disruption. These companies continued to under-perform their peers for some time. Over a two year period, their average stock return was almost 9% lower. The majority of companies experienced a greater volatility for at least two years, a sign of diminished confidence among stakeholders.

One step that companies can take to protect themselves from supply chain disruption is to audit all their business relationships and build a network of preferred and alternate suppliers with contrasting risk profiles. Having alternate relationships ensures that companies are never too reliant on a single supplier.

Businesses should also be aware that their own risk prevention strategies would be scrutinised by other members of the supply chain ecosystem. Therefore, it is important to map your position in the supply chain hierarchy and proactively communicate your business continuity plan to all relevant parties.

Planning for business resilience is becoming all the more important given the complex business environment in which we live. In today’s world, an effective business continuity plan shouldallow you to reduce the inherent risks associated not only with outsourcing plant or asset maintenance, but also with any other operations that take place beyond the walls of your own company. Such an approach can give a competitive advantage to your business as it ensures the robustness of your supply chain, and can consequently protect your reputation, share price and market share.