Phil Wall, Senior Account Engineer at ACE, speaking at The Economist Risk Summit in London on Thursday, urged businesses to recognize that initiatives designed to reduce costs and streamline operations can create unforeseen side effects. These include increasing property losses and business interruption exposures within their supply chains.
Asa result the drive to control operating costs and improve efficiencies by global businesses during the current recession has the potential to create new risk exposures within supply chains.
Wall also called on businesses to consider adopting specific measures to mitigate these exposures. These include more rigorous risk identification, “best of class” loss prevention standards in supply chains, greater communication with suppliers, and creating more robust alternative supplier arrangements.
ACE Europe’s bulletin notes that the “supply chain has been a key area of focus during the economic downturn, with companies adopting a number of different measures to achieve cost savings – in a recent survey sponsored by ACE, it was revealed that close to 60 percent of global businesses had negotiated lower prices with suppliers over the last year.
“Other measures taken by businesses include more outsourcing to third party suppliers, the placing of larger contracts with a reduced number of suppliers to achieve economies of scale, the consolidation of operations into large production facilities, the use of ‘mega’ distribution warehouses and a move to ‘just-in-time’ production.”
Wall observed that while such measures “represent short-term gains on the balance sheet, businesses need to be aware of the potential impact of these initiatives and understand the additional longer term exposures that may come with these. The failure of one supplier in a small chain or an incident in a large scale warehouse creates very real and major risk exposures that could significantly damage a company.”
The use of suppliers in new and more cost effective territories is one area that highlights the scale of the new risk exposures. Wall explained: “These emerging markets can look like attractive options with cheaper labor costs. However, issues such as unknown loss prevention standards, political and infrastructure uncertainty, cultural differences and unforeseen natural hazard exposures can make them riskier and more costly options in the long-term.”
Wall called on the Summit audience of senior European executives involved in risk, strategy, finance and compliance across a broad range of industry sectors, to ensure the appropriate level of focus on the identification of new and emerging risk exposures is being applied within their organizations. He also urged businesses to demand “best of class” property loss prevention standards at critical facilities to help ensure that the supply chain is protected.
In addition he advocated building stronger relationships, adopting a team approach with key suppliers to identify potential exposures and agree action plans to address them and identifying alternative suppliers to minimize the interruption in the supply chain.
“Supply chain risk management needs more Board-level priority. Businesses cannot afford to underestimate the potential impact of these emerging risks,” He concluded.
The Economist Risk Summit – New perspectives on decision-making – was held on 19th November 2009 at The Dorchester Hotel in London. For more information go to: www.therisksummit.com
Source: ACE Europe – www.aceeuropeangroup.com
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