Modeling Helps Determine Supply Risk

Corporations need to utilize risk models to determine hazards to their supply chains, brokerage executives advised at a Web seminar yesterday.

Their comments came during an online event yesterday sponsored by Chicago-based insurance broker Aon.

Paul Graziano, executive vice president of Aon's National Industry and Product Group, pointed out at the seminar that the more efficient a client's supply chain is, the more susceptible it is to disruption.

The discussion included Mary Duhig, director of Aon Trade Credit; Brian Eklow, senior consultant with Aon strategic risk advisory services; Mike Giacobbe, director of Aon strategic risk advisory services; and Barb Spain, senior vice president with Aon marine group.

Seminar speakers said studies indicate that a supply chain interruption can cost a company between 3 and 4 percent of its profit.

When examining exposure, the executives pointed out, the most effective way to identify the areas of vulnerability is to develop risk models. The models create risk scenarios and identify where the corporation is most vulnerable given a situation that could disrupt production or distribution of its product.

They also pointed out models can help a corporation determine its risk appetite, whether it needs to transfer risk or can afford to self-insure all or portions of the exposure.

While corporations can face some standard risks overseas from weather-related exposures or concerns with government appropriation of property, there are other risks they might not have considered, the panel said.

These can include damage to a corporation's reputation from illegal business practices of a supplier, such as the use of sweat shops.

With the help of risk models, corporations can determine if they need to identify alternative suppliers, or if they can only rely upon a single supplier as the sole source.

The models can also help identify natural risks to those suppliers and help determine if a corporation needs to put plans in place to protect the supply chain and recover from supply disruptions.

A replay of the seminar titled “Managing Risk in the Supply Chain: Building a Capital Allocation Framework” is available at http://aon.com/webseminars/.