NU Online News Service, April 13, 3:28 p.m. EST
The earthquake and tsunami in Japan, as well as other catastrophic events recently, should make it clear to companies that there are no events that cannot be planned for.
"Many once unthinkable events should no longer be considered black swans," says Gary Lynch, global leader of Marsh's supply chain risk management practice.
Lynch says the globalization and pervasive connectivity inherent to companies' supply chain operations makes it a "dangerous practice" to normalize expectations and mitigate only risks that can be seen.
Lynch was part of a panel during a Marsh webcast, "After the Earthquake: Supply Chain Resiliency in a Global Economy."
The March 11 Tohoku earthquake was a "moment of truth" for companies' risk management and resiliency plans, Lynch says. Breakdowns in supply chain dependencies are clearer now.
"True resiliency may mean reengineering or blowing up traditional plans," says Lynch, who adds that companies should be asking themselves the following question: "Did our organization's continuity plan effectively address the immediate business disruptions and are we prepared to handle longer-term disruptions?"
As global supply chains look to deliver products faster and cheaper, the risk of disruption increases. And the risk management plan in place may not be providing the best return on investment.
Supply chain resiliency and continuity of operations are normally insurance, compliance or threat-driven but that "takes into consideration only a small portion of the exposure," Lynch says. Resiliency programs need to be value-drive, he adds.
"Insurance-driven continuity typically does not take into account non-physical damage perils," he adds. Non-physical perils include government actions, bankruptcy of a supplier, strikes, service interruption with no physical damage, quarantine, and port or border closures, says Ben Tucker, leader of the property specialized risk group at Marsh.
The closure of some ports in Japan is causing a loss of $3.4 billion in seaborne trade per day, says Duncan Ellis, leader of Marsh's U.S. property practice.
Policyholders should be reviewing policies to determine covered peril definitions, since policies are triggered by a covered peril to covered property, says Ellis. There is typically no coverage for nuclear radiation, including any loss from an evacuation, he adds.
Marsh recommends an end-to-end analytical view of supply chains to quantify and prioritize investments to effectively manage risk of specific supply chain exposures.
Lynch says companies directly or indirectly affected by the March 11 Tohoku earthquake should count on severe supply chain disruption for an extended period of time.
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