Financial executives from 500 of the world’s largest companies rated competition, supply-chain disruption and property risks as their top threats, according to a new study by Johnston-based insurer FM Global.
And the number-one consequence of failing to manage for risks like these, the report concludes, is a loss of competitiveness.
In recent years, the old model of vertical integration – in which companies essentially owned or controlled their supply chains – has given way to a more fluid and global approach to production. Many Fortune 1000 companies now rely on smaller companies to complete their supply chain. And for companies of all sizes, supply chains have become increasingly complex, a reality that can expose businesses to greater risk.
It is not unusual, for example, for a company to rely on vendors in Eastern Europe, Asia, or Latin America, where loss-prevention standards (such as fire codes) may not be equivalent to those in the United States.
The costs of supply-chain disruption can be sizable. Industry Week reported that a fire at a Phillips chip plant in 2000 contributed to a loss of $2.34 billion by Ericsson, one of its customers. And in 1995, Toyota’s sole source of brake shoes had to halt production after the Kobe earthquake, resulting in $200 million in lost revenue.
Such natural hazards have long threatened business production. FM Global formed at the dawn of the Industrial Revolution, insuring local textile mills whose biggest threat was fire. The company reports that 175 years later, fire still poses the biggest threat to businesses’ property. Other potential consequences of supply-chain disruption, and the associated loss of a company’s competitive edge, include loss of market share, reduction in the company’s valuation, layoffs, regulatory scrutiny, and legal action.
FM Global spokesman Steve Zenofsky says that it is critical for a company to fully understand its markets, delivery processes, cash flows, and other dimensions of its business operations. The next step is to understand the factors that could affect its business, such as vulnerabilities in its supply chain.
This step is where some companies run into trouble, because their perception of risk is based only on the experience of their individual business. And, as Zenofsky put it, “common sense isn’t always common practice.”
With all this information, a company can then decide whether it can live with the consequences of these exposures. If it can’t, then it’s time to work on reducing risk.
“The essence of it,” said Zenofsky, “is to follow the money.”
A growing interest in anticipating and averting risk has led to the emergence of business continuity management (BCM). FM Global Senior Vice President Perry Brazeau says BCM is a management process that identifies potential threats and provides a framework for building resilience and responsiveness.
He emphasized that “BCM is a business culture rather than a project.” Some of FM Global’s clients have also taken steps to require suppliers to have adequate risk-management plans in place.
Still, Zenofsky explains, there are companies out there that discount the likelihood and severity of possible threats. And when something unfortunate does happen, they are often quick to explain how it could not have been foreseen.
In the end, FM Global believes that a sound risk-management plan will enhance competitiveness. And with nearly two-thirds of financial executives surveyed expecting competition to increase through 2009, there is a strong case for prioritizing risk management.
There is also evidence to support such a tack. In analyzing the 2005 hurricane season (which included Katrina), FM Global found that storm damage was 85 percent greater for client companies that had not implemented its recommendations for reducing risk.
Although FM Global is in the insurance business, Zenofsky said “insurance should be the last part of the BCM strategy. The best BCM plan is not to have a loss in the first place.” •
The report, Managing Business Risk Through 2009 and Beyond, is available as a free download at www.protectingvalue.com
