An integrated approach to supply chain risk
management
Following the recent economic meltdown, the life
sciences industry has made steps to protect
itself against a similar situation in the future;
however it still faces many challenges. Insurance
broker Willis Group has created a risk management
strategy that helps organisations
to focus on the key risk drivers and create a
better understanding of today’s business.
Life sciences organisations are changing their
business
models to become more resilient and sustainable
in
light of the challenging economic environment.
Trends
are showing that large multinational and mid-market
life
sciences companies are still subject to increasing
litigation,
product recalls, patent infringement and supply
chain
interruption. Increased supply chain risk in particular
is being
driven by the growth in regulations, financial
fragility in the
current environment and a heavy reliance on a
small number of
suppliers – a direct consequence of simplifying
supply chains to
improve efficiency and reduce costs.
A robust risk management strategy for companies
within this
sector must look beyond the four corners of traditional
insurance
and focus on business interruption (BI) loss that
may be removed
from direct physical damage. This provides the
opportunity to
focus on key risks, such as BI exposure in the
supply chain.
Insurance broker Willis believes that a fresh
focus is required to
get the risk management basics right and ensure
that the
foundations are in place to drive an improved
understanding of
the risks that an organisation faces. Identification
of the key risk
drivers throughout an organisation will improve
visibility around
the underlying causes. This, in turn, should lead
to the improved
understanding of the financial impact of the risk
against future
cash flows or gross profit, thereby determining
material exposures
and influencing the key priorities for allocating
risk management
resource. One such driver is the loss of a key
supplier.
Role of suppliers
Historically, key suppliers were defined by the
amount of annual
spend a company would contract with them. However,
these
large suppliers were not always responsible for
the highest
levels of BI. In many cases it was the smaller
suppliers, where
annual spend was minimal, that would create a
huge BI impact
on their customers if they stopped trading overnight,
because
they supplied one of the key ingredients or components
used
across the customer’s product line.
Willis recognises that to best support its clients
in managing
supply chain exposures, a series of steps are
required. By
improving risk assessment techniques and considering
the risks
that affect the supply chain, one can identify
the key suppliers
and better understand the financial exposure a
client has. This
process firstly involves checking the quality
and robustness of
an organisation’s existing risk management
framework to
ensure that the data generated is consistent and
relevant to the
improvement and resilience of the business. Secondly,
the
process provides an initial assessment throughout
the supply
chain to identify key suppliers. This is done
by gaining a better
understanding of revenue flows, stock throughput
and
dependencies. Thirdly, the process provides the
capability to
model the total level of business interruption
exposure the
organisation would be subject to, should one of
those key
suppliers stop trading. The final step would be
working with
the procurement function to recommend the most
appropriate
and effective risk management strategy, such as:
- increasing buffer stock levels
- buying out a financially fragile key supplier
- dual sourcing requirements
- risk transfer through insurance
An integrated approach to supply chain risk management
will provide Willis' clients with an increased
opportunity to
gain benefits including:
- improved resilience and sustainability
- improved capital allocation
- improved balance between risk retention,
financing and transfer
- brand protection.
A combination of the above could reduce the cost
of risk,
improve business performance by reducing uncertainty
and
volatility, and increase the probability of achieving
financial key
performance indicators outlined in clients'
business plans.
About Willis Group
Willis Group Holdings is a leading global insurance
broker. Through its subsidiaries, Willis develops
and delivers professional insurance, reinsurance,
risk management, financial and human resource
consulting and actuarial services to corporations,
public entities and institutions around the world.
Willis has more than 400 offices in nearly 120
countries, with a global team of approximately
17,000 employees serving clients in virtually
every part of the world.
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Company profile
Willis Group Holdings plc
For further information, visit: www.willis.com
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