Category Archives: Supply Chain

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It’s a Great Time to Be a Risk Manager

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2017 has so far been a wild ride of change. Companies are navigating through a new U.S. administration, Brexit and cyber risks that are more daunting each day. We are bombarded with uncertainty and unchartered waters. Nevertheless, it’s a great time to be a risk manager.

This kind of disruption is the reason many of us got into the risk and insurance industry.  Addressing disruption is what we do best. According to a recent CNN report, in fact, Risk Management Director is the number-two Best Job in America for 2017. Recognizing the meaningful contributions and rewarding work of a risk manager, the report highlighted the role in “identifying, preventing, and planning for all the risks a company might face, from cybersecurity breaches to a stock market collapse.”

In the midst of a riskier environment, the insurance industry that serves risk managers faces highly competitive market conditions. The result is more choices and better services for the risk management community. Now is the time for the risk manager to take the lead.

As thousands of risk professionals soon head to the RIMS Annual Conference in Philadelphia, it’s a good time to consider the opportunities in this growing profession.

Why the time is right for risk managers:

  1. 2017 brings a new risk profile. Every company, regardless of industry or size, needs to evaluate the new risks from the shift to nationalist policies in the U.S. and abroad. Our new administration’s efforts to increase America’s manufacturing raises a host of new insurance needs—more U.S. production means more U.S. liability. We are also seeing a shift in global supply chain and an increase in the political risks of operating outside our borders. These changes require board-level and C-suite attention. We expect to see risk managers play a more significant role with management in building risk mitigation into their company’s strategic direction.
  2. Rise in specialists. This is your time to be selective about specialists that understand your business and the specific challenges you face. Insurers are differentiating through specialization. Work with an underwriter that knows the risks, regulations, complexities and nuances of your industry. Many industries, such as construction and health care, will experience rapid change this year. Find partners that have been in the same trenches and can help you navigate changes.
  3. Tailored products and solutions. The highly competitive insurance market is also driving product innovation for clients with more tailored solutions. Take the time to learn about less-understood products, such as accounts receivable insurance, which protects companies from non-payment risks and gives them the ability to borrow, receive loans, and as a result, improve their credit quality. In Europe, 70% of companies purchase this coverage, compared to only 8% of U.S. companies. Understand the risks across your supply chain and work with your broker to customize insurance programs and bring innovative solutions.
  4. At the center of technology and innovation. The insurance industry is on the front lines of the cutting-edge technologies: internet of things (IoT), robots and drones. These advances will only grow and thrive with the right risk and insurance programs. For example, the technology surrounding drones or unmanned aerial systems is rapidly evolving. The ability to collect and analyze aerial data has improved efficiencies, enhanced safety and lowered costs within the construction, agriculture, telecommunications, oil & gas and real estate industries. As usage  grows, risk managers will be central to the successful operation of drones by understanding and managing the risks and compliance needs.
  5. Ability to leverage the best in data analytics. Risk managers have the data, tools and skills to anticipate the risks from this tumultuous environment. The insurance industry views these challenges with a different lens, drawing on past catastrophes and predictive analytics to plan for the challenges ahead. Risk professionals who know how to leverage this information can bring a sense of preparedness and control at a time of heightened uncertainty. There is also a role for risk managers to advise senior management on the use of data. But because models are continually amended and updated after losses occur, it is important to avoid an over-dependence on data and false sense of security.
  6. Opportunity to participate in growing your business. Risk managers do not just protect a business, they grow a business. Companies are reevaluating strategies based on new policies. Will they build manufacturing plants? Will they buy a strategic target? Risk professionals have an important role in mergers and acquisitions deals as insurance can be used to help quantify contingent liabilities and allow for accurate pricing models. The most common is representation and warranties insurance, which can help strengthen and facilitate a transaction.
  7. Better risk management services. Insurers realize it is not enough to write a check for a claim. Take advantage of risk mitigation services that are built into your insurance policies. They include education, training, tabletop exercises and risk assessments.
  8. A thriving profession. With more and more universities offering undergraduate risk management majors, we will see a dedicated, high-caliber talent pool focused on careers in risk and insurance. The Spencer Foundation, for example, has completed an eight-month competition between students of 29 universities from around the country, analyzing, developing and presenting the most comprehensive risk management solutions for a case study. The top eight teams will be in Philadelphia to present at RIMS.

The risk and insurance industry is made up of some of the most agile and level-headed professionals. Risk managers have always moved with the changing environment and crisis situations, developing programs to address their entity’s risk profile. Hopefully, we will see more companies include risk management in their strategic planning and leverage the experience and skills of their risk managers.

Accounts Receivables Coverage Helps Fill Supply Chain Gaps

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It is standard for companies to insure and protect cash, inventory, property, plants and equipment, and more recently, data. Companies are insuring every step in the supply chain and sales process from concept to delivery. What is often not insured, however, is the last but most important part of a sales transaction—getting paid. You can safely bring your product to market, but if a partner or customer defaults on payment and you have no recourse, you’ve lost your total investment. Your balance sheet takes the hit.

As with most risks, there is insurance for that, too. Accounts receivable insurance protects what is often a company’s most critical asset on the balance sheet. More than just protection from non-payment, accounts receivable insurance puts companies in a stronger position to secure loans with improved credit quality. With accounts receivable Insurance acting as a second source of repayment, a company can assure a lender it will not have covenant issues if there is default by a customer.

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Consider these hypothetical scenarios: Bob’s company is based in Canada and he sells components to computer chip manufacturers throughout North America. He buys parts from foreign markets to make his product. The company that supplies Bob with parts has been working with Bob for 30 years. Bob has always paid them for their deliveries. Recently, Bob has struggled to receive payment from his customers in North America due to their decline in computer chip sales.

As a result, Bob is now finding it difficult to pay his supplier on time. The supplier believed Bob had risk management protections in place and would always pay them for their delivery. They never thought Bob would go bankrupt. Fortunately for both Bob and his supplier, he has accounts receivable Insurance. Even though he was exposed to the risk of his customers not paying, his accounts receivable Insurance kicked in as a second source of repayment.

Here is another example regarding the uncertainty of political events in a global economy and how they can impact a company’s balance sheet. A U.S. exporter is selling to Latin America and there are a few countries within the region that are approaching elections. A regime change could mean changes in policies, resulting in the possible cancellation of an import or export license, a moratorium on the payment of any external debts outside the country, or the inability to convert local currency to hard exchangeable currency to make payment. With an accounts receivable program protecting assets, the exporter is able to securely transact with their customers in a foreign market, knowing they’ve mitigated the risk of non-payment due to any potential policy changes or actions.

These examples are not hard to imagine. What is startling to see are estimates that only 8% of U.S. companies have accounts receivable insurance compared with 70% of European companies. In Europe, boards mandate this coverage.

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This underscores the differences between regional risk perceptions. Perhaps there is a greater recognition of the account receivable risks for companies operating in multiple countries, including developing nations with a high degree of political instability.

With the new U.S. administration, Brexit and other unpredictable market forces in play, it is certain that we will be seeing shifts in the global economy. Undoubtedly, there will be bumps along the supply chain as well, and companies will face challenges, including non-payment.

These bumps are not only for the largest global organizations, however. Middle-market companies will face a new competitive landscape, with a push to focus manufacturing in the U.S., and changes to the flow of their supply chain. This will impact costs and the need for extra working capital. Accounts receivable insurance should be viewed as a tool to bolster the balance sheet to provide the liquidity needed to advance business goals.

Accounts receivable coverage provides a competitive edge by giving suppliers the ability to extend credit to their customers as opposed to requiring payment in advance or on delivery. It can be helpful in lengthening payment terms with customers to match or exceed the competition and allows for these aggressive growth strategies without taking additional balance sheet risk. Accounts receivable insurance also can help a company obtain a higher advance rate with lenders that use accounts receivables as collateral. This will provide increased liquidity without having to increase the asset base and can help in negotiating lower borrowing rates.

Supply chain risks are currently taking center stage as one of our greatest concerns. Don’t forget to protect the ultimate objective in the sales process—collecting payment.

Sears Suppliers Wary as Shares Plummet

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Sears Holding Corps’ “going concern” filing has vendors and their insurers running for cover as the venerable American department store appears heading for bankruptcy or some other final disposition.

In a filing this week with the U.S. Securities and Exchange Commission, Sears Holding Corp.

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told investors and observers that, “substantial doubt exists related to the company’s ability to continue as a going concern.” The company is parent to Sears stores and sister retailer Kmart.

The filing sent Sears shares down as much as 16% to $7.60 in New York trading, the company’s biggest intraday drop since October 2014. Prior to the drop, shares had gained some 60% since Feb. 9, according to Bloomberg.

As a result, Sears’ suppliers are changing business terms with the troubled retailer, in some cases cutting back inventory or insisting on faster payment terms, in order to mitigate the downside associated with doing business with Sears.

One such supplier, a textile maker in Bangladesh, has sharply cut back on the amount of goods it manufactures for Sears. “We have to protect ourselves from the risk of nonpayment,” the textile maker’s managing director told Reuters. “So far there was only speculation that they would declare bankruptcy in 2017. But now they are acknowledging it, which definitely complicates our relationship with them and our decision to accept future orders from Sears.”

Bloomberg Intelligence analyst Noel Hebert noted, “They’ve got all kinds of issues.” Sears has enough cash to get through 2017, he said, but its declining payables-to-inventory ratio shows that vendors have been increasingly reluctant to keep the retailer stocked.

Although Sears posted a smaller loss than expected in the fourth quarter, the company has lost some $10 billion over the past few years, according to Bloomberg.

“Whatever vendors continue to support them are now going to put them on even more of a short string. That means they’ll ship them smaller quantities and demand payment either in advance or immediately upon delivery,” Mark Cohen, the former chief executive of Sears Canada and director of retail studies at Columbia Business School in New York City, said in the Reuters piece.

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“Sears stores are pathetically badly inventoried today and they will become worse.”

Insurers that supply coverage against the nonpayment of goods are also looking to limit their exposure to what appears to be a worsening situation by backing away from business with Sears as it sinks.

“We tried to hang in as long as we could,” said Doug Collins, regional director for risk services at Atradius Trade Credit Insurance, who added that his firm has stopped providing insurance to Sears’ vendors. “Vendors may try to get a few more cycles in before the worst happens, and then it just depends if they’re lucky or not,” he said.

The situation is complicated by the personal involvement of billionaire owner Edward Lampert, who has poured hundreds of millions into Sears from his other business interests, using some of Sears’ assets as guarantees against the loans. This has resulted in a complex, even byzantine ownership structure which may complicate or preclude assets sales which could generate cash, according to some observers.

Sears’ cash position has crashed to just $286 million at the end of 2016 from a high of $1.7 billion in 2009, according to the Street.

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com, which added that the company hasn’t generated cash flow from its operations since 2006. “With negative news like this, it’s never good for confidence on the company,” Moody’s vice president, Christina Boni said. Earlier this year, Moody’s downgraded Sears’ credit rating to Caa2 from Caa1 to reflect the accelerating negative sales performance of its business and risk of possible default.

Costs Climb as Companies Move to Mitigate Supply Chain Interruptions

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Some 70% of companies have experienced at least one supply chain interruption during the past year, with an unplanned IT or telecommunications outage the leading cause, according to the eighth edition of the Business Continuity Institute’s (BCI) Supply Chain Resiliency Report, produced in association with Zurich Insurance Group.

Covering 526 respondents in 64 countries, the report studies the causes, costs, and frequency of such events while also looking at companies’ progress in responding to supply chain interruptions and mitigating further occurrences.

While 70% of respondents reported at least one supply chain interruption during the past 12 months, only 17% said they have had no supply chain disruptions, with 13% saying they did not know. Perhaps more alarming is the increase to 13%—from 3% previously—of respondents reporting more than 20 such incidents.

Also alarming is the upward trajectory of costs associated with supply chain disruptions. The portion of respondents reporting cumulative losses of more than € 1 million (,058,171.

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30) resulting from supply chain interruptions jumped to 34% in this year’s survey from just 14% previously.

An unplanned IT or telecommunications outage was the leading cause of a supply chain disruption for the fifth consecutive year, followed by a loss of talent or skills, which jumped to second place from fifth, and then cyberattack or data breach, which dropped to third place from second. Despite this drop, the portion of respondents which said that cyberattacks and data breach had a ‘high impact’ on their supply chains increased from 14% to 17%.

Reaching the top 10 for the first time was terrorism, which moved to ninth from eleventh, while currency exchange rate volatility had the largest move up the list of event causes, jumping to seventh from 20th last year and cracking the top 10 for the first time since 2012. Insolvency in a company’s supply chain also reentered the top 10 for the first time since 2012, moving from 14th to 10th.

Lost productivity (68%), increased cost of working (53%), and customer complaints received (40%) were listed as the top three consequences of a supply chain interruption by respondents. The perception of such incidents can also hurt a company, with damage to brand reputation/image (38%), shareholder/stakeholder concern (30%), and share price fall (7%) all named by respondents as consequences of a supply chain disruption.

“It is crucial to note that the percentage of organizations reporting reputational damage as a result of supply chain disruption is at its highest level since the survey began. As this coincides with greater media scrutiny and social media discussions related to organizations, this result might be a good opportunity to reflect on reputation management and how supply chain disruptions might translate into adverse publicity for a given organization,” said the report.

As threats and costs grow, there appears to have been at least some progress in more closely addressing the issue.

While the percentage of respondents without firm-wide reporting of supply-chain incidents remains high at 66%, the portion of those using firm-wide reporting has grown steadily across the past five reports, rising from just 25% of respondents in 2012 to 34% in the 2016 report, the latest.

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Similarly, the portion of respondents which employ no reporting has declined steadily from 39% in 2012 to 28% in 2016.

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As reporting is on the rise, so too is the complexity of interruption incidents as external supply chains cause more incidents. The portion of respondents which said the majority of their interruptions came from external supply chains jumped to 24% from 9% previously, and the portion attributing at least a quarter of interruptions to external suppliers more than doubled to 34% from just 15% previously.

Even with reporting on the increase, however, insurance uptake appears to be declining. Just 4% of respondents said they were fully insured against supply chain losses, down from 10% previously, with small and medium-sized enterprises more likely to be uninsured, at just 39%, than large organizations at 62%.

“These variations in insurance uptake may indicate a need to revisit business continuity arrangements and risk transfer strategies pertaining to supply chain disruptions,” according to the report.