Supply Chain Risk – an Engineering and Forensic Accounting perspective
January 27, 2016
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Risk & AnalyticsJanuary 20-22, 2016
Supply Chain Risk – An Engineering and Forensic Accounting View
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Interdependency versus Supply Chain Risks Damage versus Non-damage Risks Contingent Loss History Supply Chain Risk Assessment Process
Natural Perils Impact First & Third Party Physical DamageContract/Compliance Risk Assessment & Mapping (CRAM)
Measurement of Contingent Business Interruption (CBI) Losses
Many issues to consider…
Integrated Energy Company
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Interdependencies versus Supply Chain
Supply Chain Raw materials Catalysts Utilities Services
Integrated Energy Company
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Example Suppliers/Customer Complexities• CGTD Corp.Operator• CPCSupplier• LCY Chem.Co.Customer
KaoshiungPipe Explosion (2014)
• BPOwner
• TransoceanDrilling Rig
• HalliburtonWell Contractor
BP MacondoWell Blowout (2010)
Supply Chain Risk Radar
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Complex interplay of ‘Damage’ and ‘Non-Damage’ Risks
External Distribution
Supplier Internal
Workerinjury
Multi-party pipelines
Volatilityin the price ofraw materials
Fire/Explosions
Economicenvironment
Labour Shortages
Legal Compliance
Planning Failure
Poor Quality
Insufficient capacity
Warehouse InadequacyEnvironmental
regulation
Equipment Loss
Availability ofwork force IT Failure/Cyber
attack
Process Resilience
Capacity Restrictions
Physical Loss
Management Risk Financial
Loss
Sabotage & Terrorism
Government Compliance
Natural Catastrophe
Infrastructure Unavailability
Cargo Theft
Labour unrest
Supplier Relationship
DemandVariability
Inflexible Capacity
Dependency on Single Source
Challenge
Greater
Lower
Key:
bbc.com
wikipedia.com
Business Interruption vs Contingent BI Loss History
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Willis Energy Loss Database (WELD) Review
020,000,00040,000,00060,000,00080,000,000
100,000,000120,000,000140,000,000160,000,000180,000,000
Average Indexed Loss (US$) per Incident
BI (Average Indexed US$)CBI (Average Indexed US$)
020406080
100120140160180
Number Incidents of BI vs CBI Incidents (>US$ 1 million)
Nos. BI IncidentsNos. CBI Incidents
Supply Chain Risk Assessment Process & Resources The Analytical Broker Risk Assessment process
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Nat Cat Modellers
Risk Engineers
Actuaries
Business Continuity PlannersCyber Risk Specialists
Insurance Specialists
Forensic Accountants
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Risk Resources NeededRisk Assessment Process
Natural Perils Impact to Supply Chain Assessment
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Ref: WEF 2016 Global Risk Report, Global Risk Perception Survey.
Natural Perils Impact Assessment to Supply Chain
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Case Study: Major Port in the US (EQ PML Survey)
Case Study: Major Port in Brazil (Flood PML Survey)
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Detailed Natural Catastrophe Assessment & Engineering
Key Benefits• Provides an overview evaluation of Natural Catastrophe risk to global supply
chains• Risk adjusted benchmarking to allow each supply chain to be compared and
contrasted• Provides single supply chain site scores which can indicate where to focus site
assessments and future engineering investment
Assessing First & Third Party Damage to Supply Chain
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Extensive Damage estimated >US$ 2 billion Insured Loss• Approx. 20,000 Cars damaged• Up to US$ 60 million Container losses • Property including residential, industrial and warehousing• Supply chain disruption:
• Vishay Intertechnology Inc. and Chemtura Corp made a Securities and Exchange Commission (SEC) filing.
• Re-routing of automotive imports.• Toyota and John Deere suspended operations • GSK plant damaged• Many access roads into the port and container terminals have
been closed.• Train lines also damaged in the blast.
• Death and personal injuries (To September 2015):• 173 deaths, of which 104 were firefighters• 8 missing, declared dead• 797 non fatal injuries
Tianjin Port - Example of Unquantified Exposure to/from Supply Chain
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According to news reports at least 3,000 tonnes of hazardous chemicals were being stored in the warehouse, including: Sodium cyanide (est. 700 tonnes) Ammonium nitrate (est. 800 tonnes) Calcium carbide Potassium nitrate Toluene diisocyanate Sodium nitrate
Blast Modelling allows Risk Engineers to predict the potential blast damage from an assessed chemical risk: Post event modelling predicts 467 tonnes of
equivalent TNT 80% Damage Zone = 700 m diameter
Assessing First & Third Party Damage to Supply ChainModelling Exposure to/from Supply Chain
Assessing Risk of First & Third Party Damage to Supply Chain
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Risk Management Assessment & Benchmarking by Risk Engineers Hazardous Chemicals Management Safety Management System Emergency Response
Crisis Management Business Continuity Planning
Contract Risk Assessment & Mapping (CRAM)
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Buyer Beware – Apache Energy Supply Chain ExampleMillennium Inorganic Chemicals Manufactured titanium dioxide Natural Gas fuel sourced from Alinta Sales Pty Ltd – a retail gas supplier Alinta sourced gas from numerous natural gas producers including Apache
Energy Purchased Contingent Business Interruption Insurance for “Direct Suppliers/Customers” from National Union Fire Insurance Co.
2008 Varanus Island Explosion Corrosion led to gas plant explosion operated by Apache Energy Reduced gas supply by 30% to Western Australia Caused A$ 3 billion impact to economy 2 month shut down of Millennium Chemicals
Millennium vs National Union Fire Insurance Company (Feb. 20 2014) US Court of Appeals found in favor of insurers to deny claim Apache considered Indirect Supplier Only Alinta considered Direct Supplier
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To clearly assess contractually assigned risks and Regulatory Compliance along the entire supply chain:
Asses role and responsibilities of the contracted parties Risk and insurance obligations placed upon contract parties Identification and assessment of the timing of title and risk transfer throughout the supply chain Identify party responsible for regulatory compliance Ensure all insurances aligned to the risk transfer and mitigation. Identify all uninsured or retained risks
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Contract & Compliance Risk Assessment & Mapping (CRAM)
Raw Material Supplier(s) Trading House/Retailer Transporter Transportation Infrastructure OwnerReceiving Infrastructure Owner
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Contract & Compliance Risk Assessment & Mapping (CRAM)
Key Benefits Clear visual risk delineation between contractual relationships All related insurances assessed across entire Supply Chain Identifies retained risks, gaps and under-insurance
Supply Chain Risks - Measurement of Losses
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Consider two types of CBI loss
Losses due to disruption from single supplier/customer One cause Potential mitigation
Losses arising from Nat Cat event Multiple causes Damage to owned property potentially as well
A forensic accountant’s point of view
What Are We Actually Covering?
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“Losses as a direct result of damage to Insured property”Same as standard business interruption Loss of sales/output Multiply by a rate of gross profit, less any saved fixed costs payable out of gross profit And/or increased costs of working
Can only consider losses a result of damage to Insured property. The “but for” scenario is used
Expected position therefore needs to be modeled in the event of a loss Expected output of the business using traditional methods, production rates, budgets, forecasts, or; Relationship of supply of material to output. However, need to consider if the loss has been mitigated through increased output of another product
given the available capacity. Alternatively….use your LP / optimiser
Nat Cat Scenarios
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Damage to multiple insured properties: Direct suppliers Own property Ingress/egress Direct customers
As well as ‘uninsured’ ‘properties’ Indirect suppliers Indirect customers Utilities Roads Employees homes
Depending on coverage
But for the damage to insured property, losses may have also occurred due to uninsured perils
http://www.wemotor.com/
Supply Chain - Summary
Calculations of CBI losses are complex and time consuming but the BI principles are the same
Supply risk assessment is complex and requires a multi-disciplinary team of risk specialists
Supply chain risks can be controlled and mitigated in many ways
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