Risk managers must use big data analytics to fully understand their supply chain right down to the raw materials level, Airmic members heard at a roundtable hosted by Verisk Analytics last month.
Most organisations, the group agreed, rarely delve much deeper than mapping out their tier one and tier two suppliers. However, this is no longer good enough, Kieran Borrett, business development executive at Verisk said.
By way of example, he noted the carbon dioxide shortage in July 2018. Many ammonia and fertiliser factories - which also produce carbon dioxide as a by-product - closed due to low demand. This in turn interrupted many food and drink production firms which rely on the gas for packing and production.
This example, Mr Borrett said, illustrates why it is imperative that risk managers understand the "full supply chain down to the raw material", including the connections between different suppliers in the chain and the distribution channels used by the suppliers.
Supply chain risk tops the list of business risks in many industry surveys, including the Allianz Risk Barometer. It is a critical risk which can impact revenue, reputation and share price and is therefore heavily connected with other principal risks in the organisation.
However, understanding and managing it can be a complex and onerous task given the global and complex nature of modern supply chains. Most organisations assess their supply chain via questionnaires sent to the procurement and supplier teams as well as the suppliers themselves. Each supplier is then designated a 'risk score' based on cost, delivery times, quality and recovery processes.
Attendees agreed that this process is not fit for the modern world as it depends on time-intensive questionnaires and good collaboration with many stakeholders.
Data analytics holds the key, according to Mr Borrett. It makes the supply chain more visible and allows risk managers to map potential or actual interruptions and assess the financial impact for the organisation. In short, it moves supply chain risk from the "subjective to the objective".
At Verisk, for example, they use public data sources (e.g. WTO and industry exposure databases) and their own data to map complete supply chains and the risks associated with each node of the chain. This enables them to quantify the impact that a particular disruption to one supplier (e.g. the number of days a supplier is down) would have on the rest of the chain and how it would propagate to the client organisation resulting in a revenue loss.
Supply chain will continue to be a key subject for Airmic events - watch out for these as part of the Airmic Academy and Special Interest Group programmes. To express your interest contact firstname.lastname@example.org