In the coming year, many electronics OEMs will face challenges that have the potential to bring their businesses to a standstill. Risk management and resiliency efforts of this year will be a big part of how well they can overcome unlucky happenings.
EBN sat down with Bret Ahnell, executive vice president for FM Global, a mutual insurance company, to find out about best practices of organizations that survive and thrive in a potential calamity, whether it's a weather event, supplier shutdown, or cyber attack. He has responsibility for the several of the FM Global divisions, including underwriting and reinsurance, engineering and research, claims and enterprise learning, information services and marketing.
He shared with us how leading organizations get beyond simply relying on insurance to address risk. Read on to listen in on the conversation.
EBN: How has the attitude of global electronics companies shifted around the topic of risk and resilience over the past few years?
Ahnell: Electronics companies are clearly more aware that supply chains, in becoming more global and far-flung, have taken on new and perilous risks, especially in developing markets. As we've often seen, hidden risks can result in unanticipated supply chain disruptions that can irrevocably harm a company's revenue stream, market share, brand, reputation and shareholder value.
It's important for electronics companies to remember that just because they're outsourcing a business process, such as the fabrication of a particular chip or component, that doesn't mean they've outsourced the risk. The risk stays with the primary outsourcer.
The best companies understand that risk management is more than just purchasing an insurance policy because insurance can never make a company fully whole in the event of a loss. It can't fix bad press coverage, change an investment analyst's downgrade or bring back lost customers.
To ensure they resist disruption and stay in business, our clients often ask us to assess their supply chain risk. We trace the money flow through every facility in their supply chain. Then we look at the risks each one of those facilities faces, including lower-tier suppliers and their risks. We continually drill down this way into supply chain links, revenue streams and other business factors. In the end, we're in a good position to help clients prioritize loss-prevention investments wisely. If a particular facility in a company's supply chain holds the key to the kingdom, executives need to know this and protect it.
In performing this analysis, we discover things like sole-source suppliers or two suppliers located so close together that they could both sidelined by a typhoon. Or we might see something seemingly as simple as facilities that have no backup power supply.
In this competitive, commoditized industry, knowledge about the financial risk of each location and process is a key advantage, especially when you commit to shoring up those risks and making yourself more resilient than your competitor.
EBN: What is the biggest misapprehension about risk that you see in today's business world?
Ahnell: It's probably the notion among individual executives that a major storm, earthquake, fire, or cyberattack won't happen on 'my watch.'
With pressing business priorities and limited resources, some executives subconsciously gamble that the inevitable won't happen until they're retired or employed elsewhere. Or they assume that if something does happen on their watch, there would have been nothing they could do about it. Others prefer not to learn about their exposures so they won't be obligated to devote time and money to addressing them. The problem with this thinking, of course, is that the inevitable happens, and never at a good time.
Another common misperception is that securing insurance coverage to address a particular risk is equivalent to eliminating the risk itself. Let me give you an analogy: If you had platinum-level car insurance that would pay claims for any car problem you could imagine, would it still make sense to wear your seatbelt and drive sober? Of course. In the same way, it's better for a business to prevent loss than absorb it and try to recover before suffering permanent harm. Many understand this, but others need clarity.
A third misapprehension is that insurance covers all of your loss. It's critical to realize that no matter how good your business insurance is, a fire, flood, earthquake or cyberattack can do damage to your business far beyond a level for which you could ever be insured. Although you may be insured for lost revenue during a shutdown, your brand, your market share and your shareholder value are also at stake. All of that could be destroyed if your better-prepared competitors manage to sail through the event. That's why it's so important for us to make our clients resilient.
EBN: What are the silent problems people might not be aware of?
Ahnell: Let's talk about cybersecurity. What's the first thing that comes to mind when I say cyberattack? For most of us, it's stolen customer data such as credit card numbers and passwords. Or in this political climate it could be the leak of sensitive email archives. The liability for a company whose data is stolen in these scenarios can be enormous. But there are whole other worlds of cybersecurity beyond liability to worry about. One is the value of your data in operating your company. If your customer data is wiped out, or you lose any important data, that's not only going to infuriate affected customers, but it's going to disrupt your operations.
As we saw last October, when a massive cyberattack adversely affected major websites, there are myriad ways a company relying on the Internet can have their business disrupted. Perhaps most frightening is the prospect of hackers taking over industrial controls in your supply chain, preventing you from producing or assembling products or destroying valuable equipment. These events should be insured against, but they are more about “first-party” loss than liability.
Cyber and business experts, C-level executives and insurers are all working to get their arms around the totality of this multifaceted risk. We at FM Global treat data as property and cyber-related business disruptions are covered.
EBN: How should organizations reevaluate their property risk profile over time? How often? Any advice on best practices?
Ahnell: Well, a company shouldn't need to go to a lot of trouble to reevaluate its risk profile. That's what predictive analytics are for. So for our clients, we take data collected from all our site visits and pump it into algorithms so clients can see which of their properties have the highest relative likelihood for loss and which investments in loss prevention can give them the biggest bang for their buck.
It's also good to keep an eye on macro data that gives you an idea of your risk in a global context. For instance, once a year we update our FM Global Resilience Index, which ranks the business resilience of 130 countries and territories to supply chain disruption.
EBN: What do you see on the horizon in terms of new developments in this area?
Ahnell: I'm glad you asked. A lot is happening in this area.
First, I'm excited about the ability to continually capture more data to generate insights that support supply chain risk management. My company will be enriching the FM Global Resilience Index data next year and in years to come by bringing in more data to paint an increasingly eye-opening risk picture that can inform decision making.
Second, electronics companies are grappling with the pervasive risk of cyberattack, which can threaten supply chains from both an operations and liability perspective. We'll be doing more to help companies prevent loss and stay resilient in the face of cyber risks related to such areas as denial of service attacks, the Internet of Things, industrial controls and cloud computing.
And third, there are new developments in flood risk management. Although flood is an ancient risk, the ability to plan for it is expanding rapidly with the availability of better information about risks in emerging markets. We have one of the most robust collections of global flood maps on the planet, and we'll soon be sharing this data with the public.
— Hailey Lynne McKeefry, Editor in Chief, EBN
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