Supply Chain Risk – an Engineering and Forensic Accounting

Supply Chain Risk – an Engineering and Forensic Accounting perspective

January 27, 2016

© 2016 Willis Towers Watson. All rights reserved.

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


Interdependencies versus Supply Chain

Supply Chain Raw materials Catalysts Utilities Services

Integrated Energy Company


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


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


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

9

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


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


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

| 3

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


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?


“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


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


Documents

Supply Chain Risk – an Engineering and Forensic Accounting