How Business Impact Analysis is mitigating risks in complex supply chains

In the wake of recent global events and changing market conditions, supply chains – both national and global – are under increasing pressure and facing greater vulnerability. This is due to a variety of factors, either at the resource end, the transportation of goods, or because of increased demand. 

These pressures are apparent in the 2021 FM Global Resilience Index. The data-driven tool compiles data on numerous relevant metrics before ranking 130 countries and territories by the resilience of their business environments. The Index highlights three vital lessons for businesses as they look for a more stable and resilient future. In this article, the focus will be on one of the key lessons: the importance of mitigating supply chain risk.

A shrinking world, but increasing complexity 

Many businesses and governments never anticipated that global supply chains were as vulnerable as the past two years have illustrated. These vulnerabilities have brought home that although the world is getting smaller, many complexities remain. In addition, these factors are not likely to disappear, with increased backlogs, shortages and rising costs of transportation likely features over the next 12-24 months as articulated by various central banks including the Bank of England and the US Federal Reserve. 

So, how can organisations really understand the complexities of their global supply chains, identify the vulnerabilities and identify the mitigation strategies required? 

One of the first key steps to this is the ability to understand the business and financial exposure of a particular facility. One tool to help meet this demand and developed by FM Global, is Business Impact Analysis (BIA). Available to clients and interested organisations it was developed by the Business Risk Consulting team. 

Understanding ROI through exposure 

The BIA tool helps organisations view their risk exposure across the most complex aspects of their supply chain, the financial value of the exposure and therefore recognize the true threats being faced. This financial insight is then critical for risk managers and the CFO in getting a view of the return on investment of any policy or mitigation strategy. 

By understanding the financial value of the different parts of their supply chain, the business can see which facilities are the most essential, identifying often under recognised vulnerabilities. The client and FM Global can then target these facilities for risk mitigation efforts, ensuring that they become more resilient while understanding the accurate insurable value to assign. 

Traditionally, risk analysis has focused disproportionately on the location where a company is selling or the facilities that manage the most expensive parts in the manufacturing process. However, this can risk a misallocation of efforts to improve resilience. The BIA tool in contrast is specifically designed to use quantitative research methods to understand where the true value is generated across the manufacturing process. 

BIA providing accurate values for clients and underwriters

FM Global worked with an engineering client with operations across 150 countries and a complex supply chain. To increase their supply security, the client wanted to purchase a mine and processing plant facility –a major addition to the business. However, although a long-standing client, adding this facility to their programme was highly complex due to the difficulty in putting a financial figure to the total exposure. 

Through the BIA process, a team of engineers and business risk experts at FM Global investigated the business and wider supply chain to more accurately understand the additional exposure presented by the new facility. The process was also able to determine the difference in exposure between the mine and the accompanying processing plant, enabling more accurate financial exposure value to be reached. One of the main concerns was the shortage of alternative makeup and difficulties in locating alternative suppliers to cover any disruption. The processing plant therefore had a far greater value to the overall supply chain than was originally expected. 

Being able to quantify the ROI helps drive the case for investment

Quantifying the financial exposure is a difficult process and requires a blend of business, financial and engineering experience – working together in very close harmony. The whole process – which comes at zero cost – provides organisations valuable insight and analysis, helping save time and money. What BIA does is bring together teams that might not traditionally collaborate – risk management, supply chains, operations, finance – to provide a more holistic approach to supply chain risk mitigation. This shows a different view of an organisations’ global supply chain, the challenges being faced and what can be done to build resilience.

Having an accurate figure on the exposure is essential to correctly determining the appropriate level of cover. It ensures any organisation can be confident in the level of protection being purchased and FM Global can be confident of the values the company is insuring. Once they can see the financial exposure, an organisation can then accurately determine the business case for the capital expenditure of any risk mitigation strategies to be put in place. Equally importantly, they can also see the return on investment of this spend. When working closely with the client above for example, this aspect was essential in helping the Risk Manager secure the capital expenditure required. 

A win, win for the client and insurer

Supply chains are becoming increasingly complex and fragmented. Whilst the ‘on-shoring’ debate, which has become more pronounced since the pandemic, may be one solution, it is not always a practical option for some organisations. This being the case, organisations need to accurately understand their level of exposure – at all levels of their supply chain. This can help ensure business continuity for the client and the correct level of underwriting for the insurer. 

We know in a challenging global economy with cost pressures increasing, the ability to make the case for expenditure is becoming increasingly scrutinised with spending needing to provide a suitable return. Any tool that helps meet this challenge for risk managers is only going to become more and more valuable in the difficult months to come.

To listen to the FM global podcast, including the episode “How resilient is your supply chain?”, click here.