The Retailer Summer 2018_FA_20.07

Managing the growing risks to the supply chain


‘‘Retailers are realising that cyber risk can have a significant business interruption impact on their day-to-day operations.’’

damage at all which can create problems as insurers usually see it as the trigger for insurance to pay out. The London Bridge attack in June 2017 was a challenge for insurers in that for many insured companies there was no discernible property damage from the attack, even though there was significant business interruption resulting from the area being cordoned and evacuated. A lot of work has now been done to broaden insurance coverage into non-property damage business interruption; using bodily injury or physical harm as the trigger to access business interruption and then tying it to other areas such as loss of attraction – where turnover may be impacted. Broader peril of political violence Further down the supply chain, terrorism attacks can also impact supply and some countries that are part of the global supply chain experience much higher frequencies of terrorist attacks. There is also the broader peril of political violence which could be acts of insurrection, coups, mutinies, rebellions, or civil war. It’s not just political violence either; political risk can be as problematic. The impact of Brexit on the supply chain is huge. Take the availability of delivery drivers which is already showing signs of reducing, while in the grocery sector, where the focus is on local sourcing, uncertainty over EU migrant workers could Moving away from security and political risks as supply chain threats, what happens when a critical supplier fails? There is a basic insurance answer where businesses have a critical supplier extension in their property damage/business interruption insurance policy meaning, if something goes wrong and the supplier burns down or floods, it can protect a retailer’s margin. In practice, supplier insolvencies are more common and most businesses should have a risk management process in places that looks for red flags such as a supplier missing shipping dates or where quality control issues arise. The digital danger Beyond the physical risks to the supply chain, what risks does the increasing reliance on technology hold to retailers? The importance of the data centre in the supply chain cannot be overestimated. If a retailer loses its data centre there is an immediate business interruption impact to the point of sale functionality and financial accounting. And while the threat to a data centre could be physical – fire or flood – it could, of course, be the subject of a hacking attack. Retailers are realising that threaten local production. An insolvent supplier

beyond data breaches, the cyber risk can have a significant business interruption impact on their day-to-day operations. Protecting the brand Given the many variables a retailer has to deal with, effectively dealing with supply chain risks so that the brand remains intact – reputation was listed as the number one risk for businesses by Aon’s 2017 Global Risk Management Survey – is a major challenge. Not only have they got pressure on their supply chain to meet consumer expectations and experience they also have to be very mindful of their corporate social responsibilities. Should they have a product coming out of a factory which is unethically sourced, used slave labour or anything that is deemed to be irresponsible, then that will have a big brand impact. Retailers cannot allow anything to slip.

FROM TERRORISM ATTACKS, TO SHIPPING DELAYS AND CYBER THREATS, THE RISKS TO RETAILERS’ SUPPLY CHAINS CONTINUE TO GROW. In an age of growing consumer expectations, unprecedented technological change, geopolitical uncertainty and the shifting nature of terrorism, the retail supply chain has become fraught with potential risk. There are three key elements affecting the retail supply chain: meeting the demands and expectations of the consumer; ensuring the business’s supply model is as efficient as possible; and respecting corporate social responsibilities in an age when brand reputation can be easily damaged or even lost. Within these three elements, there are a wide range of different supply chain risks that can cause a hit on profits, revenue and reputation. Shipping delays Given many retailers source the majority of their goods from overseas on a ‘just in time’ basis, the recent collapse of the Hanjin Shipping company was a stark reminder as to what can happen when supply is interrupted through financial failure. Ports very quickly realised they were dealing with vessel owners who could no longer pay their bills, so they prevented ships from coming in to unload their cargo, tranship or even take on bunkers. Having ships at anchor for several days outside port starts to hit the commercial interests of any retail business with cargo on board. Often of course the goods might be perishable goods so any delay is critical and unfortunately delay in itself is not an insurable risk. While marine insurance policies cover physical loss or damage of cargo, in many cases the goods were not affected but the delay was still financially damaging. For retailers it could mean that – through no fault of their own – they run out of stock or miss critical seasonal demand, but have no way of recouping their costs. Changing terror threat Another potential threat to a retailer’s ability to get their product to the customer comes from terrorism. In the West we’re seeing more use of low tech weapons such as bladed weapons, firearms or cars where anyone can undertake an attack, with a focus on attempts to create mass casualties. Often there is no property The impact of Brexit on the supply chain is huge.

DAN FOX // //

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retailer | Summer 2018 | 11 UMMER

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