CHAINREACTION
sustainable supply chains
SCOTT KIRKWOOD
NATIONAL MINING PRACTICE GROUP LEADER
WILLIS AUSTRALIA LTD
A break in a supply chain can have major ramifications for industry. Pre-emptive identification of
the myriad of possible disruptions in both domestic and international terms is driving companies to
redesign their business models with a view to increasing both resilience and sustainability. In this
article, the challenge is explored by Scott Kirkwood from Willis Australia, who highlights the need
to address this issue with an integrated approach to supply chain risk management.
Research shows supply chain disruptions cause, on
average, a 25% reduction to a company’s share price with
recovery to pre-loss trading taking more than two years.
Seventy per cent of major global companies believe that
supply chain risk will increase in the next five years.
According to the Insurance Information Institute,
natural catastrophes in 2011 caused $35-40 billion in
insured losses, and many businesses were not adequately
protected in terms of insurance and risk management. Of an
estimated $11 billion economic loss from the 2011 Thailand
floods, only 20% of businesses were insured.
An analysis of 15 listed multinational companies
indicated that earnings fell by up to 33% in the quarter
following the 2011 Japan earthquake and tsunami, as a
direct result of supply chain disruptions. Toyota’s lack of
understanding of critical suppliers in the aftermath of
this event contributed to Toyota missing profit forecasts
by $1 billion. Business Interruption (BI) exposure was far
greater than originally assessed, and was not just related to
property damage. Toyota was forced to cut production due
to supply chain disruptions resulting from power cuts and
logistical problems between factories.
The Varanus Island incident of 3 June 2008 significantly
disrupted natural gas supply to Western Australia. Thirty
per cent of the state’s supply was interrupted for up to eight
weeks and full output only restored by December 2008. The
actual economic impact to the state was difficult to assess
as the incident coincided with the global financial crisis,
however the Department of Treasury and Finance estimated
losses of $2 billion. In stark contrast, the insurance industry
loss was estimated at $280 million.
Organisations are therefore redesigning business
models for resilience and sustainability. Mining companies
are subject to many risks including foreign exchange and
commodity price volatility, natural disasters, cost increases,
workforce challenges and supply chain interruption.
Supply chain risk is being driven by increased
regulation, financial fragility, over-reliance on a small
number of suppliers and ‘just-in-time’ stock management.
Increased risk is often a direct consequence of simplifying
supply chains to improve efficiency and reduce cost.
A robust risk management strategy for mining
organisations must look beyond traditional insurance
and focus on BI loss that may occur without the ‘trigger’
of direct physical damage. Conventional BI insurance is
available, but policies are ‘sub limited’ (within total limits)
By conducting a supply chain risk review, companies can implement
strategies to mitigate and manage this complex exposure
A supply chain is a set of organisations directly linked
by either the upstream or downstream flow of products,
services, finances, and information from an originating
supplier to the final customer. ‘Supply chain resilience’
refers to how quickly businesses can recover from a
disruption to their supply chain – especially when it is due
to remote circumstances beyond their direct control.
The robustness of supply chain systems are being
challenged on a global scale, from earthquakes (Japan and
New Zealand) and floods (Thailand) to volcanic eruptions
(
Iceland and Chile) and piracy in the Indian Ocean and
the Gulf of Aden.
Building resilient and
MINESITE 2012
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