DISRUPTIONS CAN COME FROM ANYWHERE – FROM NATURAL DISASTERS TO SUPPLIER INSOLVENCY.
YOUR COMPANY MUST BE PREPARED.
Risk awareness and the sophistication of risk management
practices in the construction industry continue to reach new
heights. Today’s CFMs are skilled in such core strategic risk
management disciplines as:
• Balance sheet and profit protection through surety, risk
retention, or assumption;
• Risk finance and transfer through insurance; and
• Indemnification and contractual risk transfer.
However, as new risks emerge, CFMs must continually adapt
to the changing risk landscape – they must apply different
tools and learn new risk management techniques to help
keep risk at a reasonable level and within the parameters of
their company’s individual risk appetite.
Supply chain management has become increasingly critical
to contractors, both as a profit driver and a way to minimize
potential loss. To gain a new perspective on this evolving
exposure, ask yourself the following questions:
• Is your company’s supply chain resilient, or is it vulnerable
• Has your company assessed the potential financial and
reputation risk of a project’s disruption due to subcontractor default or supplier insolvency?
• Has your company considered whether it is at risk from
routine business disruptions, including natural catastrophes
or man-made disasters?
• Has your company calculated the insured and uninsured
costs of disruptions that threaten its stability – if not its
Supply Chain Risk: Universal, Yet Unique
Supply chain risk is universal, yet it is fundamentally unique to
each company. Risk of supply chain disruption is embedded in
a company’s business model and is impacted by strategic pri-
orities, operating platforms, and tactical decisions.
Supply chain risk arises from the procurement of raw or finished goods, the assembly of finished materials or products,
the movement or storage of raw goods or finished products,
and the selling and/or receiving of such goods or products.
Supply chain risk emanates from the direct and indirect relationships among producers, suppliers, distributors, intermediaries, and end-users or consumers in B2B transactions.
Supply chain disruptions come in various forms and from multiple sources. Even the best-managed internal procurement
processes can be subject to unanticipated external challenges.
(The exhibit on page 12 lists both common causes and potential sources of supply chain risk.)
Supply Chain Risk & Interdependency
Interdependency results from closely aligned relationships in
which the activities, processes, or results of one business
affect those of another business. Organizations that are interdependent are subject to a unique potential risk: the ripple
effect known as contingent risk, which can unfold in “if this,
then that” scenarios. The greater the degree of interdependency, the higher the resulting risk of an adverse consequence
befalling both parties when an adverse consequence strikes
one of them.
Extreme Events Are on the Rise
Extreme events are characterized by very low probabilities
and very high severities. According to Daniel Hofmann, Chief
Economist for Zurich: “When the financial crisis hit, it was
seen as a 10-sigma event – an event expected to occur only
once in 10,000 years. But, between 1987 and 2008, there were
eight severe financial crises with global ramifications.”