Risk Expert Gary Lynch Discusses Hurricane Irma and Supply Chain Insurance (Part 2)

Editor’s note: This is Part 2 in a two-part Q&A. Missed Part 1? Read it here.

The unusually strong and ongoing Atlantic hurricane season prompted us to take a good look at supply chain risk. To that end, we talked to Gary Lynch, founder of The Risk Project (and considered by our own chief research officer Pierre Mitchell as “the best supply risk guru in the world”).

In this Part 2 of the Q&A, Lynch talks about different insurances that businesses can consider, which industries are likely to be most affected by Hurricane Irma and why risk can be an asset.

Spend Matters: In the first half of this interview, you talked about the importance of investing in supply chain resilience. Investing in risk management comes with a cost, of course. How do you get management buy-in?

Gary Lynch: The best way I believe to get management buy-in is to think about it through the management lens and then to apply a similar type of thinking with regards to risk investment.

When you look at risk programs, like a supply chain risk or resiliency program, that's a very broad brush. And it's very difficult to make it relevant to the decision makers, and all you're basically introducing is a program, an overhead cost and the potential impact performance. Although there might be a lot of noise to create that kind of program, it's often not sustainable because it's very difficult to continue to justify its broad brush.

Where I've seen the greatest success is when you go in and you really take a look at it through a value-driven lens. Instead of looking at all of Pepsi's supply chains, you might look at Fritos or Aquafina. The point is that you really have to get something that's very relevant and that can be measured, so you gotta actually measure performance against the risk investment. Look at it vertically in the context of value to the business, as opposed to a horizontal program approach.

That way, when you start to get to the point where you're suggesting different types of solutions, you can actually model out the solutions and see what potential impact you're going to have from an investment standpoint and what impact they potentially will have on performance, and it gives you a way of balancing its overall effect on profitability.

SM: Only about 20% of homes in the Houston area are covered by flood insurance. How many businesses have supply chain insurance?

GL: The majority of organizations that do any sort of manufacturing production have to have that insurance because their business partners require it. So that's basic property insurance. Then there's contingent business interruption insurance, which is really focused on your third parties. So if your third party goes down from these specific events, then there is some coverage for you. There's a smaller percentage of organizations that have contingent business interruption insurance because it is expensive.

Then you have something called non-physical supply chain insurance. [We talked about] fires and floods, but what about everything from a port shutting down to a pandemic? Unfortunately, there wasn't a large pick-up, so my guess is you're probably talking less than 5% that have the non-physical damage insurance.

In addition to that, you have things like marine business interruption insurance. You have trade disruption insurance, trade credit insurance, political risk insurance, product liability insurance … When you look at supply chain insurance, it's [about] what assets you’re looking to protect. It's a very fragmented market, and I'd say the only place where you really have capacity and coverage is on physical property.

SM: Let’s talk specifically about Irma. Which industries can expect to see disruption?

GL: One [industry] that comes to mind is produce — oranges, strawberries, things like that. As far as I’m aware, that's the primary industry that's going to be affected. What's interesting is other countries such as Brazil step up pretty quickly to those vacancies in the market. One of the biggest challenges to the producers is losing capacity and the ability to supply Tropicana and others.

So you got two effects: the immediate effect and then capacity issues, which means prices will go up. Then if the prices go up enough, that opens up the opportunity for someone else to step in from another country.

Other than that, Charleston and Savannah are ports for moving drugs through and sending them to the places where they're labeled and packaged. I just think there'll be some delays, and I don't think it will affect capacity because the capacity in the drug industry is fairly significant. They do plan for these kinds of events and they have a lot of inventory on hand. Whereas with crops, [if] you miss the season, you [will have to wait until the next one].

SM: Is there anything we haven’t covered that our readers should know?

GL: I think this is pretty much it. I just wanted to emphasize though, I think the change in the industry that is going on in automotive, high-tech, healthcare, and even consumer products — they all have a common denominator. It's [the necessity of] data.

I need the data to understand what potential risk there might be. [If] I'm going to make that investment, I'm going to make it not only from a defensive standpoint, but I have to be able to use it also to go on offense. That's where I think uncertainty becomes a real weapon at the organization, an asset. The CEOs I continue to work with see that as a tremendous opportunity. I think this uncertainty opportunity is huge.

This interview has been edited and condensed.

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