Driving Forward: Navigating Supply Chain Risk in the Automotive Industry
In May 2018, a fire broke out at a magnesium die-cast company’s plant in Michigan, causing enough damage to suspend the production of critical parts used in auto manufacturing across the globe. The resulting parts shortage caused production line shutdowns at major auto manufacturers, with consequent business interruption losses running int to the tens of millions of dollars per day.
Being able to identify and proactively address supplier risks is critical to the sustainability of both the automotive industry and the insurance industry. Disruption at a small but deeply-networked supplier shines a light on supply chain interdependencies. A single breakdown can quickly ripple across the globe with devastating financial consequences. Perhaps surprisingly, many companies have limited visibility into their supply chains, making it difficult to mitigate connected risk.
With the advent of new technologies, such as those powering autonomous and electric vehicles, the complexity of manufacturing cars has increased exponentially. Today, a single vehicle is comprised of tens of thousands of components, many of which are provided by hundreds or even thousands of suppliers. In turn, those tier-1 (i.e. primary) suppliers frequently have secondary and tertiary supply chain networks of their own. The increased complexity of manufacturing coupled with the speed of technological evolution requires close collaboration: suppliers are now strategic partners with significant input on the automotive design and development process.
The deeper the supply chain network, the harder it is for risk and procurement managers to identify and understand potential risks embedded in the network. While most companies know who their tier-1 suppliers are, there is often little transparency about the identity of tier-2 and tier-3 suppliers. Research from the industry trade group MForesight found only 9% of companies across all industries had complete visibility across their supplier tiers; 32% had good tier-1 and some tier-1 visibility; and 49% had limited tier-1 visibility, with no line of sight into tier-2 and beyond.
For insurance companies and underwriters, insight into these supply chains is also critical. Many commercial property policies include coverage for contingent business interruption (CBI) insurance. CBI protects the insured from physical disruption at a supplier’s property. In the example of our die-cast supplier plant fire, auto manufacturers dependent on that supplier would likely be covered for loss of business income while their production was suspended. With many auto manufacturers relying on that single supplier, the aggregated CBI losses can accumulate quickly for the insurer.
Axa XL has teamed up with Swiss Re to use our combined risk knowledge and modelling expertise to develop supply chain resilience scores that reflect the vulnerability of a company’s entire supply chain network to disruption.
Using external market data, we can identify exposures in the supply chain network beyond tier-1 suppliers. A risk manager can test the impact of changing a supplier on the overall resilience of the network and identify problematic supplier relationships that may require deeper analysis and/or a visit from one of our loss prevention experts. Optimising this score in parallel with optimising supplier costs will enable deeper collaboration between procurement and risk management functions, leading to supply chains that are both more cost-effective and resilient to disruption. But every supply chain is unique, and we’ll be working with client partners to shape specific solutions to meet their needs.
Being able to identify and proactively address supplier risks is critical to the sustainability of the automotive industry. As a risk manager, understanding supply chain risk requires having an overview of who your suppliers are, where they are located, where your suppliers’ suppliers are located, and the risks associated with each of these as well as their interdependencies. As an underwriter, understanding the impact of dependencies between supply chains across your portfolio is paramount. By partnering with AXA XL and Swiss Re, we can help you uncover and explore hidden relationships and build stronger, more resilient networks.