Cost of Risk analysis case study: Outsourcing Risks and Product Liability Issues China toys, tires'

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Cost of Risk analysiscase study Outsourcing
Risks and Product Liability Issues China
toys, tires.

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Overview

• Introduction of issues China case study
• Risk Cost or Opportunity?
• How to affect costs of risk manage opportunity?
• What impact of relationships, corporate
  governance?
• Where Who - What affect, jurisdictions?
• Taking a calculated risk?
• Foreign Direct Investment (FDI)
• Sourcing, Outsourcing
• Insurance markets?

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Outsourcing sounds good, right?

• Outsourcing non-core competency
• Information from The Outsourcing Risk Management
  Survey
• Motivation and advantage of outsourcing
• Reduce cost
• Focus on core competency, specialization
• Take advantage of other firms specialty
• Reallocate resources optimally

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Outsourcing

• What to outsource
• Manufacturing
• Customer service
• Research and Development
• IT related product and service
• Considerations when outsource
• QUALITY OF PRODUCT AND SERVICE

Impact of China on USA, EU consumers and
industries? Toys and Tiresand electronics!
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Background and Motivation US

• Some summary statistics

CPSC consumer products and public safety
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Background and Motivation
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The situation today

• Product safety problem in consumer goods
• How bad is it?
• CPSC Recalls of Imported Goods over time

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The situation today

• CPSC Recalls of Domestic and Imported Goods over
  time

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Other jurisdictions EU
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Toys, tires, and electronics!
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EU the group and the silos
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Risk Assessment Step One

• Expected costs and forecasting
• Cost consequence
• Cost of notification of regulatory authorities?
• Recall of products? (who owns it? Voluntary?)
• Corrective actions? Testing, sampling,
  surveillance
• Personal injury?
• Seizure, penalties, fines
• Civil action in contract or tort
• Violations of safety rules
• Import surveillance on supply chain
• Criminal action?
• Reputational risk

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Plusemerging risks

• Emerging risks impact business value - RM
  requires assessment of costs of global
  contracting, sourcing
• Regulatory, political, compliance risks
• Data security eCommerce risks
• Legal and third-party, vendor risk
• Privacy, intellectual property risk
• Transportation, terrorism, avian flu risks
• Cultural risks (enforceability of contracts?)

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In the Global Arena

• World-Trade Organization conferences
• CPSC, EU (RAPEX) rapid response monitoring
• Due diligence, corporate governance
• Sustainability social responsibility

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Identify Impact Step Two

• Two lines of insurance are major contributors
• Products liability coverage
• Workers Compensation
• Non-insurance
• What Legal and Regulatory sources of risk?

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Risk Cost or Opportunity?
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Where are the costs of a product?

• Manufacture
• Suppliers
• Shippers
• Distributors
• Retailers
• Buyers

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Opportunities?
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Maximizing value
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Business Liability and Coverage Territory

• According to a major insurer
• For Comprehensive Business Liability, pay those
  sums that the insured becomes legally obligated
  to pay as damages because of bodily injury,
  property damage, personal injury or advertising
  injury to which this insurance applies.
• It requires that the above mentioned injuries or
  damages occur in the COVERAGE TERRITORY.

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Business Liability and Coverage Territory

• Coverage Territory means
• a. the United States of America (including its
  territories and possessions), Puerto Rico and
  Canada
• b. international waters or airspace, provided
  the injury or damage does not occur in the course
  of travel or transportation to or from any place
  not included in a. above
• c. all parts of the world, if
• the injury or damage arises out of
• Goods and products made or sold by you in the
  territory described in a. or
• The activities of a person whose home is in the
  territory described in a. above but is away for a
  short time on your business
• The insureds responsibility to pay damages is
  determined in a suit on the merits in the
  territory described in a. above or in a
  settlement we agree to

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Background and Motivation

• Some stories behind the statistics
• Manufacturing-based development pattern of
  China
• China is engaged in over 850 billion worth
  imports and exports in 2003.
• Chinas per capita GDP doubled in the last decade
  and grew 500 percent since 1980.
• Well-planned strategic movements
• Four stages to attract FDI
• Assembly plants
• Lower-end components
• All inputs to the assembly plants
• Globalization of Chinese firms
• Moving into Intellectual Economy

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The situation today

• Outsourcing to China benefits both U.S. and
  China
• From U.S. perspective
• Reduce various costs, etc.
• From China perspective
• Direct and indirect benefits
• Stimulate economic growth
• It is OK we are the World Manufacturing
  Factory, we will develop from there Mr. Gang
  Fan

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The situation today

• How may it affect the interests of both parties?
• From US perspective
• Harm consumers and the society
• Will the potential cost exceeds the savings?
• From China perspective
• hinder foreign investment and thus economic
  development
• Harm Chinese manufacturing industry
• Bad firm and country image

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Efforts at the government level

• From US perspective
• Government agency
• Consumer Product Safety Commission (CPSC)
• Facilitate mutual understanding and cooperation
• International Consumer Product Safety Program
  Plan China (CPSC, Draft 5/25/05)
• Creation of CPSC interdisciplinary China team
• Handbook for Manufacturing Safer Consumer
  Products (Draft, translated into Chinese)

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Efforts at the government level

• 10 specific activities suggested in the Program
  Plan
• China U.S. comparative standards study
• The importance of using U.S. mandatory and
  voluntary standards
• AQSIQ staff CPSC staff cooperation
• Testing and Certification program
• Pilot compliance program
• Professional exchange program
• Open dialogue on Chinese imports
• Biennial Sino-American consumer product safety
  summit
• Horizontal efforts for implementation
• Interagency activities

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Efforts at the government level

• Regulations
• CPSC compliance overview (Presentation at the
  Summit, Aug. 31, 2005)
• Mandatory standards
• Consumer Product Safety Act
• Federal Hazardous Substances Act
• Flammable Fabrics Act
• Private sector or Voluntary Standards
• to avoid entry problems with the U.S. Government
  (Customs and CPSC), manufacturers SHOULD comply
  with BOTH mandatory and voluntary standards

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Efforts at the government level

• Certification and Testing -- To ensure compliance
  with appropriate standards
• take advantage of certification programs where
  available
• In the absence of certification, test
  representative samples by an accredited
  laboratory

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Efforts at the government level

• From China perspective
• Government agency
• the General Administration of Quality
  Supervision, Inspection and Quarantine (AQSIQ)
• Responding to the problem -- Strengthen
  certification and accreditation
• Establish Certification and Accreditation
  Administration of the Peoples Republic of China
• Improve certification and accreditation policies
  in China
• Establish and implement Chinese compulsory
  product certification system
• Set up a unified laboratory qualification
  assessment system
• Open testing and certification markets

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Efforts at the government level

• Some statistics
• 6,322 certificates of voluntary product
  certification
• 138042 ISO9001 certificates
• 106 certification bodies accredited by CNAB
• 2,039 laboratories accredited by CNAL
• As of August 10, 2005
• The issued CCC certificates 171394 (total)
• The issued CCC certificates 158,507 (domestic)
• The issued CCC certificates 13,238 (import)
• The certified factories 34,209 (total)
• The certified factories 31,851 (domestic)
• The certified factories 2,368 (import)

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Efforts at the government level

• Regulations
• Law of the P.R.C on Import and Export Commodity
  Inspection
• Law of the P.R.C on Product Quality
• Law of the P.R.C on Standardization
• Law of the P.R.C on Consumer Protection
• Regulations of the P.R.C on Certification and
  Accreditation
• The keyword unitary
• Regulatory Rules on Compulsory Product
  Certification
• Regulatory Measures on Certification Bodies
  Undertaking Compulsory Product Certification and
  Related Inspection Bodies and Laboratories

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Efforts at the government level

• Implementing technical regulations and standards
• Compliance
• Products governed by compulsory standards or
  other inspection standards shall be inspected
  accordingly.
• Other products shall be inspected based on
  foreign trade contracts.
• AQSIQ inspection and administration on exported
  consumer product
• Follow a set of inspection supervision patterns
• Lot-by-lot
• Type experiment spot-check inspection
  supervision on enterprise
• Subject-testing
• Spot-check

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Efforts at the government level

• Establish common understanding
• Mandatory vs. Voluntary Standards
• Misunderstanding on Chinese side
• The actual case
• As important as mandatory standards
• CPSC generally can not adopt a mandatory standard
  where there is a voluntary standard for the
  product
• Some product may be subject to both standards,
  while some others are just subject to voluntary
  standards.
• Products that do not comply with voluntary
  standards may be considered as a substantial
  product hazard for this reason alone.
• CPSC AQSIQ Memorandum of Understanding (Apr.
  21, 2004)
• CPSC trip to China 8/29 -9/2, Sino US Safety
  Summit Aug 30-31, 2005

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Efforts at the firm level

• Why firms care?
• Brand is the most important asset
• Customer always goes first
• Cost and benefits
• Strategic plan
• What are firms concern and what do firms do?
• Industry interviews (In a broader sense)
• Concerns
• A variety of risks.
• Product liability is one of the biggest concerns
• Risk management techniques
• Risk transfer (insurance), captive insurer
• Quality Control!!!

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Efforts at the firm level

• Quality control, quality assurance and product
  testing
• Ensure every product comply with applicable
  safety requirements
• Ensure purchased parts, raw materials and
  finished goods are in compliance
• Ensure laboratories used are certified

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The Future

• What remains to be improved
• From U.S. perspective Resolve the problem!!
• From Intertek ETL SEMKO (testing laboratory
  perspective)
• Align global conformity schemes
• Construct models for risk analysis
• Implement global systems to trace non-certified
  products
• Educate consumers and manufacturers
• From China perspective
• Fully understand the regulations and
  administrations in U.S.
• Solve the problem through negotiation and
  consultation
• Exchange experts and staff for better cooperation
• The implications for WTO

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Random thoughts.

• Academic research focus
• Economics
• Labor Economics
• Knowledge Spillover
• Business
• Firm Decision
• Contract Design
• Markets and Insurance thoughts
• Business Value and Continuity Issues?
• Catastrophe risk management global issues of
  risk financing (Risk securitization? Regulation?)

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Sources

• Advantage China , Konana, P., Doggett J. and
  Balasubramanian S., 2005, Frontline, 22 (06)
• Sun Microsystems 10K (managements discussion of
  risk factors, p. 19)
• China Insights (Benesch, Nov/Dec 2005)due
  diligence
• Summary of points Legal Liability of Suppliers
  (Truly Global)
• Better Safe than Sorry (Lovells)with charts
• International Consumer Product Safety Program
  Plan China, and Office of International
  Programs and Intergovernmental Affairs (CPSC
  2006 Performance and Accountability Report))
• CPSC Staff Conformity Assessment Message for
  China
• Trends the Shift to Selective Sourcing Continue
  (Forrester)
• First Sino-American Consumer Product Safety
  Summit Presentations
• Industry interviews
• Managing the risks of outsourcing a survey of
  current practices and their effectiveness,
  PROTIVIT and APICS
• Articles from Chinese journals
• Weekly News Round-up Corporate News,
  Reinsurance, Insurance Market, Markets and
  Producers (Hays, January 26, 2007)
• Risk Alert Understanding Chinas Business Risk
  Environment (Marsh Vol. V, Issue 3)

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Managing Riskthe risk transfer process

• Identifying and Analyzing Exposures
• Examining Alternative Risk Transfer Techniques
• Selecting the Best Risk Transfer Technique
• Implementing the Selected Technique(s)
• Monitoring the Selected Technique(s)

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Questions to Ask Prior to Selecting Risk Transfer
Strategy

• What is your risk appetite?
• How diverse is your Companys operations?
• How strong is your Companys Financial Statements
  (Cash Flow)?
• What are the State Insurance Laws?

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How Does Insurance Impact the Financials?

• Protects assets and capital
• - Spreads cost evenly over a longer time period
• - Minimizes risk of catastrophic losses that
  could
• impair capital
• It depends on the program and amount of risk the
  Company will assume.

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Types of Risk Transfer Techniques

• Commercial Insurance
• Large Deductible
• Self-Insurance
• Captive Insurance
• Loss Portfolio Transfers
• Finite Reinsurance

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Accounts Unique to Insurance

• Premiums Underwriting income
• Losses Underwriting expense
• Loss reserves
• Outstanding Loss Reserves (OSLR)
• Incurred But Not Reported (IBNR)
• Unearned premiums
• Reinsurance

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Training for Team

• Training Issues
• Hazard recognition and control
• Group processes and decision making
• Teamwork and interpersonal skills to establish
  trust
• Management skills to relate to workers making
  decisions

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Enterprise-Wide Continuity Planning and Crisis
Management Program
Recovery
Response
Prevention
Mitigation
Purpose
Identify, assess and take action to avoid risk
exposures utilizing risk recovery practices
Identify ways to lessen the effect of unavoidable
risk exposures to ensure recoverability
Ensure that systems, processes and resources are
ready and available to manage incidents/events
Continue business operations following outages,
events and crises minimize downtime
Key activities and deliverables

• Policies, standards and guidelines
• Risk and impact analyses
• Site risk assessments
• Education and training programs
• Business continuity methods, tools, and templates

• Crisis management and incident management
  planning
• Crisis management disaster response support
• Support of crisis management centers,
  emergency/operation centers/disaster field
  offices
• Government coordination and response

• End-to-end business recovery plan development and
  maintenance
• Disaster exercises
• Disaster readiness assessments
• Corrective action plans
• Disaster recovery support
• Coordination with local and national agencies

• Business impact analyses
• Service criticality assessments
• Disaster recovery strategy development
• Executive and strategic contingency planning

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The Global DO PolicyDO Policy Construction
Executives Personal Assets Exposed
Executives Asset Protection
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Shareholder class action filings
Source Stanford Law School Securities Class
Action Clearinghouse
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