Title: Cost of Risk analysis case study: Outsourcing Risks and Product Liability Issues China toys, tires'
1Cost of Risk analysiscase study Outsourcing
Risks and Product Liability Issues China
toys, tires.
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3Overview
- 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?
4Outsourcing 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
5Outsourcing
- 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!
6Background and Motivation US
CPSC consumer products and public safety
7Background and Motivation
8The situation today
- Product safety problem in consumer goods
- How bad is it?
- CPSC Recalls of Imported Goods over time
9The situation today
- CPSC Recalls of Domestic and Imported Goods over
time
10Other jurisdictions EU
11Toys, tires, and electronics!
12EU the group and the silos
13Risk 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
14Plusemerging 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?)
15In the Global Arena
- World-Trade Organization conferences
- CPSC, EU (RAPEX) rapid response monitoring
- Due diligence, corporate governance
- Sustainability social responsibility
16Identify Impact Step Two
- Two lines of insurance are major contributors
- Products liability coverage
- Workers Compensation
- Non-insurance
- What Legal and Regulatory sources of risk?
17Risk Cost or Opportunity?
18Where are the costs of a product?
- Manufacture
- Suppliers
- Shippers
- Distributors
- Retailers
- Buyers
19Opportunities?
20Maximizing value
21Business 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.
22Business 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
23Background 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
24The 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
25The 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
26Efforts 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)
27Efforts 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
28Efforts 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
29Efforts 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
30Efforts 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
31Efforts 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)
32Efforts 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
33Efforts 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
34Efforts 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
35Efforts 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!!!
36Efforts 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
37The 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
38Random 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?)
39Sources
- 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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41Managing 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)
42Questions 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?
43How 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.
44Types of Risk Transfer Techniques
- Commercial Insurance
- Large Deductible
- Self-Insurance
- Captive Insurance
- Loss Portfolio Transfers
- Finite Reinsurance
45Accounts Unique to Insurance
- Premiums Underwriting income
- Losses Underwriting expense
- Loss reserves
- Outstanding Loss Reserves (OSLR)
- Incurred But Not Reported (IBNR)
- Unearned premiums
- Reinsurance
46Training 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
47Enterprise-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
48The Global DO PolicyDO Policy Construction
Executives Personal Assets Exposed
Executives Asset Protection
49Shareholder class action filings
Source Stanford Law School Securities Class
Action Clearinghouse
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