Product quality is an emerging risk with global reported incidents increasing year-on year. This is predominately driven by new regulation, more complex supply chains and the cost of production economic pressures for operators. Non-conforming products can cause serious public safety concerns while triggering significant financial and reputational damage for the liable companies.
Product quality incidents have led to insured losses in excess of USD 2 billion over the past five years, making them the largest generator of liability losses, according to an Allianz Global Corporate and Specialty research study published in December 2017.
Management of product quality risks are now drawing more focus as manufactures, blenders and compounders improve their capabilities to deliver finished products closer to the end consumer sales specification. New quality control checks, a heightened focus on batch transfer contamination and a greater utilisation of product interface storage is predicted to become entrenched in normal operational deliverables.
Manufacturers are now increasingly seeking insurance to cover product liability exposures, loss of profit and brand rehabilitation costs, with major companies frequently imposing this requirement on their suppliers.
The standards for refined fuels are primarily performance based, in that they specify physical and chemical properties that the product should achieve. The specifications do not identify the chemical constituents in detail. The chemical mixtures of refined fuels are highly complex, and may vary so long as the performance specification is met.
A number of other performance parameters are also required in order for fuel to function as intended. Refined fuels are typically manufactured by similar processes in different refineries, and if the defined performance parameters are met, then the undefined parameters will normally remain reasonably constant.
There is a reasonable expectation that these undefined parameters will be constant; however, there is no obligation for a fuel manufacturer to ensure that these undefined parameters remain constant. Engine designers, manufacturers and operators who rely on a number of these undefined parameters may have little assurance that those undefined parameters would always exist.
The Energy industry is not immune to large product quality losses. Contaminated Aviation fuel (Avgas) manufactured by an oil major grounded 5,000 planes in Australia when an increased dosage of an anticorrosion chemical (ethylene diamine) was added to the plant, this combined with the aviation fuel product from the alkylation plant which then reacted with aircraft components to form a sludge.
One of the 24 Australian Transport Safety Bureau (ATSB) recommendations included that it is a normal process, in a quality assurance context, to conduct a practical validation to ensure that a designed change conforms to requirements.
Both the Oil Company’s and the corrosion control contractor’s personnel expected that the ethylene diamine would have been extracted from an effluent stream. This expectation was supported by an understanding that ethylene diamine would dissolve in water in preference to the products of reaction from the alkylation process.
However no evidence was found to indicate that practical validation testing to verify this expectation was considered when the anticorrosion chemical was introduced. As a result, this Oil Company today ensures that product quality risk exposures are controlled through stringent management of change processes.
Furthermore detailed technical studies are undertaken to understand and validate the final disposition of any chemical added to the process.
Emerging Energy Industry Product Risks:
- Economic pressures to reduce cost of production
- Integration and consolidation of supply chains
- Advances in industry precision testing
- Increasing regulation and litigation
- Identification of new pathogens
- Rise in consumer awareness / use of social media.
Managing Product Risks
Through analysis of historical losses we can begin to see root causes that are closely linked to features, techniques and elements which are well understood by risk engineering experts. Utilisation of management of change (MoC), adequacy of site security, design engineering standards and risk based preventative maintenance have all featured as gaps for recent publically documented product quality losses. These gaps have also featured with well-known major industry property damage events which risk engineers are accustomed to help prevent. This provides an opportunity for risk engineers to modify their current practices to bring new value and reduce third party liability product quality exposures.
A best-in-class operator is expected to have an in-house product quality management system (PQMS) providing clear instruction, corporate governance and company standards associated with at least these six key management elements represented below:
Product representation in itself is a key area for owning as well as quantifying inherent product quality risks. While this management system breaks down in to a number of specific controllable elements, there are also a large number of random factors that influence the variable site precision of an individual test method, as shown below:
For random factors, such as site testing precision, it is possible for risk engineers to model and statistically quantify these exposures which can lead to benchmarking and improvement of product quality risks. All manufacturers deliver products while attempting to balance between their customer requirements and maximising value for shareholders.
If product risks are poorly managed then you are exposed equally to either displeased customers or out of control high costs of production. This is illustrated in Figure 3 below.
By improving site precision techniques, manufacturers may produce products closer to the specification maximums, reducing giveaway and saving money. However it is vital that they understand and quantify their product risk of contract disputes.
Product Quality Management (PQM) Review
Marsh JLT Specialty engineers are capable of understanding the complex product quality risk exposures to support manufacturers and third party liability insurance underwriters. A key risk which can be controlled, benchmarked and improved, is Product Quality Management (PQM). A PQM assessment returns the following benefits;
- Helps clients to understand their third party liability risks more fully
- Improves the marketing of risk to underwriters
- Drives client improvements which minimises the likelihood and consequence of a product quality loss or recall
- Enhances client profitability through applied statistical risk optimisation
- Demonstrates good corporate governance and collaboration with third party risk advisor may drive increased confidence on marketed products.
The PQM assessment expands from 6 key management systems to 22 topics, encompassing 170 features.
This enables easy comparison of risk quality between manufacturers, gap analysis and opportunities to drive improvements. Using analytics such as benchmarking and recommendation analysis can then demonstrate to Insurers, and other key client stakeholders, the risk quality, but also, importantly, where the clients are “Best In Class”, or where opportunities might exist to improve versus peers.