Written by: Roland Guillen
While lean manufacturing has become a cornerstone of successful supply chain management and a way for manufacturers to stay responsive to changes in their markets, the dependence on and relationship with suppliers, resulting from outsourcing and minimizing stock, creates a host of exposures for manufacturers.
Successfully navigating and managing the risks presented by a convoluted supply chain that spans across regional, national and international markets could be a complicated endeavor, considering the countless factors that can cause disruptions or liability issues across the entire supply chain.
The survey of over 500 companies from 68 countries across 14 different industry sectors conducted by the U.K. Business Continuity Institute found:
- 65% of respondents experienced at least one supply chain disruption
- 44% of these disruptions occurred with tier 1 suppliers
- Loss of productivity was the most common consequence of supply chain disruption
Risk Factors Abound
A key supplier or buyer can be debilitated for a number of reasons such as natural (floods, pandemics, earthquakes, and severe storms), human (terrorism, civil disorder, electronic security breaches) or technical (power failure, hardware or software viruses). These events can have dramatic effects on supply chain partners both upstream and downstream. A single disruptive event in any part of the world could initiate a customer service nightmare in the United States.
And disruptions are more common than one might imagine. The survey by the U.K. Business Continuity Institute revealed that 73 percent of respondents had experienced a supply chain disruption in the last 12 months, not only affecting top and bottom lines but also damaging their brands and relinquishing market share.
Potential effects of supply chain disruptions include a variety of potential negative consequences:
- Reduced market share
- Loss of customers
- Damage to image, reputation or brand
- Higher cost of capital
- Potential breach of contract
- Failure to meet legal or regulatory requirements
- Decrease in sales and increase in costs, from which many companies never recover
Considering Your Liability
Worse, companies can be held liable for their supply chain partners’ mistakes. A defective or inherently dangerous product or part can cause liability issues for its designer, off-shore manufacturer, shipper, wholesale distributor, retail seller and installer, who are collaboratively and jointly responsible. In fact, even though a seller has exercised all possible care in the preparation and sale of the product, it can still be held responsible. Wholesalers or finished product manufacturers can be sued by an injured third party individually or together with any or all other parties involved in bringing the product to market and selling it to the consumer.
What, then, can a risk manager do to effectively mitigate risk in such an environment? Fortunately, there is a growing body of best practices for risk management across the supply chain. One of the most important things is to stay abreast of every development in your business environment. Consider the following steps you can take to mitigate your business’s risk:
- Choose suppliers carefully, and conduct regular audits and visits to ensure their commitment to business interruption prevention matches yours. Consider the following:
- Which suppliers do you depend on for raw materials and component parts?
- What would happen if you lost one of them for any reason?
- How long would you be able to operate?
- Verify suppliers’ insurance coverage. Remember, a certificate of insurance is evidence of insurance only when the certificate is written, and not at any time after that moment.
- Clearly define contract scopes and draft contracts carefully with the assistance of specialized legal counsel. Consider indemnification, hold harmless and defense agreements.
- Work with your insurance broker to understand the extent of your exposure, and create a business interruption worksheet to quantify, as accurately as possible, the effect these exposures could have on revenue and profit.
One aspect of business interruption, and often not considered, is Contingent Business Interruption and Extra Expense Insurance.
For a business, the risks associated with catastrophic events go far beyond the damage caused to its facility. For instance, many manufacturers rely on parts and raw materials from external suppliers. If a supplier’s factory is temporarily shut down or if a key shipping channel is closed as a result of damage caused by a catastrophic event, this could prevent a facility from receiving components needed to effectively produce a product on time.
Unfortunately, the smallest interruption in the supply chain can incapacitate a facility’s operations for a significant period of time – and even put a company out of business. To help mitigate this risk, a business should evaluate the appropriate limit of coverage for Contingent Business Interruption and Extra Expense Insurance.
This type of insurance is designed to cover the loss of income resulting from property damage at supplier or receiver locations, rather than damage directly to a manufacturer’s operation.
Of course, some supply chain partners may have several locations that could keep the flow of raw materials in the event of a disruption. Investigating these factors is an important component to creating a supply chain risk management plan.
Consider the following and transfer your risk by purchasing appropriate insurance coverage, which could include the following, depending on your exposure mix and risk tolerance:
- Business Income and Contingent Business Interruption Insurance
- Marine and Cargo coverage for long voyages taken by commodities, components and finished products
- Product Recall coverage
- Liability coverage, including Commercial General Liability, Directors and Officers Liability
- International Liability Coverage
- Other special endorsements specific to your exposures
- Carefully review your policy with your insurance broker and ensure that it includes coverage of loss of supplier, stoppage of supply and interruption of service.
Engaging supply chain partners in your effort to minimize supply chain risk and regularly reassessing exposures can help you to successfully manage your business’s risk from beginning-to-end of the supply chain. Advances in technology, evolving customer preferences, and the entry and exit of business partners are driving changes in the global economy and supply chain. Those companies that establish and follow robust risk management plans for their supply chains will be in the best positions to respond to these changes and recover from interruptions.