Risk & Business Magazine JGS Insurance Risk & Business Magazine Spring 2018 | Page 4


Reducing The Risk Of Supply Chain Disruptions

Butterflies are beautiful creatures . Songs and poems have been written about them as long as their striking colors have enchanted us . They also serve as a wonderful metaphor when discussing supply chain disruption .

With its origins in weather predicting , the concept known as the “ Butterfly Effect ” states that small causes can have larger effects . For instance , that a butterfly ’ s flapping wings in South Africa can create weather in New York .
The same can be said of supply chain disruption . The smallest interruption in the chain can cause significant revenue loss to even the most established business . The supply chain must be proactively managed to minimize financial , confidential , operational , reputational , and legal risks . Fortunately , with strategic planning , not only can an organization prevent such losses but it can possibly be poised to take advantage of situations when competitors are left unprepared .
The first step is to evaluate as many potentially disruptive scenarios as possible . For most , this begins with reviewing where each of their suppliers operate and how they deliver their goods or services . Here we want to identify if a supplier may be unable to deliver and manufacture due to natural disasters such as hurricanes in Florida , earthquakes in California , blizzards in the Northeast , tsunamis in Japan , or volcanoes in Iceland .
It is as important to identify potential risks associated with a loss in utility service . Consider the impact to a business if the local power grid became compromised , a nearby gas line broke , or communications equipment went down . Such interruptions could be devastating .
Risk managers are tasked with minimizing risk to person or property . For supply chains , their responsibility is to insulate a business from disruption .
Mitigation strategies can take many forms . Some methods may include identifying suppliers in different geographic regions to reduce interruptions caused by weather . More simplistic ways would consist of maintaining certain levels of inventory to wait out any disruption .
Building safeguards is another approach to reduce supply chain disruption . On-site generators can provide power when the local grid cannot while off-site information storage and communications backups give assurances that access to data will be readily available .
When the ability or cost to mitigate supply chain risks exceeds a business ’ s capability , a business may be able to transfer the risk to an insurance company . The most commonly known type of insurance product to address this risk is Business Income . An insurance company can provide loss of income suffered by a business when damage is caused to its premises .
Often overlooked is the availability of Contingent Business Income . Offered as additional coverage with many insurers , this option provides funds to businesses that have lost revenue as a result of one of their suppliers suffering a loss .
There is an important balance in maintaining supply chain efficiency and reducing risk . While sourcing goods from multiple suppliers may reduce the risk of a supply chain interruption , it may not make financial sense when secondary supplier pricing reduces profitability . On premises , increasing inventory levels and building redundant systems are also common risk management strategies , but these too may be prohibitively expensive pursuits .
However , depending on your specific business , you may be able to enter into contracts which would provide the goods and services required to continue operating in the face of a disruption . For example , if you live in a hurricane-prone area , you could contract with a general contractor who would access and repair your property ahead of others . Or , you may consider a future contract providing for the delivery of supplies after a triggering event by a supplier .
Identifying your exposure to a supply chain disruption is worthless without having an executable plan . If and when the time comes , the faster an organization can respond to an interruption , the less negative impact to the bottom line .
Remember , in many instances , your business will not be the only business impacted by disruptive events . When this occurs , competition for the goods and services which are the lifeblood of your business can increase dramatically . This makes your actionable speed a critical factor for the survivability of your business .
Develop a plan organized first by each potentially disruptive event . From there , identify the responsible employee and , if necessary , employee team . Outline step by step what actions to take and by whom .
A good plan could be the quintessence of an organization ’ s survival , as the future cannot be predicted . +
As an insurance expert who focuses on the food and beverage industry , Gwenyth Luu has seen many unusual exposures and claims . That ’ s why she knows firsthand that it ’ s imperative for businesses to work with an industry-specialized insurance partner . Gwenyth has earned a certificate of completion in the HACCP System .