Reducing The Risk Of Supply Chain Disruptions

By Gwenyth Luu, Director – Commercial Lines

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.

Evaluate Chain Weaknesses

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.

Identify Safeguards & Alternatives

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.

Transfer the Risk

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.

Develop Strategic Partnerships

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.

Build & Review Your Plan

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.

 

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