You probably saw stories earlier this week marking the one year anniversary of Superstorm Sandy, and the devastation it left on the Eastern United States, as well as how people and businesses alike are still dealing with the aftermath.
With those stories fresh on my mind, I was interested to also see an article about risk and the insurance business, which pointed out that disasters such as Sandy, the earthquake and tsunami in Japan in 2011 and flooding in Thailand later that year all showed how a catastrophe can slow global supply chains—and possibly bring them to a halt. These events also serve to remind the insurance industry of the challenges in quantifying risk and accounting for exposure in an increasingly complex supply chain environment, write the authors, Timothy Comer and Neil Silverblatt, of insurance and risk management firm Hylant. Consequently, risk managers are being asked new questions as insurance underwriters require them to seek information from a broader range of stakeholders within and outside of their organizations, they write in the article, which ran on Industryweek.
What I found intriguing is that insurance underwriters already know what an individual insured’s supply chain loss could cost through their receipt of business interruption worksheets. That’s because whether an interruption is the result of circumstances at the insured’s facility or at a supplier’s or customer’s facility, the result is the same: They can’t produce products, which means profits are lost and/or extra expenses incurred. What the underwriters don’t always know—and what is changing in the aftermath of such disasters—is which of an insured’s suppliers or customers is more likely to have an interruption, what percentage of revenue is exposed based on any one supplier or customer, what interdependencies exist across operations and suppliers, where these losses will occur in the world and the magnitude of all losses related to the occurrence, write Comer and Silverblatt.
The problem is that a significant disruption anywhere along the supply chain can cause substantial impact for the rest of the supply chain. Furthermore, risk managers, who are already challenged to accumulate and collate underwriting information on their own company, now must also collect additional information about partners—often—across international and cultural borders. And while purchasing and procurement professionals consider a multitude of risk issues and seek inputs from multiple parties in making their sourcing decisions, the article’s authors point out that it’s unlikely these professionals know how well a supplier’s facility is protected, or if it’s located in a high-hazard flood or earthquake zone, for example.
Considering all that, the authors then list some factors to bear in mind when evaluating risk. For example, companies should ask if a supplier’s facilities are well protected. That way, while the facilities may experience loss events such as fires, they won’t suffer catastrophic damage and can generally recover quickly with little or no interruption.
In addition to asking where the supplier’s sources are located geographically, other key questions for suppliers include:
How quickly could they reestablish production after a significant disruption, and are there plans to do so?
Does the supplier have multiple manufacturing sites and excess capacity to draw from, and where on the priority scale do you fall relative to other customers?
Are there proprietary technologies or processes involved, and would your supplier be willing to license those technologies or processes to others to fill your needs?
Are there alternative products or suppliers that can be substituted without compromising quality or performance of your product?
There are, of course, a great number of other questions to ask suppliers, including questions about their suppliers. While it takes a great deal of time and effort, in the end, it can prove extremely beneficial.
How well does your company know its suppliers and the possible risk they present?