April 2021 – Risk Management – Supply Chain Disruption Lessons from Pandemic

BESIDES THE health and economic devastation that the COVID-19 pandemic has left in its wake, it has also caused supply chain disruptions that have affected a number of industries.

The fallout for companies of all types illustrates the fragility of most businesses’ supply chains. The pandemic has left retailers with half-empty shelf space because product manufacturers couldn’t keep operations going due to raw material or personnel shortages, while a number of carmakers and other manufacturers have had to suspend operations because of a global semiconductor shortage.

But it’s not only large companies that suffer, and small businesses are especially vulnerable. That’s why it’s important that you have in place a solid plan for averting and dealing with disruptions to your supply chain if you rely on materials and inputs from outside vendors.

Here’s what you can do to manage this growing risk.

Understand your supply chain

Start by identifying risks in your supply chain and develop ways to mitigate them.

FOUR MAIN EXTERNAL SUPPLY CHAIN RISKS

• Flow interruptions – Problems with the movement of goods and materials.
• Environmental risks – Economic, social, political, terrorism threat and weather-related factors that affect facilities and infrastructure. The pandemic falls into this category.
• Business risks – Problems caused by factors like a supplier’s poor financial or general stability, or the purchase or sale of supplier companies by other entities.
• Physical plant risks – Problems at a supplier’s facility. For example, a key supplier could have a machinery breakdown and/or regulators may shut the facility down.

 

Develop a plan

The best way to manage a supply chain disruption is to prepare for it. Start by undertaking a business impact analysis to prepare your company.

Form a team of key personnel to:

• Identify alternatives to key suppliers. One option is to contract with an alternative vendor in advance, so you can certify them and ensure they can ramp up if you lose a critical supplier.
• Model the impact of disruptions on your production and inventory for the four supply chain risks listed to the left. Think about how non-delivery of a key item
  would affect your operations.

Using that information, you can build contingencies for supply chain failures:

• Plan for how you would respond to all “what if” scenarios that could affect your operations. Be realistic about assessing your capacity to respond to these scenarios.
• Create a contingency plan for failure of any supply chain pillars. Identify the points at which you would need to execute risk-mitigating measures, like sourcing from other vendors or using new distribution channels.
• In advance, amass a contingency management team that will bridge the divide between your departments during disruptions. This team must include senior
  staff who are influential with top company decision-makers.
• Make sure your supply chain is flexible enough to deal with risks. Look at opportunities to address current supply chain bottlenecks; investigate alternative transportation network configurations or production systems.

 

The final backstop: insurance

You can address supply chain risks with business interruption insurance or contingent business interruption insurance.

Business interruption insurance.
This coverage, which is often included in a commercial property policy, covers lost profits after a company’s own facility is damaged by an insured peril.

Contingent business interruption insurance. This is often a policy rider that you can purchase. It covers lost profits if an insured peril shuts down a critical supplier, part of the transportation or distribution chain, or a major customer.

This coverage is triggered if there is:
1. Damage to property that prevents one of your suppliers from making products or delivering them.
2. Damage to property that prevents your customers from receiving your products.