Published 09/01/2022
The vital parts and products that industries require to meet consumer demands are in short supply these days, from computer chips to household goods. And while supply chain risk is nothing new for risk managers or underwriters, the perfect storm of a pandemic, the war in Ukraine, and worldwide inflation is creating never-before-seen issues across the entire spectrum of business.
The seriousness of the supply and labour shortage issues impacting the risk landscape for industries like energy, manufacturing, hospitality, and construction, can’t be overstated. 94% of Fortune 1000 companies have reported significant disruption from supply chain right now, costing businesses worldwide an average of $184 million annually.
While the severity of supply chain issues caught many companies off guard, tried-and-true risk-management approaches still apply over time and across sectors. For companies that want to stay ahead of the threat, there are risk-management decisions that can be made, including operational considerations that significantly help defray the risks encountered.
1. Manage contracts proactively
An essential risk mitigation step is to create contracts that are flexible from the start.
Supply chain and labor shortages create situations where companies may not be able to meet their contractual obligations, putting them at risk for breach of contract or budgetary issue claims, but flexible contracts give businesses more wiggle room when it comes to meeting their contracts.
Implementing this step requires a serious look at how well your business can meet its obligations under less-than-ideal circumstances, followed by adding measures that create an adequate response to those circumstances. Then, new contracts can be drawn up to include those new responses.
2. Reassess inventory management systems
Gone are the days of just-in-time delivery systems, as the early days of the pandemic revealed the vulnerability of operations that rely on last-minute sourcing. This was most apparent during the initial stages of the pandemic when ventilators, personal protective equipment, and other key healthcare products were in short supply.
Now, the same issue is taking hold across a wide range of businesses, from retail to raw materials. And the answer isn’t as always as simple as having more inventory on hand.That’s because an increase in inventory can bring its own set of risks, from adding property and personnel for increased storage capacity to the threat of damaged, outdated, or spoiled products. Companies must make sure that any additions made to meet new inventory warehousing needs are covered by up-to-date property appraisals and insurance coverage.
3. Vet your entire supply chain
Many companies adequately vet their most prominent suppliers. However, few bother with secondary and tertiary suppliers. Changing your point of view on your supply chain to include those beyond your primary sources will help protect you during times of turbulence.
And don’t forget to vet carefully all new vendors who are added to meet original vendor shortcomings.
4. Revisit your business continuity plan
Virtually every company should address whether or not their business continuity plan considers who they’ll turn to if a primary source of materials dries up.
Having a second and even third choice of supplier can avoid situations like the infamous Chinese drywall incident, where defective imported drywall was used to help ease supply issues after a series of hurricanes hit the U.S. in the early 2000s.
Proactively maintaining relationships with all your suppliers, including those lower on the chain, can help ensure you have backups if something happens. Additionally, make sure to include measures to address quality risks, should you inadvertently find yourself in a ‘drywall’ type situation where a supplier’s materials aren’t up to snuff.
An insurance partnership can help risk-proof your supply chain
As a final tip for businesses struggling with supply chain issues, you should reach out to your insurance provider for guidance — proactively.
Companies sometimes forget that their insurance partners can help provide guidance and strategy on many parts of the risk control equation. Liberty Mutual can assist you in identifying gaps in your risk-management plan, and then work to find solutions to fill them, forming a partnership in all areas of risk management and control – not just insurance coverage.
For more information about the current supply chain disruption, please click here.
