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The West Coast ports strike illustrates the dangers of just how fragile most companies’ supply chains are, as disruptions to the delivery of crucial items threatened the viability of many businesses during the industrial action.

Retailers waiting for shipments had empty shelf space where some items were supposed be, carmakers suspended operations because key parts were sitting on the docks or waiting to be unloaded, and some companies were forced to lay people off due to the ports’ inability to take in more cargo.

The fallout should come as no surprise. Whenever there is a supply chain disruption, companies suffer as products and key parts deliveries are delayed indefinitely. As more companies rely on just-in-time manufacturing and the supply chain stretches to all corners of the globe, small hiccups can turn into big problems.

Prudent companies address these challenges by building safeguards into their supply chains, and planning that includes contingencies. They enhance those risk management efforts by purchasing contingent business interruption insurance, which will cover lost profits if an event shuts down critical suppliers or major customers.

And while it’s typically the woes of big companies that make the news, the impact is felt far and wide – and small companies are especially vulnerable. That’s why it’s important that you create a solid plan for dealing with disruptions to your supply chain, as most every company has one to some extent.

 

Understanding your supply chain

You’ll be best able to reduce the effects of supply chain disruptions on your business by identifying the risks within your supply chain and developing ways to mitigate them. You should document this process in your risk management plan, which is part of your overall business continuity plan.

There are four main types of external supply chain risks, which are largely out of a business’s control:

  • Supply chain risks that are caused by any interruptions to the flow of products, whether finished goods, raw material or parts, within your supply chain.
  • Environmental risks, which are related to economic, social, governmental, political and climate factors – including the threat of terrorism – that affect the supply chain.
  • Business risks, which can be caused by factors such as a supplier’s financial or management stability, or purchase and sale of supplier companies.
  • Physical plant risks, which can be caused by the condition of a supplier’s physical facility and regulatory compliance. For example, if your key supplier has a machinery breakdown and can’t produce, or regulators shut the facility down, your supply chain will be affected.

 

Developing a plan

The best way to manage a supply chain disruption is to prepare for it. You should undertake a business impact analysis to prepare your business to address the impacts of supply chain disruption.

Form a team of key personnel that should include shipping and receiving, and management and supervisors involved in your key processes. The team should:

  • To mitigate risks caused by disruptions, consider lining up alternatives to critical suppliers in advance, as finding a new supplier in the midst of a crisis situation could be challenging. It’s important this is done in advance so that you aren’t trying to hunt down a new supplier during a disruption. Even if you find one, you still have to certify that it is able to meet your quality standards, which can be a time-consuming process.
    One option is to contract with a supplier in advance, so the contractor has already been certified and has capacity available as soon as a company loses a critical supplier.
  • Model the impact of disruptions on your sourcing and inventory strategies. You should do this for the four disruption types listed above, so that all contingencies are covered. Under these scenarios, think about how non-delivery of a key part or material would affect your operation. Examine the likely fallout and build contingencies based on those results.
  • Outline the steps that need to be taken for all of the “what if” scenarios that would affect your operations. Be realistic about assessing your capacity to respond to these scenarios. If you would be rendered unable to cope, start now in developing plans.
  • Engineer an actionable contingency plan for failure of any supply chain pillars. Identify key thresholds for executing risk-mitigating decisions, like sourcing from alternative partners, channels or alternative manufacturing and distribution systems whose risks are divorced from the preferred options.
  • Most disaster situations lead to chaos due to the non-alignment of multiple departments within the same company. That makes centralized decision-making based on real-time information from all sources crucial. Institutionalize a contingency management team that will champion all actions during times of disruption. This team must be comprised of senior people who can exercise influence over the various decision levers of the company.
  • Make sure your supply chain is flexible to dealing with risks. Look at opportunities to alleviate current supply chain bottlenecks, model alternative transportation network configurations and look for alternative sources of supply.

 

The insurance backstop

Companies can address supply chain risks either through business interruption insurance or contingent business interruption insurance. Business interruption insurance covers lost profits after a company’s own facility is damaged by an insured peril, while contingent business interruption insurance covers lost profits if an insured peril skips over the policyholder’s own facilities but shuts down its critical supplier or a major customer.

Contingent business interruption coverage is triggered if there is:

  1. Direct physical loss or damage to a dependent property (supplier or customer);
  2. The loss or damage is caused by a covered cause of loss; and
  3. The loss results in a suspension of operations at a covered location.

 

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