Supply Chain Disasters: Why A Little Planning Can Go a Long Way
Authors' note: This is the first in a series of blog posts that examines some key considerations for supply chain disaster planning.
For any company that relies on vendors to supply components or raw materials for products, a good business continuity plan must consider the upstream supply chain. All too often, companies overlook inevitable issues that will result from a disaster somewhere upstream. Or they may simply choose to focus on other priorities. Without a clear understanding of potential issues and how you will respond to them, however, contingent business interruption is a big risk that can impact your relationships with customers and the long-term health of your business.
It's a small, complex, highly connected world…
Simply put, a supply chain is a set of organizations directly linked by one or more upstream and downstream flows of raw materials, products, services, finances or information, ultimately leading to end customers. And now more than ever, suppliers can be located anywhere, from across the city to across the globe. No matter where they are located, a disaster at a supplier's site can lead to significant contingent business interruption losses that insurance can't protect against. Some such loss examples include:
- Customers may switch to competitors' products and be difficult to win back if you are unable to meet market demands.
- Brand and reputation damage may result directly impacting your bottom line.
- Short- and long-term income and profitability losses will ensue.
In the U.S., a disaster could mean weeks or months before a supplier is able to resume regular operations. In less-developed countries, disaster recovery can take months or run into years, often spelling the end of a business. In recent years, countries most frequently hit with natural disasters include the United States, China, the Philippines and Indonesia. That's why even if your business locations are in relatively safe areas, there’s a decent chance that one of your suppliers may face a disaster at some point.
How prepared are your suppliers?
While it can seem like many issues related to supply chain disasters may be out of your control, there are key steps you can take to mitigate your potential losses, such as the following:
• Verify insurance — Ask your suppliers to provide a certificate of insurance to verify they will be able to rebuild in event of a disaster
• Understand the plan — Ask your suppliers to walk you through their business continuity plans to understand what risks they potentially face and when a disruption to their business will begin to impact your business
• Map out risks — Once you understand the risks your suppliers face and how prepared they are, perform an analysis to determine how supplier outages could impact your business
• Build in redundancy — Identify how you will fill gaps if a key supplier can’t meet business needs
A little planning can go a long way
By taking the types of steps described above, you can rest more easily knowing that the ongoing health of your business doesn't depend on luck alone. We will examine key considerations around each of the steps above in subsequent posts, starting with an exploration of insurance-related considerations.
Resources for supply chain disaster planning: