Supply Chain Disruptions: Why You Need to Be Ready
If one of your important suppliers experienced a disaster, does your business have a backup plan in place?
If you answered no, you’re definitely not alone. Most organizations lack clear visibility into their supply chain, let alone a plan for addressing supply chain disruptions.1
Why it’s Time to Take a Close Look at Your Supply Chain
We all know that the global economy is more interconnected than ever. And the fact that it runs relatively smoothly most of the time may be giving too many people a false sense of security. For example, more than half of the respondents (SMEs from small and mid-size businesses) to a Zurich survey didn’t anticipate any serious impact from the loss of a key supplier (only 13% of respondents thought the impact of a key supplier loss could be serious).2
Perceptions aside, business interruption (BI) insurance claims are starting to tell a different story.3 It turns out that, at least for large businesses, BI claims have risen sharply in recent years—and BI is now a top risk. When you stop to think about the way the global supply chain is operating, it shouldn’t come as a surprise: Allianz Global Corporate & Specialty (AGCS) notes that global supply chain interdependencies are not only tightening, but common just-in-time and lean-manufacturing business approaches also leave little room for error. So when an important manufacturer experiences a fire or technical issue, or an area is hit by a natural disaster, for example, the impact can spread far and wide.4
How can You Protect against Supply Chain Disasters?
If one of your key suppliers experienced a disaster that took them offline for more than a few days, how long would it be before your business is impacted?
If you haven’t done an analysis and are just guessing about the answer, it’s time for a more rigorous review. In fact, a careful analysis of your supply chain should be part of your business continuity planning. Why? Because when you clearly understand the risks your suppliers face and how a disaster might impact your business, you can make sure you have an appropriate contingency plan in place. And remember, you are not simply at the mercy of fate when it comes to controlling supply chain risks. At the very least, you can verify that your suppliers have a certificate of insurance on file and have them walk you through their business continuity plans. And don’t be afraid to ask clarifying questions that will help you determine how the key risks they face could reverberate through to your business. For example, it’s important to understand things like:
- How technical issues ranging from equipment failure to IT outages or issues could lead to short- or long-term outages
- The types of natural disasters that typically occur in their area
- Whether or not social circumstances could lead to business outages
Once you understand supplier risks, you can map your vendor risk landscape and plan accordingly. For example, inadequate insurance or absence of a business continuity plans are red flags that you need a backup plan sooner rather than later—especially in the case of a key supplier.
Keep Your Business Humming
If you’ve never experienced a supplier-related business interruption, it can be easy to ignore the possibility that it may ever happen. But the reality is that the health of your business likely depends more than you may realize on the health of your suppliers. After all, a supplier delay can leave your people idle and customers fuming. Fortunately, all it takes is a bit of planning to avoid a worst case scenario that could significantly impact your business.
1 News Release: Driving blindfold into a disaster, Zurich Insurance Group, November 10, 2015.
2 Potential business impact of ‘loss of the main supplier’ for small and medium enterprises (SMEs) in 2015 Global survey report, Zurich Insurance Group, November 2015.
3 Business Interruption Claims Are on the Rise as Companies Contend with Interconnected Global Supply Chains, BusinessWire, December 9, 2015.
4 Global Claims Review 2015: Business Interruption In Focus, Allianz, 2015.