Modern supply chains are complex networks prone to many risks. Insurance is an invaluable way of mitigating those risks and maintaining business continuity.
Traditional business owner policies and property insurance do not adequately cover supply chain risks, so companies require specific coverage from an insurer that can help mitigate them by understanding their supply chain ecosystem. Insurers also provide valuable insights that help businesses mitigate these risks through understanding.
Understanding the Risks
From a business perspective, insurance's value lies in its ability to shift risk from organizations onto investors willing to pay. This transfer impacts both bottom lines and economies alike.
Supply chain risks come in various forms. They could range from economic issues like supplier bankruptcy or recession, environmental ones like natural disasters or climate change to political risks such as trade policy changes or regional instability as well as ethical concerns such as purchasing from companies with dubious labor practices.
Many supply chain risks are known and easily quantifiable over time, such as supplier bankruptcy which could significantly impede your product supply and market reach. Newer risks, like cybersecurity vulnerabilities, can be more challenging to quantify but can still be reduced through regular assessment of suppliers to ensure they adhere to appropriate security protocols. An effective governance mechanism includes cross-functional risk boards which involve representatives from each functional node of the supply chain with ownership over any mitigation actions they must take.
Mitigating the Risks
Your company can mitigate supply chain risks in several ways. One effective method is forming a cross-functional team to identify all aspects of risk in its entirety and define "what good looks like" for each supply chain management metric.
Your team can also develop supplier rating systems that place weighted importance on factors like economic and political disruption, financial dependency, credit history and natural disaster risk - helping you identify high-risk suppliers and take appropriate actions to mitigate those risks.
Another effective strategy for mitigating risks is through physical logistics. That means creating a backup supply chain which can be deployed if needed - this may involve procuring materials from multiple locations while setting up reliable transportation routes.
An effective insurance policy can also protect against catastrophic loss, by spreading out risk across many premium payers. Thus enabling insurance companies to provide generous payouts without excessive premium payments.
Insuring the Risks
Insurance companies pool and invest the premium funds collected through premiums into money market instruments that generate returns, providing businesses with access to capital that allows them to continue operations despite assets that have been lost; this function is comparable to banks', leading to economic expansion and job creation.
Contingent business interruption coverage and supply chain policies that cover direct costs such as supplier disruption as well as indirect expenses like lost profits can help to minimize these risks.
An effective supply chain is key to any retail or manufacturing operation's success. Disruptions to this chain can have serious repercussions that impact consumers and customers, but with proper risk mitigation you can prevent such problems from having an effectful negative ripple-through to consumers and customers alike. By effectively mitigating risks effectively you can ensure your clients and customers get quality and reliability they expect, strengthening both your brand reputation in the process.
Conclusion
Supply chains may be exposed to operational, economic and political risks. Operational risks could include an inability to locate critical spare parts for equipment - for instance a theme park may rely on custom motors with 10-year operational lives which need replacing annually - without an available replacement they could experience severe production delays with potentially dire results.
Warehouses play an essential part of the supply chain, and can be vulnerable to fires, bad weather, handling errors or criminal activities. Cargo insurance provides protection from these potential losses - the responsibility being shared between both sender and buyer.
Business interruption claims represent a serious threat for insurers and can arise from unexpected risks. When businesses transition towards just-in-time delivery with reduced warehouse stock and reliance on only certain suppliers, the potential for disruptions that are not captured by traditional commercial property policies becomes greater. A partnership must exist between a business and their insurer in order to develop a collaborative ecosystem that provides data insights, synergies and ultimately improves supply chain resilience.
