Identifying weak links gets tricky up the supply chain

Possible delays in shipment of Apple’s much-anticipated iPhone 6 and the recent earthquake in Northern California serve as reminders about potential supply chain vulnerabilities.

“You have two weak links in your company: your employees and your suppliers,” said Florian Beerli, senior vice president, product recall, ACE. “With 80 percent of our goods or the components for them coming from outside the US, you can’t be too careful about supply and suppliers.”

While having the appropriate insurance in place – including business interruption coverage – can help keep a company going financially, it’s no substitute for preparation and prevention.

Here are 10 questions companies need to ask themselves about their supply chains.

1. DO YOU KNOW WHERE YOUR RISKS ARE COMING FROM?  

“There are countless causes for supply chain interruption, ranging from climate to political instability to simple things like machine failure,” said Ken Katz, property risk control director for Travelers.

For some companies, the risks stem from not having deep enough visibility into their supply chain, according to Kip Bohn, director and actuary at Aon Global Risk Consulting.

“Companies tend to have a handle on first tier but it gets murkier the deep you go into the supply chain,” he told Advisen.  “The second and third tiers will affect the first tier.” Manufactures, retailers, and insurance companies are increasingly partnering with consulting or logistics companies that can correlate data and events between first-tier suppliers and those below to provide a view into the second or third tier.

According to Katz, you can’t do enough due diligence around your suppliers, which means looking at their financials, their history of interruptions, their exposure to risk, whether for climate, geographic, or political reasons, whether they are using child labor, and how they manage their own supply chain. “Whenever possible, I recommend checking out your suppliers’ bricks and mortar,” he said.

2. WHERE DO YOU RANK WITH YOUR SUPPLIERS?

If one of your suppliers had limited capacity to fulfill orders, what is the likelihood you would make the cut? “You need to understand not just how important your supplier is to you but how important you are to them, especially if it’s a single-source supplier,” said Katz. Having conversations and even legal agreements around how your suppliers prioritize your business could help you determine if you need another supplier as a backup.

3. WHO IS IN CHARGE OF YOUR SUPPLY CHAIN?

Supply chain management is most effective when it involves cross-divisional teams and managers in addition to the supply chain manager, according to Eileen Ficaro, an attorney with Kaufman Dolowich Voluck. “You can’t look at supply chain in a siloed way if you hope to reduce risk,” she said.  Companies that don’t have supply chain managers have to make sure responsibility for it goes beyond procurement, observed Dante Disparte, managing director, Clements Worldwide.  “The sophistication of the process will grow as the company does, but you always have to have someone who is looking at it from a risk perspective. The risk team must partner with the purchasing team.”

4. HOW DIVERSE IS YOUR SUPPLY CHAIN?

The sheer volume and variety of risks should make companies look at whether there is sufficient diversity in their supply chain.

“Diversification can be good under the right circumstances but not always necessary,” said Bohn. “That said, the first thing you should look at is your single and sole-source suppliers and the risks they are most susceptible to. If it’s political, it doesn’t make sense to have a back-up supplier from the same country.”

5. IS YOUR COVERAGE COMPREHENSIVE AND COHESIVE?

As supply chains have become increasingly global and complex, insurance products have been keeping pace. While companies typically relied on business interruption insurance to be triggered by a property event such as an earthquake, there are now non-property damage business interruption policies.  “Depending on what you are making/selling, you might want to make sure you are covered for something like a contaminant getting into food or pharmaceuticals that go to market and then causes a business interruption,” said Bohn.

Just as companies need to make sure the disparate parts of their supply chain work as one, they should do the same with their insurance policies. “Often you’ll find different parts of the supply chain are covered under different policies, which can create unnecessary complexity,” said Disparte. “Fortunately, such issues are fairly easy to rectify but too few customers are doing that.”

6. ARE YOU PAYING ATTENTION TO UNINSURABLE RISKS?

Just because you can’t insure a risk doesn’t mean it doesn’t deserve attention. One of the biggest risks that companies with global supply chains face is violation of the Foreign Corrupt Practices Act. It’s a particularly tough risk to uncover and/or prevent, Bohn according to. “No one wants to admit they are doing something wrong and especially something illegal.”  A company’s best defense lies in increased governance, employee education, and auditing. “You need to make people aware and accountable,” he advised.

7. WHAT ABOUT YOUR CYBER SUPPLY CHAIN?

A supply chain can be interrupted because of a security breach or failure at either a supplier or in your own system.  “As cyber crime becomes more of a problem overall, we’re seeing an increase in supply chain disruption either because of sensitive information being stolen or because of intellectual property theft,” said Ficaro.  Companies should make sure their own cyber security is optimized and monitor that of their suppliers as well.

“Supply chain isn’t just about what you can touch or feel,” said Bohn.

8. WHAT IS YOUR PLAN IN CASE OF AN INTERRUPTION?

Having the proper insurance coverage in place is necessary but not sufficient to deal with supply chain vulnerability.  “You need a business continuity plan – not just business continuity insurance,” said Beerli. “That includes looking at operations as well as supply chain, including redundancies in suppliers.”

An interruption plan should also include being prepared to act quickly, whether it’s knowing how to find alternate sources, who to notify, and who will be the face of the company. “Regardless of the reason for the disruption, you need to act quickly,” said Ficaro.

9. ARE YOU AWARE OF `VICARIOUS LIABILITIES?’

When it became known that the clothing factory in Bangladesh that collapsed in April, 2013, was a tertiary supplier for such companies as Zara, Benneton, Joe Fresh, and Walmart, the backlash against the clothing sellers was swift and fierce.  The blowback was severe even though the bold-name companies seemed to be were unaware of their connection to the factory, albeit through a third-level relationship. “No matter how remote the connection, there can be reputational damage that is hard to recover from,” said Disparte.  “I call it `vicarious liability.’”

10. DO YOU OVER-RELY ON JUST IN TIME?

The perils in the strategic and operational transition from having inventory on hand to manufacturing just in time became clear after the 2011 Japan earthquake that caused such great interruption in supply chains around the world. “Companies that rely heavily on a just in time strategy may need to rethink that,” said Disparte. “They made need to strike a balance between the savings from just in time and the security of having inventory that allow you to be resilient and remain in the game if you have an interruption.”

CONCLUSION

“Knowledge about your supply chain is power and a source of competitive advantage,” said Katz. “What keeps people awake at night is a lack of focus, information, and understanding of all your risks. You also need to be comfortable that your supply chain strategies are connected to the company’s overall risk tolerance.”