Supply chain failures cause rise in insurance premiums
Written by Richard Gane, supply chain specialist at Vendigital market experts and advisers
A spate of recent disasters and product failures is impacting on manufacturing supply chains, leading to a rise in the insurance premiums associated with certain types of specialist cover, such as business continuity insurance.
Global supply chain failures, such as General Motors India’s recall of its Tavera multi-utility vehicle, which was allegedly due to safety risks posed by a specific component, are having a significant impact on manufacturing supply chains. Disruption caused by political unrest is also having an effect, for example, there have been issues sourcing wiring harnesses from North Africa since the onset of the Arab spring. With supply chain upheaval becoming more prevalent, some businesses have noticed that insurance premiums are rising and in some instances, cover is becoming more difficult to obtain.
Supply chain contracts typically include business continuity insurance to cover individual parties for the risks posed by a potential break in supply. Such cover is regarded as essential in a world where supply chains have become more complex and just-in-time deliveries, backed by reduced inventories, have been adopted as standard.
The fallout from the Tohuku earthquake and tsunami in 2011 has raised awareness of the vulnerability of global supply chains to unforeseeable disasters as well as well as to more commonplace commercial issues, such as suppliers going out of business. Insurers are responding to this.
Business continuity insurance and other types of specific risk insurance that impose penalties if large projects or programmes suffer setbacks have been undergoing closer scrutiny by insurers when contracts are being drawn up. To offset this, companies need to take steps to demonstrate supply chain resilience.
When supply contracts are being prepared and insurance cover is being sought, it may be necessary to provide insurers with detailed information to demonstrate that the supply chain risks are fully understood and contingency management systems are in place.
It may also be appropriate to alter the footprint of the business or even re-source a particular contract, if only to ensure optimum supply chain visibility, which can help to alleviate such risks and ensure that contingency management systems are triggered as quickly as possible. These changes could significantly enhance the risk profile of the business from a supply chain perspective.
To boost supply chain resilience, it is best to follow these key steps:
- Consider shortening the supply chain and ensuring good supply chain visibility – this will make it easier for manufacturers to spot potential issues and react to them more quickly.
- Consider adapting the footprint of the business – do you need a warehouse or operating facility in Egypt at a time of significant political unrest? Temporary or permanent changes could be considered which would reduce the risk profile of the business.
- Complex supply chains can impact on your risk profile – consider consolidating your supply chain and make sure you understand fully how individual suppliers are managing delivery of their contract and what resources they are using if appropriate.
- Re-sourcing specific contracts where needed. Are you using the right supplier? Make sure their communication systems are adequate and give you the right level of supply chain visibility. You may also find that a slightly more expensive supplier has greater capacity or access to an alternative supply base and this could provide you with additional security.
Biden establishes Supply Chain Disruptions Task Force
The US government is to establish a new body with the express purpose of addressing imbalances and other supply chain concerns highlighted in a review of the sector, ordered by President Joe Biden shortly after his inauguration.
The Supply Chain Disruptions Task Force will “focus on areas where a mismatch between supply and demand has been evident,” the White House said. The division will be headed up by the Secretaries of Commerce, Transportation, and Agriculture, and will focus on housing construction, transportation, agriculture and food, and semiconductors - a drastic shortage of which has hit some of the US economy’s biggest industries in consumer technology and vehicle manufacturing.
“The Task Force will bring the full capacity of the federal government to address near-term supply/demand mismatches. It will convene stakeholders to diagnose problems and surface solutions - large and small, public or private - that could help alleviate bottlenecks and supply constraints,” the White House said.
In late February, President Biden ordered a 100 day review of the supply chain across the key areas of medicine, raw materials and agriculture, the findings of which were released this week. While the COVID-19 health crisis had a deleterious effect on the nation’s supply chain, the published assessment of findings says the root cause runs much deeper. The review concludes that “decades of underinvestment”, alongside public policy choices that favour quarterly results and short-term solutions, have left the system “fragile”.
In response, the administration aims to address four key issues head on, strengthening its position in health and medicine, sustainable and alternative energy, critical mineral mining and processing, and computer chips.
Support domestic production of critical medicines
- A syndicate of public and private entities will jointly work towards manufacturing and onshoring of essential medical suppliers, beginning with a list of 50-100 “critical drugs” defined by the Food and Drug Administration.
- The consortium will be led by the Department of Health and Human Services, which will commit an initial $60m towards the development of a “novel platform technologies to increase domestic manufacturing capacity for API”.
- The aim is to increase domestic production and reduce the reliance upon global supply chains, particularly with regards to medications in short supply.
Secure an end-to-end domestic supply chain for advanced batteries
- The Department of Energy will publish a ‘National Blueprint for Lithium Batteries’, beginning a 10 year plan to "develop a domestic lithium battery supply chain that combats the climate crisis by creating good-paying clean energy jobs across America”.
- The effort will leverage billions in funding “to finance key strategic areas of development and fill deficits in the domestic supply chain capacity”.
Invest in sustainable domestic and international production and processing of critical minerals
- An interdepartmental group will be established by the Department of Interior to identify sites where critical minerals can be produced and processed within US borders. It will collaborate with businesses, states, tribal nations and stockholders to “expand sustainable, responsible critical minerals production and processing in the United States”.
- The group will also identify where regulations may need to be updated to ensure new mining and processing “meets strong standards”.
Partner with industry, allies, and partners to address semiconductor shortages
- The Department of Commerce will increase its partnership with industry to support further investment in R&D and production of semiconductor chips. The White House says its aim will be to “facilitate information flow between semiconductor producers and suppliers and end-users”, improving transparency and data sharing.
- Enhanced relationships with foreign allies, including Japan and South Korea will also be strengthened with the express proposed of increasing chip output, promoting further investment in the sector and “to promote fair semiconductor chip allocations”.