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.