The Japanese earthquake and tsunami that occurred in March served as a wake-up call for businesses vulnerable to supply chain exposures. Subsequent intense weather events in the U.S. during April and May have underscored the importance of preparing for disruptions to supply chains for operations that rely on the products and services of other entities.
“Two years ago, there was hardly any interest in this subject,” said Bret Ahnell, senior vice president and western division manager for FM Global.
Ahnell said the problem now is that because many companies have been focusing on costs and efficiency, “they have turned a blind eye to the risk associated with their supply chain.”
It’s critical that companies assess the risk/reward implications associated with their supply chains, he said. They need to understand the risks they have before they can manage them.
FM Global focuses on site-specific property related risk when working with insureds to mitigate supply chain exposures. Such risks include: hazards to physical structures; hazards in the manufacturing process and downtime; situations that may disrupt a company’s ability to produce or to operate; inability to access the facility; interruption of incoming power; and the ability or inability to ship or receive products.
“All of these are property-related risks that people have a tendency to treat as [a] blind spot; they just don’t want to go there,” Ahnell said.
Developing a supply chain risk management plan is not a one-size-fits-all endeavor, said Bradley Johnston, chief administrative officer with Temple-Inland, which manufactures corrugated packaging. Each company needs to look at its own operations, transportation modes, and where and how it receives supplies to determine how much diversity it needs in the supply chain, he said.
Also, while diversity of suppliers is important; a more holistic approach is needed. For example, transportation in and out of a facility can be a big risk.
“You can go look at a supplier and see if they are financially viable and if they have good back up systems, if they have good safety systems. But if they have transportation issues that may not even be near them but somewhere in the chain between you and them, it’s very important to analyze those very carefully,” Johnston said.
Insurance Strategy
Insurance can be an effective part of the plan, but it shouldn’t be viewed in isolation. “It should be there as a complement to other, probably more sustainable strategies,” Ahnell said.
One basic insurance issue to consider is whether the contingent time element coverage provides for both direct and indirect suppliers, customers and manufacturers. “It’s really that indirect that people need to look at because are you picking up just that first tier or are you picking up the second, third, fourth, fifth tier all the way down the line,” Ahnell said. Standard coverage is going to pick up just that first tier but broader coverage is available.
Typically the time element extension coverage is not extended to the supply chain, so it has to be added, as do coverages for civil authority, ingress/egress, service interruption, power interruption, and extended period of liability, Ahnell said. Logistics extra expense coverage is also often overlooked, he said.
Peril restrictions and territorial definitions are important. “If you had a policy, for example, that just covered the U.S. and Canada and you had key suppliers in Japan, and did not cover Japan as part of the territorial definition, you didn’t have any coverage. So make sure your territorial definition is broad enough.”
The more a company knows about its suppliers, the more insurance capacity it will be able to find at the price it expects to pay, Ahnell said.
FM Global focuses on the risk quality of suppliers, such as whether the facility is going to be there after an event, diversification and redundancy. If a supplier is down, it may take months to get them back into service, he said. They may get reimbursed through insurance but have already have lost customers. So, he advised, companies should focus on risk management strategies and use insurance as a backstop for those strategies.
Note: This is based on a Webinar hosted by Advisen, in which Ahnell and Johnston participated.
Topics Catastrophe Trends Japan
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