Bakers Journal

Features Business and Operations Finance
Planning ahead


January 31, 2013
By Laura Kennedy


Topics

The paradigms of today’s business environments have changed. Outsourcing
has become a buzzword in the global business arena, where your supply
chain factors in production elements from across the globe.

The paradigms of today’s business environments have changed. Outsourcing has become a buzzword in the global business arena, where your supply chain factors in production elements from across the globe. Companies are able to minimize costs and focus on their core competencies.

What companies fail to realize, however, is that a simple fracture in the supply chain can leave a business paralyzed. Whether it’s a major earthquake on another continent, a fire in a manufacturing plant or a piece of manufacturing equipment that breaks down, with the supply chain broken, the finished product cannot be produced, a situation that affects relationships with clients. More importantly, your company’s operating revenue and profits will have a massive negative impact.

Toyota, for example, was unable to produce more than 20,000 cars after damage to plants caused by last year’s earthquakes left it short of critical components.

The problem is that companies ignore, underestimate and fail to appreciate the dramatic consequences that even a seemingly minor supply-chain disruption can trigger. What’s worse is that modern-day supply chains have been stretched farther than they have ever been stretched in the past.

As an operating business, it is in the best interests of all stakeholders that a strategic supply-chain management plan is put in place so that when there is a catastrophic disruption in a company’s supply chain, various steps can be taken to minimize the risk.

So how does a business mitigate the risks imposed by a disruption in its supply chain?

First, address the risks that are associated with disruptions in a company’s supply chain. Disruptions in a company’s supply chain can come in various forms. Most of them will fall along the lines of:

  • political risks and labour unrests
  • Mother Nature and natural disasters
  • fire and power grid blackouts
  • equipment breakdowns

The next step is to put together a comprehensive supply-chain risk-management program that clearly outlines how a company evaluates its suppliers and responds to any disruptions in its supply chain.

Therefore, in the event of any unforeseen disruption in the supply chain, the company is well positioned to mitigate risk posed by that particular disruption and lessen the financial impact to the business.

The following questions will help you identify and classify your suppliers and in turn lessen the risk of disruptions in the supply chain (Zurich Insurance, 2012):

  1. Do you know who your critical suppliers are, and how much their failure would impact your company’s profits?
  2. Have you fully mapped out your critical supply chain upstream to the raw material level and downstream to the customer level?
  3. Have you integrated a risk-management process into your supply-chain management approaches?
  4. Do you have routine, timely systems for measuring the financial stability of critical suppliers?
  5. Do you understand your tier 1 production facilities and logistic hub exposures to natural catastrophes?
  6. Is supply-chain risk management integrated into your enterprise risk-management approach?
  7. Do you record the details of supply-chain incidents and the actions you have put in place to avoid future incidents?
  8. Do your tier 1 suppliers have business continuity plans that have been tested in terms of their viability?
  9. Have you provided risk training to your supply-chain-management team?
  10. Is risk on the agenda at performance meetings with your strategic suppliers?

Zurich Insurance (2012), a provider of supply-chain disruption insurance, outlined what its risk assessments have discovered for various businesses:

  • identified two key second-tier suppliers that were in significant financial trouble
  • Recognized a higher loss potential of a supplier than anticipated by insured: USD $10 million versus USD $1 million
  • discovered actual reliance on one supplier significantly greater than presumed: 70 per cent versus 20 per cent determined that a key component supplier and its alternative were located in earthquake zone

If your organization is an operation that relies on multiple supply chains, an insurance program armed with a risk-assessment plan can help the company deal with operational and financial losses as a result of a disruption in its supply chain. What better way to lower the cost of doing business?


Laura Kennedy is an account director at Hallmark Insurance Group. She can be reached at lkennedy@hallmarkins.com, or by phone at 1-800-492-4070, ext. 225.