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Supply chain management – are your suppliers a risk?

At a glance

  • Supply chain risk is part and parcel of a modern, global economy and no business can protect itself completely from it
  • How many businesses are paying adequate attention to their supply chain risks, risks that could have a devastating impact on their business operations?
  • Once a business has a clearer view of the supply chain risks it faces, it is in a much better position to transfer some of that risk into the insurance market

This article counts towards accumulating your annual CII CPD structured learning hours for Business Interruption.

By reading this article, and correctly answering the three questions underneath, you will have achieved the following learning outcome: Summarise the key components of a business continuity plan and/or the benefits of supply chain risk management.

Visit the CPD Hub to log in and begin accumulating CPD hours.

Business interruption is one of the key corporate risks guaranteed to strike fear into the heart of every risk manager. There is the immediate impact such as loss of income and profitability but there is also the long-term impact of losing customers and incurring reputational damage. And in the worst-case scenario, prolonged business interruption can result in a business’ demise. All of which goes some way to explaining why it is often at the top of the risk agenda.

The insurance industry has had a lot of success in the last decade raising awareness of the impact of business interruption, particularly among SMEs, but how many businesses are paying adequate attention to their supply chain risks, risks that could have a devastating impact on their business operations?

Many businesses will understand who their immediate suppliers are, where they are based, where their weaknesses lie and how those risks impact third parties, but in a global economy, getting a full understanding of any supply chain is tough.

Top threats facing supply chains

According to a report from international courier company, DHL, the top threats facing supply chains today are trade wars, rising demand for raw materials, product recalls, climate change and the consequences of tougher environmental regulations.

Which seems a little out of the realms of influence for most businesses. How can they even begin to manage threats at that level and scope? While these are undoubtedly live concerns, the reality is that more mundane and eminently manageable issues appear to be the cause of most supply chain disruption.

A joint report from the Business Continuity Institute and Zurich found that unplanned IT and telecommunications outages were behind 44% of reported disruptions in 2019. Adverse weather accounted for 35%, cyber-attacks and data breaches for 26%, loss of talent or skills caused disruption for 21% and finally, for nearly 16%, supply chain disruption was caused by problems on the transport network.

All of which tells us that threats to the supply chain are varied and, as such, difficult to manage. No business can hope to influence all of that throughout a global supply chain but while nearly half of all disruptions occurred within Tier 1 suppliers, 25% were in Tier 2 and 12% in Tier 3 and beyond.

And with 1 in 20 disruptions resulting in losses great than €100m, it’s clear that businesses can’t simply hope for the best when it comes to their extended supply chain. So where to begin?

Understanding your risks

It’s important a business understands its ‘known’ risks which can be anything, from environmental and operational to economic and political. Once specific threats have been identified, they should be documented, scored to understand the business’ tolerance threshold and monitored to capture any changes in their profile.

There are tools out there such as the Zurich Risk Room which can help businesses model and understand the risks they face in in being part and parcel of a global supply chain. But even that will not guarantee protection from disruption.

Because of course there are the unknown risks, the incidents that nobody could have predicted but that can have an all-too-real impact on a business. By their very nature, they can’t be mapped, documented or monitored but there are steps businesses can take to try to protect themselves from the worst.

It’s important to build a risk aware culture, one that empowers employees to flag up risks as they develop and to communicate the risk appetite throughout the organisation so that employees can react quickly and appropriately to minimise any impact.

But it is not enough to understand and apply all this internally – it is vital to understand whether the same rigorous processes are being undertaken by suppliers throughout the supply chain. Which is why risk management must be at the same table as procurement when supplier decisions are being made – a cost-effective supplier may in fact carry unacceptable risk for a business, making any savings illusory.

Once a business has a clearer view of the supply chain risks it faces, it is in a much better position to transfer some of that risk into the insurance market. It goes without saying that no two business interruption policies are the same, particularly if a business is seeking to insure itself against issues beyond Tier 1 suppliers.

So, the more a business understands its supply chain and its potential weaknesses, the more specific and tailored an insurance product can and should be, identifying particular risks, suppliers and events.

Supply chain risk is part and parcel of a modern, global economy and no business can protect itself completely from it. But by making the effort to understand where the real weaknesses lie and whether they can be managed or insured against, businesses can give themselves the best possible chance of surviving the unexpected as well as the expected.

For more information on the topics discussed in this article, please get in touch with your local Zurich contact.

Supply chain risk management: transforming risk into a competitive advantage

Taking a holistic approach to mitigating supply chain risks can help you maintain and expand your competitive advantage. However, in today’s interconnected and complex supply chain risk environment risk managers and procurement professionals are challenged more than ever to understand and manage these risks.

During this webinar our expert speakers will share their insights and knowledge on managing complex supply chains and discuss the benefits that you can achieve by leveraging technology, insurance and services, and by breaking down silos within your organisation. This powerful combination will allow you to generate new solutions and added value for your customers.

This webinar will be a practical session based on real-life case studies. Click here to register.

 

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