Insights
How to Protect Your Business Against Supply Chain Disruption
By Melody Yuan
Ensuring your business is covered against unforeseen business interruption is crucial.
With an increasingly competitive and connected global marketplace, more businesses are going overseas to find cost-effective ways to lower the prices of their goods and services. On the flip side, the number of factors that could lead to a potential business interruption has also increased. While a business could be headquartered in California, raw materials could be collected from Southeast Asia, and parts could be assembled and manufactured in China. According to Resilinc’s annual EventWatch Report, global supply chain risk events have grown 36 percent in 2018 due to a more volatile geopolitical landscape. From Brexit to trade negotiations between the U.S. and China, having a global supply chain has made certain businesses vulnerable to higher rates of supply chain disruptions. Data from the report showed that 21,152 suppliers and 58,191 supplier sites producing 552,950 parts across supply chains were potentially impacted in 2018 alone. The research also showed that the top five most disruptive causes came from natural disasters, as well as a 370 percent increase in protests/riots around the world.
Supply chain risk management (SCRM) can be daunting, and a business must analyze the impact a delay or loss in time or product has on its bottom line. If your business relies on overseas suppliers and is dependent upon the timely delivery of goods, any kink in the chain could bring a financial blow. Calculated decisions that involve choosing the best insurance to protect the business is imperative, not for if a supply chain disruption occurs, but when.
According to Industry Star, the five main causes of a supply chain disruption are:
- Natural disasters
- Transportation failures
- Geopolitical instability
- Price hikes
- Cyber attacks
“You really can’t put all of your eggs in one basket,” says Sharon Wang, assistant vice president and trade advisor at East West Bank. “To better navigate the ever-changing and uncertain environment, you need to make sure that your global supply chain is diversified with vendors and buyers from different areas. Establish steady relationships with a variety of vendors and buyers as back up to have some security in your supply chain.”
Ways to address supply chain risk
The first step in addressing supply chain risk is identifying potential areas for disruption within the supply chain. A comprehensive review of supply chain needs and exposure points helps create a better map for risk management.
Good experts to have as advisors include trade finance and foreign exchange (FX) teams to help guide and prepare your business for volatility. “You have to understand and utilize the right financial instruments like an FX forward contract to minimize FX risk exposures, or a letter of credit to mitigate trade transaction risks,” says Wang.
“Have a conversation or schedule a consulting session with trusted FX and trade finance experts during the early stage of your supply chain growth to make sure you’re making the right financial decisions while protecting your business.”
Surprisingly, despite 52 percent of businesses having experienced a disruptive event in the past five years, the Disaster Recovery Preparedness Council estimates that 73 percent of organizations are not ready for a potential business interruption. “Business interruption or a disaster can strike at any time,” says Linda Williams, economic development specialist at the U.S. Small Business Administration. “If you’re a business that relies on the timely delivery of parts and materials from other vendors, then you should really consider looking for business interruption insurance.”
According to the U.S. Federal Emergency Management Agency (FEMA), 40-60 percent of small businesses never recover from a disaster. “You must weigh the cost of having insurance versus not being covered by the insurance,” says Williams. “Make sure you’re honest with your risk assessment. Can you run a business in a place that has a history of being a flood zone? Sure, but how smart is that really?”
There is a lot to consider beyond the actual business interruption scenario, and to ensure that those areas are not overlooked, Wang firmly believes in businesses reaching out to experts who are veterans in their field. “Have a conversation or schedule a consulting session with trusted FX and trade finance experts during the early stage of your supply chain growth to make sure you’re making the right financial decisions while protecting your business,” says Wang.
Types of insurance options and how to choose the best one
“Being aware of the situations around you and making intelligent decisions help,” says Williams. “But at the end of the day, your main job as a business owner is to actually run the business.” Having solid supply chain insurance or contingent business interruption (CBI) coverage could give business owners peace of mind.
CBI coverage essentially protects businesses against revenue-related losses caused by a third-party supplier or distributor shutdown as a result of physical property damage. Companies typically purchase CBI coverage in addition to their standard property insurance. If a fire breaks out at your supplier’s plant and results in the suspension of production, the CBI kicks in due to a loss in revenue. According to the Insurance Journal, the purpose of a CBI is to replace a business’s loss of income and reimburse any additional expenses that were incurred from the interruption to the insured’s supply chain.
Supply chain insurance goes a step further and has a broader range of coverage than CBI. According to the Insurance Information Institute, in addition to covering disruption costs from property damage to your suppliers’ or distributors’ businesses, supply chain insurance can cover losses caused by a wider range of events, from financial solvency issues, to public health emergencies. For companies with a global supply chain to manage, having coverage that addresses multiple scenarios may be the safest and most secure option.
“Here are four steps to buying insurance,” says Williams. “I believe that these steps apply to all types of insurance for your business.”
- Assess your risks. Think about what kinds of interruptions and natural disasters could damage your business. If you need help, the nonprofit National Federation of Independent Business can provide information for choosing the best insurance after analyzing your risks.
- Find a reputable licensed agent. Commercial insurance agents can help you find policies that match your business needs. However, they receive commission from insurance companies when they sell policies, so it’s important to find a licensed agent that’s interested in your needs as much as his or her own.
- Shop around. Prices and benefits can vary significantly. You should compare rates, terms and benefits of insurance offers from several different agents.
- Reassess every year. As your business grows, so do your liabilities. If you’ve purchased new equipment or expanded operations, you should contact your insurance agent to discuss changes to your business and how they affect your coverage.
“The best way to mitigate supply chain risk is to plan ahead,” Wang says. “A business with well-structured plans and strategies for every scenario is going to come out ahead (of) the ones that don’t.”