Sheila Reilly, Partner Executive, DisasterAWARE Enterprise
Manufacturing companies rely heavily on their supply chain to produce and distribute products to customers. However, natural catastrophes such as floods, wildfires, hurricanes, earthquakes, landslides, etc. can disrupt the supply chain and cause significant damage to a company’s operations and bottom line. What are the top 3 contributors to this supply chain exposure? Read on for my thoughts.
Lack of Visibility into Supply Chain Risk
One of the biggest challenges for manufacturing companies is having a clear understanding of the natural catastrophe risks and manmade threats that their suppliers and logistics providers may face. This is actually a 2-part problem:
- Knowing all of the Tier 1 suppliers (most companies have a good grasp on this) as well as knowing the Tier 2 suppliers (many companies struggle with this).
- Understanding what hazards threaten ALL Tier suppliers globally.
Without visibility into the potential risks, a company may be unaware of the impact that a natural disaster could have on its supply chain until the threat is already underway. This lack of visibility often leads to unexpected disruptions and delays, which then cause major disruptions to operations and subsequent financial losses.
For example, after incurring financial losses associated with floods in Asia, one large global manufacturing company’s Procurement & Sourcing Department created an internal reference that reflects the relationships among their Tier 1 and Tier 2 suppliers. Documenting their supplier taxonomy has enabled them to visualize their assets holistically while monitoring threats to those assets. Likewise, they have moved from a manual, labor-intensive global threat review to an automated system that proactively alerts them BEFORE their assets are in harm’s way. The benefits have been:
- The manufacturer is ‘in the know’ and no longer awaits their supplier to advise of a disruption (suppliers don’t want their manufacturing customers to seek alternative sources for obvious reasons). The manufacturer contacts the supplier to inquire what supplier is doing regarding the given threat.
- Activate ‘backup’ Tier 1 suppliers with visibility of associated Tier 2 supplier risk.
- Advise affected manufacturer stakeholders of the situation and what Procurement & Sourcing is doing to ensure operational resilience with no/minimal negative impact on the company. This informed communication/collaboration has been hugely valuable to the company.
Limited Ability to Mitigate Risks
Another problem that manufacturing companies may face is a limited ability to mitigate natural catastrophes and manmade risks worldwide. Even if a company has visibility into the risks, they may not have the resources or capabilities to take action to mitigate those risks. This can include things like building resilience into their supply chain, diversifying their supplier base, or developing contingency plans. Without the ability to mitigate risks, a company may be left exposed to significant financial losses in the event of a natural catastrophe.
Of course, having effective tooling assists in getting advanced optics on threats to the supply chain so that the manufacturer can take mitigative action to minimize impact. In addition, when vetting a new supplier, it’s advisable to use historical threat intelligence globally to:
- Understand all natural catastrophe risks before signing an agreement with the new supplier.
- Be a more informed buyer, using historical threat intelligence to negotiate the contract with the new supplier.
- Fully consider a given geography regarding logistics associated with supply lines (marine, rail, road, ports); what are the potential risks on the movement of supplier’s products to the recipient (e.g. the manufacturer or their Tier 1 supplier).
One of my clients used historical data to his advantage, selected a ‘less risky’ geography for one of his Tier 1 suppliers, and stipulated specific conditions in another new supplier’s agreement. Smart.
Inadequate Insurance Coverage
Finally, many manufacturing companies may be inadequately insured against natural catastrophe risks. Many traditional insurance policies do not cover supply chain risks, and even if a company does have insurance, it may not be enough to fully cover the costs of a natural disaster. This can leave a company exposed to significant financial losses, even if they have taken steps to mitigate risks and minimize disruptions.
Certainly, it behooves the manufacturer to ‘shop around’ and ensure the best possible coverage. Over the last twenty years, we’ve seen parametric insurance introduced and adopted by the market as one of many financial risk tools used. Given climate change and subsequent more severe, more frequent natural disasters, some insurance companies are offering creative and cost-effective solutions. I expect the insurance industry will continue to evolve in response to the ongoing global climate risk.