Hurricane Irma highlighted how fragile America’s supply and logistical chains can be. Thanks to a variety of technologies like RFID tracking and just-in-time supply chain management, U.S. businesses are running leaner than ever. And sometimes, all it takes is a bump in the road to show us just how lean, and how easy it is for events beyond anyone’s control to wreak havoc with a business’s ability to function.
When Hurricane Irma walked up the Florida peninsula, tens of millions of Floridians flocked to stores to stock up on bottled water, batteries, ice and other supplies, expecting to be out of power for days and possibly weeks after the storm.
Meanwhile, the storm itself blocked trucks and trains from coming down the peninsula for days. Shippers could not risk their trucks, drivers and cargos in the violent storm. This prevented the normal delivery of all kinds of supplies, from fuel to food, water and generators.
The result: Gas stations had no fuel to sell, grocers had no meat and bakers had no bread. Each of these businesses suffered significant financial losses because they couldn’t sell product – even if they made it through the storm unscathed.
Further examples: Hundreds of businesses in the U.S. were disrupted because the 2011 Tohoku earthquake and tsunami in Japan destroyed scores of their suppliers and interrupted operations for many more. The tsunami and quake led to a worldwide shortage of semiconductors, computer components and other parts.
And the 2011 floods in Thailand, affecting many manufacturers, caused widespread disruption to companies in Europe and the U.S. that relied on them for product, with total losses from business interruption claims elsewhere amounting to as much as $12 billion.
It could happen to your firm
A disaster doesn’t have to befall you right in your own town to cause a major supply disruption that can severely affect your business. As shown above, companies that rely on overseas vendors are particularly at risk of having their operations hobbled by natural disaster, strikes or disruptions to transportation or supply chain functions.
Mitigating supply chain risk
Of course, insurance coverage is only part of the risk management solution. Business owners and risk managers should also consider other ways to limit damages from supply chain interruptions. Common measures include:
• Local storage or warehousing of a stockpile of needed materials.
• Developing multiple supply sources.
• Identifying and contracting with backup or contingent vendors.
• Developing new markets to diversify revenue sources.
• Writing detailed contingency plans.
• Including supply chain interruption in business continuity planning.
Contingent business insurance
Contingent business insurance (CBI) reimburses you against losses arising from disruptions to other companies and people, not just those directly affecting you and your company. In some circles, this insurance may also be called dependent property insurance, and is usually purchased as an extension of your commercial property insurance policy.
However, CBI by itself is frequently not a practical solution – especially for businesses with supply chains that extend overseas, or that rely on long transportation lines.
Supply chain insurance
When CBI alone isn’t the solution, that’s where supply chain insurance comes in. This type of coverage provides protection against a much broader array of risks than CBI.
For example, supply chain insurance may provide coverage for these perils that are usually excluded from CBI policies:
• Industrial accidents
• Strikes and labor unrest (such as a longshoreman’s strike at a major harbor)
• Raw material interruptions
• War, terrorism or civil disorder
• Disruptions of transportation lines (i.e., a train derailment or washed-out bridge)
• Loss of ingress or egress
• Power and water services loss
• Loss of telephone services
• Pandemics
• Cyber attacks
• Regulatory or political action in foreign companies
• Bankruptcy or insolvency of a supplier or purchaser on whom you rely.
Supply chain insurance can be single-tier – covering only vendors and purchasers on whom you directly rely – or multi-tier. Multi-tier insurance would also cover you against interruptions to your suppliers’ suppliers.
Do you need supply chain insurance?
Supply chain insurance and CBI is most important for companies that rely on specialized vendors that cannot be replaced, or if you have only a single buyer or rely on just a few buyers.
It’s also most important for businesses using just-in-time production or shipping, operating on lean manufacturing methods, and/or those with low cash or liquid reserves and limited ability to endure disruption.
Call us today for a professional risk assessment and insurance review.
