Risk Management Strategies to Mitigate Supply Chain Disruption

From Mike Flaherty Posted in Alerts

There is little doubt Risk Managers have great angst over supply chain risks based on the complexity and enormity of the perils they face. Obviously, there are numerous broad based factors to consider when operating a business that has to rely on external organizations to sustain your ability to function on a daily basis. Both up and downstream considerations present catastrophic issues to the viability of your organization, and need to be identified and planned for prior to any losses occurring.

Supply Chain threats come from a multitude of factors including economic, judicial, political, environmental, or societal to name a few. Availability of raw materials due to limited resources, fire destroying a sole-source supplier facility, change in public sentiment towards your product can cripple a portion of your operation, or seize the operation entirely for an extended period of time.

Through appropriate risk management initiatives and a thoughtful evaluation process, the long-term impacts of a disruption in your supply chain can be minimized. Equally important, many techniques will not require any additional operating expenses to your organization. The following is a basic outline of the process:

The initial step in the process is to identify opportunities for disruption within your supply chain. Examples like a single source provider of raw materials, or finished product; limited availability of raw materials important to your process; drastic fluctuation in prices of materials incorporated into your product; geographic considerations of vendor or supplier relationships; etc… A major disruption in any facet of your process will likely cause a cascading failure of the remainder of the process.

Now that opportunities for disruption have been identified, the impact of each on your organization and its ability to operate needs to be analyzed. Factors for consideration include:

  • Frequency – What is the probability of frequency and severity of disruption?
  • Financial – What are the short and long term impacts of the particular disruption to the organization, its employees, clients, and suppliers?
  • Operational – What is the likely impact on the current and future sustainability of the business?
  • Reputational – What will be the consensus response to a disruption of the operation resulting from a particular business disruption, and what is required to correct?
  • Organizational – What alternatives are available beyond the current operational model to mitigate the severity and duration of a disruption?
  • Workforce – What is the need of the organization to retain the existing workforce during the disruption, and what are the associated expenses?
  • Solutions – What options are available to finance the impact of this disruption?

Once the potential disruptions and subsequent impacts have been identified and analyzed, an organization must implement procedures to control the likelihood of an impactful disruption. In many cases, advanced planning can significantly reduce the impact of a disruption and its associated expenses.

Considerations prior to a disruption should include:

  • Disaster Recovery Plan creation, implementation and testing;
  • Pre-negotiated terms with an alternate supplier or vendor;
  • Bilateral agreement with a “friendly” competitor to assist in the event of a disruption;
  • Inventory of raw materials on hand in the event of a supplier disruption
  • Off-site redundant computer back-up.
  • Alternative venues for operations or distribution should regime changes or civil unrest cause disruption

If there is no means available to control or avoid the exposure, an organization must determine the most appropriate way to finance the risk. This can be accomplished by retaining the exposure, or by transferring it to a third party such as an insurance carrier. There are a number of tools that can help an organization determine the appropriate level of coverage and coverage limits for losses resulting from a shutdown (Business Interruption) or the shutdown of a critical supplier or vendor (Contingent Business Interruption).

When determining appropriate limits of insurance or acceptable limits of retained losses, an organization should utilize outside expertise such as their CPA, a TCOR™ Certified Analytical Insurance Broker, or Risk Advisor to ensure that all financial exposures are contemplated in the figure.

The transfer of this risk to an insurance company will bring expenses, and does not guarantee the policy will respond to the unique set of circumstances present in any loss. On the other hand, employing the retention transfer technique will tie up available capital for the company, if reserved in advance, or may exceed the liquidity of the company if not reserved. Again, soliciting the thoughtful input of outside advisors will aid in accessing the best course of action for any organization.

In conclusion, the most important mitigation factors when facing a supply chain disruption is prior planning, consistent procedure execution, and constant monitoring and updating of the procedures to fit the most current needs of the organization. Having the appropriate policies and procedures in place prior to a loss is critical in ensuring the organization’s ability to remain viable during, and long after, the disruption.