Supply Chain Risk and Contingent Business Interruption (CBI) Insurance
In today’s highly globalized business environment, companies recognize more than ever that disruption in their supply chains – or to their vendors’ operations -can cause immediate impact on their ability to provide their customers with dependable on-time delivery of their products and services. Addressing this formidable risk requires more than just internal resiliency— it requires a commitment by every vendor in the supply chain to achieve a similar state of readiness.
Unfortunately, the inability to continue operations after an interruption may only become obvious after the supplier is no longer able to meet its obligation. The result is that the end product or service is delivered late, if at all. The effect is loss of confidence, lost revenue, potential loss of customers to competitors – and the reputational damage that can ensue. Volcanoes, tsunami and typhoon-driven floods are recent examples of natural disasters suffered by single or sole source suppliers that have had a major negative impact on some of the largest and most sophisticated companies in the world. Volatile international political and social instability seems less predictable and more prevalent than ever before.
To be fully prepared for operational recovery, companies should look past their primary suppliers to secondary and tertiary vendors in their supply chains to fully appreciate their vulnerability to global disruptions. They should develop vendor resilience auditing programs. They should understand how to quantify value-at-risk in their supply chains (good in raw material form, in production, in storage, or finished goods in transit) as an element of arranging contingent business interruption insurance. They should identify their single points of failure from sole sourcing - as potential unintended consequences of efficiency and cost take-out strategies such as lean manufacturing, just-in-time procurement and consolidation.
This kind of business continuity planning at the supply chain level is fundamental to providing the clarity required by underwriters and re-insurers in order for them to provide sufficient capacity and pricing for contingent business interruption insurance coverage that can financially transfer supply chain risk.
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For more information, please contact RSI today!