Reducing Your Exposure

        Supply Chain Risk Management


What can a risk manager do to effectively mitigate risk in such an environment? Fortunately, there is a growing body of best practices for risk management across the supply chain. One of the most important things is to stay abreast of every development in your environment. Consider the following steps you can take to mitigate your business’s risk:

     • Choose suppliers carefully, and conduct regular audits and inspections if
     possible to ensure that their commitment to business interruption
     prevention matches yours.

        ◦ Check the Moody’s or S&P rating of potential suppliers.

        ◦ Verify suppliers’ insurance coverage. Remember, a certificate of insurance
        is evidence of insurance only when the certificate is written, and not at any
        time after that moment.

     • Clearly define contract scopes and draft contracts carefully with the
     assistance of specialized legal counsel. Consider indemnification,
     hold harmless and defense agreements.

        ◦ Learn and understand the extent of your exposure, and create a business
        interruption worksheet to quantify as accurately as possible the effect
        these exposures could have on revenue and profit.

        ◦ Re-evaluate the worksheet on a regular basis to account for changes in the
        market or your business model. Focus not only on the inherent risk of a
        broken link in the supply chain, but the interdependencies
        between links throughout the chain.

        ◦ When there is a global event, examine your supply chain to see if any part
        of it might be affected.

        ◦ Be aware of developing risks, e.g., cyber warfare, climate change,
        nanotechnology, synthetic biology.

     • After identifying risks, put a plan into place. While it is easy to prioritize
     speed over follow-through, identifying risks is of little use if steps are not taken
     to mitigate these risks. Plans might include these components or others:

        ◦ Business continuation plan

        ◦ Geographical diversification of servers

        ◦ Plan to relocate business to an alternate location

        ◦ Sourcing of goods from alternate suppliers

     Of course, some supply chain partners may have several locations that could keep
     the flow of raw materials going in the event of a disruption. Investigating these
     factors is an important component to creating a supply chain risk
     management plan.

     • Transfer your risk by purchasing appropriate coverage, which could
     include the following, depending on your exposure mix and risk tolerance:

        ◦ Business Income Disruption

        ◦ Marine and Cargo coverage for long voyages taken by commodities,
        components and finished products

        ◦ Liability coverage, including Commercial General Liability, and Directors
        and Officers Liability

        ◦ Other special endorsements specific to your exposures

        ◦ Carefully read your policy and ensure that it includes coverage of loss
        of supplier, stoppage of supply and interruption of service.

While lean production has become a cornerstone of successful supply chain management and a way for businesses to stay flexible and responsive to changing tastes in their markets, the dependence on and relationship with suppliers resulting from outsourcing and minimizing stock creates a host of exposures. This was no better demonstrated than by the natural disasters in Japan in spring of 2011. Successfully navigating and managing the risks presented by a complicated supply chain that spans across regional, national and especially international territory is a complicated endeavor considering the countless precarious factors that can cause disruptions or liability issues across the entire supply chain.