War in Europe, inflationary pressures and the ongoing fallout from a global pandemic are all contributing to supply chain disruption in many industries. Insured persons need a risk management partner who, in addition to tailor-made insurance cover, is also available to advise them.
Supply chain risk is not a new concept for underwriters or risk managers. But it is no exaggeration to say that the extent to which supply chain issues are now affecting the operations of businesses across many industries is unprecedented in our lifetime.
“I read the other day that about 95% of Fortune 1,000 companies are currently reporting significant supply chain disruptions. This is as systemic as possible,” said Seth Hedrington, senior vice president, major accounts – risk management at Liberty Mutual.
Supply chain issues not only affect companies’ ability to obtain essential materials, but also impede their ability to fulfill their contracts and deliver goods to their end customers.
“The broader risk management concerns relate to supply chain uncertainty, quality control and contractual liability. Talent risk is also a factor given how labor shortages are affecting manufacturing, construction, hospitality, retail and a host of other industries,” said Heath Kidd, vice president, Industry Solutions at Liberty Mutual. “It’s really hard to overstate how pervasive these issues are across all industries and the risk landscape.”
Different causes, similar solutions
The reasons we see supply chain disruptions of this magnitude are diverse and in some cases overlap. But the most important of these are an ongoing global pandemic, the war in Ukraine, and the aforementioned labor shortages and inflationary pressures, which are driving up material costs for numerous industries.
Regardless of the causes of supply chain disruptions, yesterday, today or in the future, the approach to managing these risks applies over time and across all sectors.
“I think many companies have been caught off guard by the severity of the supply chain issues they are facing and don’t want to be burned again. Supply chain risk management can and should be a proactive risk management decision. And that goes beyond insurance coverage. There are many operational considerations that can help mitigate risk significantly, and we see many of our clients taking these steps,” Hedrington said.
There will be those who do little, and that’s a legitimate choice, but understand that they’re essentially insuring themselves against that risk. It comes down to a business decision,” he added.
Four key mitigation actions to address supply chain disruptions
1) Check your extended supply chain. “First and foremost, companies should think about supply chain reviews,” Hedrington said. “And in many cases that can be quite a long chain; longer or more complex than expected.” He explained that traditionally, most companies have examined their key suppliers to assess whether they can deliver key goods and services when and where they promise.
But he said it’s not that common for companies to audit their secondary and tertiary suppliers.
“I think one of the most important mitigation techniques is to broaden your view of what the supply chain really is beyond those primary suppliers,” Hedrington said.
This includes reviewing suppliers, particularly when adding new suppliers to fill material shortages at existing suppliers, or when trying to diversify suppliers. Businesses might also consider ensuring that supply chain partners include the business as an additional insured in general liability policies, Kidd said.
Communication with suppliers’ insurers and brokers at all levels should be open and as frequent as possible to ensure all stakeholders respond to this increased supply chain risk and manage their operations accordingly, he added.
2) Rethink your business continuity plan. A second key factor, Hedrington said, is maintaining a current and quality control focused business continuity plan.
“Does your business continuity plan include where you will source critical materials if a key supplier fails?” is a question Hedrington asked.
He also explained that many companies may consider material substitutions to adapt to shortages, but that this can pose unexplained risks.
Many of us remember the remarkable replacement of Chinese drywall after supplies of American-made drywall ran out due to rebuilding demand after several severe hurricanes in the Southeast. The Chinese drywall used to build thousands of homes there between 2002 and 2007 was found defective, causing health problems and property damage.
“Make sure you’re proactive in having and nurturing relationships so you can go to a secondary or even a third source if needed,” Hedrington said.
Kidd cautioned that product liability and product defect claims can be serious and lengthy.
Apart from taking all preventive measures to ensure the quality of the materials, this also means developing plans to respond to situations where a substitute material is not enough and anticipating how to deal with the consequences.
Given the challenges many organizations face in finding skilled workers and keeping their operations fully staffed, you should also analyze how labor shortages might impact quality.
3) Reevaluate inventory management. A third mitigation technique that represents a significant change in the way companies do business is inventory management.
There was a time in the not too distant past when just-in-time delivery was all the rage in manufacturing, retail and other sectors. The logic was that companies could save money by ordering and receiving the products they needed within a predictable target date, thereby avoiding the need to tie up capital in extensive inventory. But it has left many companies empty-handed in the face of recent supply chain challenges.
“Healthcare and the crisis of PPE, even ventilators, in the early days of the pandemic are examples of this vulnerability,” Kidd said. “Many, probably most, hospitals didn’t have enough protective equipment available during the first virus waves. Because of the lead times and supply chain issues, you just couldn’t get them. A lot of them are rethinking that.”
“Now the same thing is happening in all kinds of industries, and that applies to raw materials as well as parts and equipment. Many companies try to offset this risk by stocking more items. But this brings with it some other risks that policyholders may not be aware of.”
For example, when inventories increase, many companies face inventory constraints. It is important to consider other related issues such as: B. scaling property coverage to match existing supply, as well as maintaining up-to-date valuations to ensure coverage is appropriate.
4) Proactively manage contracts. A fourth technique is contract monitoring and flexibility. Widespread supply chain disruptions mean that many companies are at risk of not being able to deliver goods and services at the promised price level and delivery date.
“Many companies are in dire straits right now because of potential breaches of contract,” Hedrington said.
Their contracts were not flexible enough to accommodate adverse circumstances.
“We’re also proactively letting them look at this as another non-insurance technique,” Hedrington said.
This should include a sober assessment of a company’s ability to complete projects on time, within contract specifications and within budget. Breach of contract or financial performance problems can lead to professional liability claims. It is important to continually assess the adequacy of coverage and adapt to the changing environment, while recognizing that these types of claims tend to have long arrears, so the true impact may not be seen for some time.
A productive partnership
Whether it is reviewing the supply chain, strengthening a business continuity plan, identifying alternative suppliers or analyzing the suitability of customer contracts, Liberty Mutual is working with customers and brokers to guide them through this time of disruption accompany, they said.
“I think it’s at times like these that you really learn to appreciate these collaborative partnerships. Perhaps the whole lesson from all of this is how connected business is today. No one will be able to get through this alone. That’s true for insurance, and that’s why it’s so important to have a team that can bring the best insights to these planning discussions and provide the risk control guidance that can help mitigate some of these impacts in the future,” Kidd said.
“We differentiate ourselves beyond the products and services we provide by meeting clients where they are from a risk perspective and really helping them bridge the gaps,” said Hedrington. “We are partners in all areas of risk management, not just the product [insurance coverage] side of things,” he added.
“We integrate feedback based on what we see, what the claims data tells us and what our customers are experiencing in the marketplace, and respond to that with industry insights, trends – observations that then allow us to inform a better process going forward” said Kidd.
“I think that’s what sets Liberty apart. And I think that allows us to respond to the needs of our customers and respond to the demands of the market.”
To learn more, please visit https://www.business.libertymutual.com/.
This article was created by R&I Brand Studio, a unit of Risk & Insurance’s Advertising Division, in partnership with Liberty Mutual Insurance. The editors of Risk & Insurance were not involved in the creation.
Liberty Mutual Insurance offers a wide range of insurance products and services including general liability, property, commercial vehicle, deductible and workers’ compensation.