No matter your line of work, it’s likely you heard the term “supply chain” more during the last week of March 2021 than you did in all of 2019. Blame it on the Ever Given – and, of course, the pandemic.
The Ever Given, for those who either haven’t been following the news or simply didn’t pick up on the name, is the giant cargo vessel — roughly equivalent in size to the Empire State Building — that wedged itself in the Suez Canal on March 23 and blocked the busy waterway for over a week. More than 400 ships were essentially stopped in traffic, tying up billions of dollars in international trade.
Making matters worse, the massive mishap coincided with ongoing delays in international shipping by land and air, much of it caused by COVID-19.
"There's been a great convergence of constraints in supply chains like I've never seen before," Bob Biesterfeld, the CEO of global logistics firm C.H. Robinson, told CNN. "It really has been unprecedented."
For manufacturers — particularly those who rely on materials, parts or finished products from distant producers — it also has underscored the importance of supply chain insurance and protection against contingent business interruption.
Contingent Business Interruption Insurance covers losses caused by a disruption in the supply chain, whether the disruption occurs at the point of origin or at the back end, shutting down one or more of your customers. Standard insuring agreements typically require three elements be present to trigger coverage:
- A covered cause of loss, as described in the policy declarations, behind damage or loss of property;
- Necessary suspension of operations during the period of restoration;
- Actual loss of business income.
Because the Ever Green’s blocking of the Suez Canal wasn’t the result of physical damage, CBI Insurance won’t cover resulting losses. Broader Supply Chain Insurance, on the other hand, will.
As the Insurance Information Institute (III) notes, Supply Chain Insurance “covers losses caused by a wide range of events, including:
- Natural disasters
- Industrial accidents
- Labor issues, such as strikes, shortages, etc.
- Production process problems
- Political upheaval, war, civil strife
- Riots or other disruptive civic action
- Closure of roads, bridges, or other transportation infrastructure
- Public health emergencies, such as pandemics requiring quarantine
- Regulatory action
- Financial issues, such as solvency, cash flow problems.”
If you question the value of such coverage, ask yourself this: What would happen if one of my key suppliers went down for three or four months?
Given the current hard market for Property and Casualty Insurance – increased rates and underwriter selectivity, reduced availability of and limits on coverage, greater reliance on the excess and surplus markets – managing your business’ risks and working with a knowledgeable agent or broker are more critical than ever.
Here are five tips for managing risk and containing costs:
- Multi-source. Warehousing inventory mitigates the impact of supply chain disruption, but warehousing is expensive, and that’s why many companies use a just-in-time system of aligning inventory with production schedules. To mitigate the risk of just-in-time, consider maintaining at least a minimal inventory, and, whenever possible, utilize more than one supplier.
- Be prepared to present a strategy for responding to a supply-chain disruption involving a sole supplier. Multi-sourcing sometimes may not be possible, particularly for highly specialized, highly sophisticated products. Certain components of some medical devices, for example, may have only one manufacturer. Underwriters will take note.
- Pay attention to policy limits, and consider requesting a limit hike.
- Include in your policy a specific named supplier – or, if applicable, suppliers. Some insurers offer multi-tier supplier coverage. If your supply line includes multiple tiers, try to avoid any gaps in coverage.
- Push to include Dependent Properties Coverage in your policy. This pays for the loss of income or increase in expenses resulting from a covered cause of loss to the premises of an organization on which the insured business depends, be it a supplier or a customer.
Getting Beyond the Pandemic
At a recent event in Washington, D.C., lawmakers from both sides of the congressional aisle expressed optimism that manufacturers will emerge from COVID-19 stronger than ever. But we’re not out of the woods yet.
Zahir Balaporia, Senior Director of Solutions Consulting for data analytics firm FICO, recently outlined a path forward from the pandemic for the publication Supply and Demand Chain Executive headlined 3 Stages for Getting Your Supply Chain From Recovery to Resilience. Here’s a summary:
Stage 1: Get through recovery. This is the survival stage.
- Avoid making too many or unnecessary changes.
- Avoid complex forecasting techniques.
- Practice wargaming.
- When communicating, keep it simple.
- Focus on making the uncomfortable comfortable.
Stage 2: Pause for discovery. In a nutshell, identify the parts of your operations and pieces of information that are most critical to running your business.
Stage 3: Steps to resiliency. Prepare for an uncertain future that will be different in unknown but significant ways.
- Don’t put off resiliency planning just because things have improved.
- Commit to improving your digital supply chain (e.g., capturing needed data and gathering it for insights).
- Don’t conflate resilience with simplicity (i.e., avoid single-sourcing, if possible).
- Incorporate optimization models into your operations. An investment that raises costs by, say, 5% could make your network 50% more resilient.
- Remember that one size does not fit all. Your company is unique and therefore requires a unique resiliency plan.
One more step: Register for Alera Group’s April 28 webinar, Cyber Security: What to Do Before and After a Breach. The risk of cyber breach is greater than ever. Take part in our webinar to learn how to build a cyber-security strategy that will help you protect your business.
About the Author
Senior Vice President
Lighthouse Group, an Alera Group Company
David Hildenbrand has been an account executive with Lighthouse Insurance Group, an Alera Group Company, since 2003. His focus has been on providing business insurance solutions for manufacturing and human service organizations.