How Captives Can Help Solve the Supply Chain Riddle
Global supply chain risk increased in the second quarter of 2016, reaching the highest levels since records began in 1995, according to the recent report prepared for the Chartered Institute for Procurement and Supply (CIPS). The recent UK vote to leave the European Union (EU) has exacerbated UK risk in particular, with an immediate fall in the value of sterling and concerns about medium and longer-term access to markets if the benefits of EU trade agreements fall away. The election result in the United States creates further uncertainty with potential for more protectionist trade policies.
While supply chain has been recognised as a critical risk in multiple reports over recent years, there has been mounting pressure on global supply chain professionals to not only increase the resilience of their supply chains, but to also ensure that they are having a positive social impact. The World Economic Forum defines this as their impact on the environment and their ability to improve local economic activity.
Major catastrophes and controversies, such as the Rana Plaza factory collapse in Bangladesh in 2013 and evidence of child labour and unsafe working conditions in the extended supply chains of multinationals, have put significant pressure on supply chain officers to adopt and demonstrate responsible behaviours.
How can you protect your business from supply chain risk?
The combination of global financial pressures, political protectionism, and an expectation that ethical standards will be monitored and continually enhanced, emphasises the critical importance of global supply chains and the potential impact of their failure.
Given this environment, businesses may look to captives to provide more comprehensive supply chain cover. Traditional business interruption insurance provides only limited protection, as it is restricted to the impact of physical loss or damage at (primarily) first-tier suppliers. The development of full all-risks supply chain cover, supported by captive funded pre-placement risk assessments, can provide additional comfort for your business in a challenging risk environment.
We recommend that risk managers work closely with their own supply chain managers and external advisers where appropriate in order to:
- Identify/validate business-critical suppliers of goods and services and the suppliers on which they rely.
- Assess and quantify the impact of the loss of that supply and its inherent resilience.
- Obtain indicative costs for all-risks supply chain cover for key elements.
- Consider preliminary assessment funding and risk transfer through captive vehicles.
It is important to remember that the assessment of supply chain risk is not, however, a standalone exercise but one that should form part of an integrated approach to the identification, mitigation, and transfer of risk.