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Risk in Context

Don't Let the Next Catastrophe Fracture Your Supply Chain

Posted by Duncan Ellis June 11, 2015

Your supply chain is the lifeline of your business, but it also can be a significant vulnerability during a hurricane or other natural catastrophe. With hurricane season underway, it might be a good time to review your supply chain to understand critical dependencies and identify alternate sources in the event of a supply chain failure.

Although this year’s forecast for a below-average hurricane season may put some at ease, it only takes one major storm to significantly disrupt your suppliers and ultimately your operations. For example, during Hurricane Katrina, which hit 10 years ago this summer, wide swaths of critical infrastructure — including ports and harbor facilities — in Southern Louisiana and the Mississippi Delta were severely damaged. That disrupted many organizations’ supply chains, regardless of whether they were in the storm’s path.

SUPPLY CHAIN WORRISOME FOR MANY ORGANIZATIONS

Supply chain and business interruption losses are a major concern for companies globally. Supply chain risks account for 50% to 70% of all insured property losses — as much as US$26 billion a year, according to the Allianz Risk Barometer 2014.

Due to their locations, ports and many warehouses are particularly at risk to hurricane-driven storm surge, according to the Supply Chain Management Review. And even if your warehouses are protected, flooded transit routes, debris, and damaged infrastructure such as railroads, bridges, and airports can hinder your critical suppliers from operating.

PROTECTING YOUR ORGANIZATION

Most companies purchase coverage for unspecified suppliers, but materially fewer do so for specified suppliers, according to a recent report published by Marsh's Business Interruption Center of Excellence.  To help ensure your organization is adequately protected, take the following steps:

  1. Know your exposures — Identify supplies and suppliers in the areas likely to be affected by closures, power outages, or other service interruptions. Determine the extent of your reliance on these supplies and suppliers and the extent to which delays might affect you.
  2. Know your suppliers — A thorough understanding of your supply chain’s resilience can help manage potential disruptions caused by significant storms. Take a closer look at your suppliers and your suppliers’ suppliers to evaluate their contingency plans.
  3. Know your coverage —There is often a mismatch between the expectation of business interruption policies and the reality of the contract in place. Evaluate your policies for restrictions that may only compensate for insured perils at insured premises and determine if your coverage needs are being met.

By taking these steps you can help your organization make risk-informed decisions to lessen the impact of a supply chain disruption.

Related to:  Property , Flood Services

Duncan Ellis

Duncan is a managing director resident in the New York office and is the leader of Marsh’s US Property Practice.