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RISK IN CONTEXT

Supply Chain Risk Becomes More Acute Amid Growing Uncertainty

Posted by David Lanfranchi December 02, 2016

Driven in part by uncertainty related to the US election campaign, global supply chain risk increased in the second quarter of 2016, reaching the highest levels since records began in 1995, according to a recent report prepared for the Chartered Institute for Procurement and Supply (CIPS).

With the elections over, the potential for “America first” trade policies and renegotiated trade agreements from the incoming administration may bring added uncertainty. This follows the UK vote in June to leave the European Union — commonly called “Brexit” — which exacerbated UK risk, with an immediate fall in the value of the pound and concerns about medium- and long-term access to markets if the benefits of EU trade agreements were to fall away.

As supply chain has been increasingly recognized as a critical risk, pressure has mounted to not only increase global supply chain resilience but also to ensure they have a positive social impact. 

Major catastrophes and controversies — such as the 2013 Rana Plaza factory collapse in Bangladesh and evidence of child labor and unsafe working conditions in the extended supply chains of multinationals — put significant pressure on organizations to adopt and demonstrate responsible behaviors.

Protecting Your Business From Supply Chain Risk

The combination of global financial pressures, protectionist policies, and an expectation that ethical standards will be monitored and continually enhanced means having a resilient supply chain is critical.

Given this environment, businesses may look beyond typical supply chain risk mitigation and management to captive insurers to provide more comprehensive coverage. 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-risk” supply chain coverage, supported by captive-funded, pre-placement risk assessments, can provide additional assurance for your business in a challenging risk environment.

You should work closely with your own supply chain managers and external advisors 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-risk” supply chain coverage for key elements.
  • Consider preliminary assessment funding and risk transfer through captive vehicles.

It’s important to remember that the assessment of supply chain risk is not a standalone exercise, but one that should be part of an integrated approach to the identification, mitigation, and transfer of risk.

David Lanfranchi