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How Well Do You Know Your Supply Chain?

How Well Do You Know Your Supply Chain?


by Hassan Karim, Technical Underwriting Manager, Zurich Asia Pacific

Historically, businesses have focused their continuity plans internally, but today’s widespread outsourcing of services and the increasing size, complexity and interconnectivity of supply chains mean it is now critical for businesses to identify and manage their exposures effectively, whichever industry they operate in.

Asia is a major global manufacturing hub and home to some of the world’s largest producers, exporters and outsourced service providers. In today’s increasingly interconnected world, the potential impact to a supply chain – whether it is goods or services – is far-reaching and a board level issue for companies, with supply chain disruption regularly cited as one of the top concerns among senior management and risk managers from leading global corporations. The involvement of thirdparties means companies do not always have complete control over their own supply chain, yet the ripples of disruptions have the potential to affect the end customer, the brand image, revenues and even investors.

The need for managing supply chain risks has grown along with the dual trends toward globalisation and outsourcing. The first makes supply chains longer and more exposed. While this can provide increased flexibility and cost savings, it also requires more time for shipping and ultimately affects the time needed to end a disruption. The second makes companies more dependent on outsiders — external strategic suppliers who deliver ever-more complex and critical products that once were produced in-house.

Minimising potential disruptions to the supply chain can bring many benefits to an organisation, including improving cash flow, helping to protect its brand and reputation, bottom-line performance and maintaining shareholder value.

What happens when your supplier is disrupted by their supplier(s)?

The greatest exposures to supply chain risk can often come from suppliers that organisations have little or no visibility of, or from perils that they may have not considered. Half of supply chain disruptions occur beyond the preliminary supplier of goods (the direct supplier), which makes it extremely difficult to establish exactly where an organisation lies within its suppliers’ priorities. Understanding these risks has become increasingly challenging, with some companies having thousands of suppliers.

Alarmingly, many organisations are not aware who their key suppliers are, especially in the lower levels of the supply chain, and very few have visibility over their entire supply chain. This is despite 74 per cent of companies suffering at least one supply chain disruption each year, according to the Business Continuity Institute Supply Chain Resilience Report 2015.

For a supply chain strategy to provide a competitive advantage, companies need to build a holistic view of their critical suppliers, looking beyond just their first tier suppliers to further down the supply chain.

Mapping your supply chain

There are two key aspects in knowing your suppliers: one is knowing where suppliers’ supplies come from, sometimes all the way back to the raw materials. It is important to know where the supply is being produced as often companies are just given the billing address or head office location which can create a false sense of security, or provide misleading data when it comes to mitigation plans or natural hazard monitoring for example.

Uncovering such information can be a serious challenge, but is critical in protecting a company’s balance sheet. The other aspect is understanding where the organisation stands in its suppliers’ priorities. This relates to how the supplier views the insured and will impact how a supplier will respond to a disruption.

Companies do not need to map an entire supply chain before taking any action. For example, Zurich Insurance takes a unique approach by instead concentrating on where value is created for the company, thereby focusing clients’ resources on managing the risks that pose the greatest threat. As well as offering a detailed supply chain risk assessment which looks at 23 individual areas of risk, it can provide an “all risks” insurance cover focusing on incidents outside of the insured’s control, including disruptions related to both physical and non-physical damage, which can extend through to the lower tiers of the supply chain (subject to policy conditions).

Every business’ supply chain is different and requires a tailored solution that is designed to not only help reduce the number of supply chain failures, but also to provide cover in the event of an incident where supplies are not delivered or are otherwise delayed resulting in a financial impact on a company’s operations. As a first step, a comprehensive supply chain risk assessment will identify and quantify the exposure to critical risks throughout an organisation’s supply chain. The results can often be surprising, revealing unknown suppliers that are critical to a supply chain, while a large supplier might turn out not to be as critical as previously thought. The invaluable information from the assessment can then be used to inform business decisions and prioritise the necessary mitigation actions.

Gaining a holistic view of an organisation’s critical suppliers can provide the insights needed to help reduce costs, improve cash flow and solidify the value chain. A company that expertly manages risks in the supply chain by looking at its value chain – not its spend – will avoid some disruptions altogether and can bounce back quickly from others that are inevitable.

About the Author

Hassan Karim, ACII, is a Chartered Insurer and is currently Technical Underwriting Manager within Global Corporate Asia Pacific, having previously held senior roles in both London and Global Underwriting where he was involved in a number of global initiatives and projects related to Emerging Risks, Cyber, Property, Supply Chain and Business Interruption.

He is an experienced multi-line underwriter and international speaker, having spoken on a variety of topics related to Insurance from capital adequacy to supply chain risk and the implications of emerging risks and the rise of disruptive technologies on the Insurance industry.