This seems to be the year that companies will no longer be able to use supply chain disruptions as an excuse. As shockwaves that happen in one corner of the globe increasingly reverberate throughout worldwide operations, there has been a slow awakening to all the potential repercussions of supply chain risk. Too many companies remain asleep, however, and that will become more and more unacceptable to shareholders and corporate boards in 2013.
“We surveyed all of our risk engineers recently and asked them what is the biggest blind spot for 2013,” said Linda Conrad, director of strategic business risk at insurer Zurich. “Without prompting — it wasn’t multiple choice or anything — they came up with supply chain.”
In this day and age, supply chain disruptions are inevitable. A 2011 Zurich survey found that 85% of companies had experienced at least one disruption in the past year. Nearly one-third reported more than six. Still, companies remain unprepared.
When disaster strikes, she says, companies are usually ready to deal with the property loss. But they continue to be caught off guard by the wide-ranging exposures presented by the subsequent business interruption (BI) and contingent business interruption (i.e., downtime experienced by suppliers). Worse still, while property claims are relatively easy to quantify after a disaster, the percentage of claims caused by supply chain issues continues to rise. “We see that validated within Zurich in the research that we do in our own claims,” said Conrad. “Property damage is pretty much steady, but it is the contingent BI and BI that is really increasing exponentially.”
She credits that fact to a lack of understanding. “People haven’t necessarily spent the time to quantify it, to understand where their exposures are.” Additionally, the insurance market for these more complex business interruption claims is immature. Companies have not habitually transferred the risk away as they have with many other potential large-scale losses. The result is that reputational damage, shareholder impacts and coming up with cash to deploy an adequate recovery plan while sales are low remain major problems after a disruption.
“They’re bearing all of that on their own balance sheet when something happens,” said Conrad. And that hit to the bottom line is something no investor wants to see.