APICS CEO Abe Eshkenazi, CSCP, CPA, CAE -
June 06, 2014
Interesting that the May 23 issue of CFO Magazine highlights supply chain risk, indicating that everyone in the C-suite is starting to pay attention to this important (and expensive) topic. Of course, it’s a subject that has been on the minds of supply chain and operations management professionals for a long time.
The article, which focuses on the insurance aspects of supply chain risk, starts by outlining the effects of the 2011 Japanese earthquake and tsunami. American supply chains, mainly in the automobile and electronics industries, were disrupted because Japanese and Thai suppliers couldn’t deliver. The insurance industry also took a big hit.
“Whereas business interruption insurance covers lost profits and continuing expenses as a result of physical damage to a policyholder’s own facilities, contingent business interruption insurance covers such losses stemming from damage to the premises of a supplier or customer,” Edward Teach writes. Large companies usually have both types of insurance, but smaller companies might skip the contingent business interruption insurance.
Still, supply chains are increasingly complex, as businesses partner with sources near and far to cut costs, while they rely on just-in-time principles to keep their inventories lean. This means disruption can be all-the-more devastating. The article points out that the 2011 disasters in Japan revealed concentrated supply chain risk—many US manufacturers relying on only a few suppliers. As a result, insurers had to raise prices and limit coverage.
The experts interviewed stress the importance of knowing business insurance coverage—where it starts and stops. For example, does it cover flooding? Does it cover flooding of your suppliers? Does it reimburse you for service interruptions caused by a power outage? “Contingent business interruption insurance may cover a company’s direct and indirect suppliers and customers, or just the direct ones,” Teach writes.
It’s complex, but insurance companies also can offer higher limits when companies have an established supply chain risk management program in place. Some companies qualify their suppliers and their suppliers’ suppliers if applicable. These measures, combined with high-quality data, demonstrate supply chain resilience to insurers and investors.
When it’s worth the risk
Consider the following from the APICS Supply Chain Risk and Reward Folio: “There is not yet insurance for every supply chain risk. Or available insurance costs offset expected reward. This means sharing risk, mitigating risk, or self-insuring against risk across the supply chain. Supply chain strategy helps clarify risk and reward worth facing. Supply chain risk management must continually investigate and evaluate appropriate risk and reward balances.” At APICS, we know that risk and supply chain management go hand in hand. Therefore, we offer a variety of resources for professionals seeking knowledge on the subject. For example, APICS 2014 will once again include the risk and resiliency learning path, which features sessions to help attendees learn how to foster resilience in their supply chains, proactively manage vulnerabilities, and recover quickly after a disaster strikes. APICS 2014 takes place October 19–21, in New Orleans, Louisiana. Find out more at apics.org/conference.
Additionally, before the conference, APICS again will feature the APICS Supply Chain Risk Management Seminar, a popular one-day overview of important topics in risk management. This seminar is an essential element of the APICS Risk Management Education Certificate, which demonstrates a commitment to employers that the certificate holder can be a valuable participant in the development of a global risk mitigation strategy. Please visit apics.org for information about these or any APICS programs.