Tuesday, January 22, 2013

Want to Reduce the Impact of Supply Chain Risk?

This article is built upon the reading “Stress Test for the Global Supply Chain”. The article touches upon the impact of events that have low probability of occurrence (like a natural disaster) on the supply chain. As the supply chain management goes through layers of improvisation, there is an increased need to develop a supply chain model that empowers the organization to spring back from such impacts.

When a project is initiated, the budgeting incorporates any costs associated with risk management. Similarly the supply chain has to be undertaken as a project that feeds the organizations business and the risks, surrounding the supply chain, should be analyzed and responded with mitigation plans. Though the less probable incidents like natural disasters, terrorist attacks and riots cannot be predicted, they can be anticipated in some regions. For instance, Japan - an earth quake zone, should have been identified as a weak link in the supply chain handled just like any other risk in a project – by allotting a cost to reduce the impact of the situation. In the case of HP, the earth quake in Japan brought the operations of HP to a halt and caused business loss (customer base that switched to other manufacturers) and financial loss because of the failure to meet the orders.

Trade Disruption Insurance protects the companies that are forced to operate with weak links in their supply chain for strategic reasons (like in the case of HP as discussed in the reading material). In addition to bearing the financial loss, the TDI[1] also pays for any additional cost involved in continuing operations from/through another facility/channel. As it is not always practical to refrain from such weak links, incorporating such risks in the mitigation plans and protecting the supply chain by procuring a Trade Disruption Insurance would enable the company to recover from at least the financial impact. The operation restoration could only be achieved with a disaster recovery plant that is readily operable though.

Most companies that protect their tier I suppliers with CBI[2] (Contingent Business Interruption Insurance) do not realize the need to protect the weakest link in the supply chain. Considering the financial impact of business interruption & restoration, is it not compelling to consider TDI as a life injector when there is a major blow to the supply chain?


[1] Inbound Logistics, Reducing Risk With Trade Disruption Insurance, by Robert L. Sobel, April 2010, <http://www.inboundlogistics.com/cms/article/reducing-risk-with-trade-disruption-insurance/>

[2] Inside Insurance. "Inside Insurance." Chronicle Augusta. Inside Insurance, 12 Oct. 2012. Web. 22 Jan. 2013. <chronicle.augusta.com/news/business/your-business/2012-09-12/inside-insurance-businesses-must-consider-better-supply-chain>.

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