Natural disasters and supply chain risks.
Supply chains act as circulation systems for companies, linking the manufacturing and distribution of goods globally. In the modern era, many businesses have decreased their amount of local “sourcing” in favor of global supply chains in order to minimize costs and raise profits for their shareholders. Not only does this type of outsourcing effect the local work force and communities, but it also exposes said business to many new types of risks, including the risk of supply chain disruption due to natural disasters. A good example of this is the Japanese earthquake which occurred in March of 2011 which de-railed electronics manufacturing thus causing business disruptions in the automotive and tech industries here in the USA. On October 25th 2012 Superstorm Sandy struck and damaged many properties and facilities vital to various industries (again heavily affecting the US auto industry) and supply chains along the east coast of the US.
Managing these types of risk has become an increasingly important topic for businesses to address and there is much discussion and assessment of these risks as of late due to its relevance in the modern markets. The integration of risk management can seem costly for companies. Many had initially switched to global supply chains in an effort to reduce costs for their business and/or to offset capital levels in response to the troubled world markets and thus may perceive risk management as a deterrent to their business models. However, it is proving to be more and more crucial for companies to assess these risks and take measures to avoid vulnerability in supply chains. When a company operates over such a large geographical area, it exposes itself to the risk of business interruption due to unforeseen events such as natural disasters. Many risk specialists encourage the use of advanced supply chain modeling tools that can help surmise the financial impact of supply strength on product and service demand, and can measure the impact that new product manufacturing (or entering a new market) can have on a companies’ financial position. These risks are even further exacerbated by the possibilities of natural disasters disrupting supply chains and causing business interruption.
We all know now that climate change is increasing the frequency and intensity of natural disasters, and have seen these disasters occurring all over the globe. The link between a company’s product and its consumer market can easily be disrupted in various ways due to these unforeseeable, natural events. Risk assessment, modeling, and preparedness will prove to be vital for companies as they manage their global supply chains. Many insurers provide corporate business supply chain coverage or “all risks” policies intended to protect businesses from some of these risks. Many companies suffering business delays resulting from damage to a third party facility do not realize that they may be protected by their insurance policy. Corporate business interruption and extra expense insurance policies can be incredibly complex in their wording once again highlighting the importance of policy interpretation and comprehension when leveraging a claim with your insurer. Risk management again takes center stage as we continue to observe the mix of turbulent weather patterns and global business networking. How will your company respond in the case of a natural disaster? We, of course, feel that a well thought out, actively integrated risk management plan is essential for business survival in this new era of uncertain, and devastating natural events.