Ripple Effect

As is often the case, it comes down to supply and demand.

But sometimes supplying that demand is slowed – even stopped – by a single event or a tangle of interconnected ones that break vital supply chains, producing adverse and expensive ripple effects.

Supply chain disruption should be a concern, and certainly is if several recent reports and surveys reflect an accurate image of what’s what.

Consider the results of Allianz Risk Barometer 2013, a survey of 529 corporate and industrial insurance experts from 28 countries across the Allianz Group. Allianz Global Corporate & Specialty (AGCS) reports business and supply chain interruption was identified as the top risk companies face in 2013, cited by 45.7% of respondents. Compare that to natural catastrophes at 43.9%.

For the United States and Canada as a region, the top concern did not change, though the percentages were higher: business interruption, supply chain risk was at 54.8%, and natural catastrophes at 53%.

“The flexibility that provides a modern supply chain with its cost advantages has also created its inherent vulnerability,” Paul Carter, global head of risk consulting at AGCS, notes in the company’s survey report. “Checking a supplier’s own business continuity planning should also be embedded in the supplier selection process and, ideally, include even the suppliers of the primary suppliers,” the report adds.

Business interruption often goes hand in hand with natural disasters. But despite the connection – as shown by Hurricane Sandy, for example – companies are not properly prepared for certain types of business interruption, such as IT failures and power outages.

Not only are supply chain interruptions a concern when it comes to preparedness, they are a concern when it comes to cost.

A new survey from Deloitte Consulting LLP indicates that of the 600 polled manufacturing and retail executives (mostly in North America, Europe and China), 53% said these interruptions have become more expensive over the last three years, while 48% noted the frequency of risk events with negative outcomes has increased.

A report from PwC, based on its 16th annual global CEO survey, says the move to “new and unfamiliar markets is opening up insurers to risks about which they have virtually no data.” It points to the $12 billion in losses linked to the Thai floods two years ago, prominently from supply chain and business interruption claims from other countries.

“The flooding disaster in Thailand showed that business interruption at a key supplier can cause a ripple effect felt across an entire industry,” adds Timon Mueller, AGCS’s head of property underwriting.

Last December, Amy Ingram, vice president and worldwide clean tech manager for Chubb Group of Insurance Companies, noted that “a catastrophe like the Japanese tsunami can shut down suppliers for months and sink a company that does not have a business continuity and recovery plan.”

Ingram made the comments in a statement announcing results from the Chubb 2012 Clean Tech Industry Survey, which involved decision-makers at 268 clean tech companies in the U.S. and Canada. The survey found that 36% of clean tech companies polled have not created a supply chain disruption plan.

Last March, the Business Continuity Institute reported results from 17 organizations interviewed earlier that year. The time for business supply chains to recover from the earthquake and tsunami in Japan or the earthquake in New Zealand, both in 2011, varied widely: 29% of respondents reported their supply chain was back online within a week; 24% said within a month; and 41% said within one to six months.

For the two respondents in the survey affected only by the Christchurch earthquake, they reported it took between one and 12 weeks to recover.

Being properly prepared demands looking beyond a particular event; it requires understanding that supply chain disruptions can result from numerous influences.

A supply chain risk assessment is a must to quantify disruption exposures, calculate recovery costs and identify mitigation actions.