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Supply Chain Disruption Lessons from Pandemic

Besides the health and economic devastation that the COVID-19 pandemic has left in its wake, it has also caused supply chain disruptions that have affected a number of industries.

The fallout for companies of all types illustrates the fragility of most businesses’ supply chains. The pandemic has left retailers with half-empty shelf space because product manufacturers couldn’t keep operations going due to raw material or personnel shortages, while a number of carmakers and other manufacturers have had to suspend operations because of a global semiconductor shortage.

But it’s not only large companies that suffer, and small businesses are especially vulnerable. That’s why it’s important that you have in place a solid plan for averting and dealing with disruptions to your supply chain if you rely on materials and inputs from outside vendors.

Here’s what you can do to manage this growing risk.

Understanding your supply chain

You should start by identifying the risks within your supply chain and developing ways to mitigate them.

You should document this process in your risk management plan, which is part of your overall business continuity plan.

There are four main types of external supply chain risks, which are largely out of a business’s control:

  • Flow interruptions — Problems caused by interruptions to the movement of products, like finished goods, raw materials, or parts.
  • Environmental risks — Economic, social, political, terrorism threat, and weather-related factors (like storms that damage facilities and infrastructure) that can affect the supply chain. The COVID-19 pandemic falls into this category.
  • Business risks — Problems caused by factors like a supplier’s poor financial or general stability, or the purchase or sale of supplier companies by other entities.
  • Physical plant risks — Problems caused by issues at a supplier’s facility or regulatory compliance. For example, your key supplier could have a machinery breakdown, and/or regulators may shut the facility down.

Developing a plan

The best way to manage a supply chain disruption is to prepare for it. Start by undertaking a business impact analysis to prepare your company.

Form a team of key personnel that should include shipping and receiving, and management and supervisors involved in your key processes. The team should:

  • Identify alternatives to key suppliers in advance. You don’t want to be scrambling in the midst of a crisis. One option is to contract with an alternative supplier in advance, so you can certify them and ensure they can ramp up if you lose a critical supplier.
  • Model the impact of disruptions on your sourcing and inventory strategies for the four supply chain risks listed above. Under each of the scenarios, think about how non-delivery of a key part or material would affect your operations.

Examine the likely fallout and build contingencies:

  • Outline how you would respond to all of the “what if” scenarios that could affect your operations. Be realistic about assessing your capacity to respond to these scenarios.
  • Create a contingency plan for the failure of any supply chain pillars. Identify the points at which you would need to execute risk-mitigating measures, like sourcing from other vendors or using new distribution channels.
  • During disruptions, there is often a lack of alignment and communication between departments. In advance, amass a contingency management team that will bridge the divide between your departments during disruptions. This team must include senior people who are influential with top company decision-makers.
  • Make sure your supply chain is flexible enough to deal with risks. Look at opportunities to address current supply chain bottlenecks; investigate alternative transportation network configurations or production systems.

The final backstop: insurance

You can address supply chain risks through business interruption insurance or contingent business interruption insurance.

Business interruption insurance, which is often included in a commercial property policy, covers lost profits after a company’s own facility is damaged by an insured peril.

Contingent business interruption insurance is often a policy rider that you can purchase. It covers lost profits if an insured peril shuts down a critical supplier, part of the transportation or distribution chain, or a major customer.

Contingent business interruption coverage is triggered if there is:

  1. Damage to property that prevents one of your suppliers from making products or delivering them.
  2. Damage to property that prevents your customers from receiving your products.

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