Stress-testing supply chains

Stress-testing supply chains | Insurance Business Australia

Stress-testing supply chains

The manufacturing sector has been shaken by the COVID-19 crisis, which has buffeted the global supply chain and forced businesses of every size to rethink their oper-ating models. While various manufacturing businesses have been impacted in different ways and thus require varying solutions, there are several cross-sector challenges that COVID-19 has exacerbated.

Chief among them is global and domestic supply chain disruption, which is inter-rupting both upstream and downstream processes. This disruption has been building for some time, says Michael Burg, managing director of Gallagher’s manufacturing pract tice in the US, as supply chains have been getting tighter and more focused on just-in-time delivery.

“COVID has certainly accelerated some of the supply chain challenges and risks that we advise our clients on,” he says. “We see both supply- and demand-side challenges to the supply chain, so we’re helping our clients evaluate those risks and exploring the insur-ance solutions that are available to address those risks rather than just retaining them on the balance sheet.”

The manufacturing space evolves in waves, says Riskonnect CEO Jim Wetekamp, who first noticed the new wave that came with COVID-19 when supply chains in China first started being impacted. Organisations began looking for better ways to assess their risk, understand the challenges they faced and build agility as COVID-19’s impact started to pivot from transportation to hospitality, healthcare and financial services.

“What [manufacturing businesses]  have had to do is work through the crisis to establish what continuity looks like moving forward, to think through better workforce planning, alternative inventory policies and planning parameters such as how they think about their supply chains,” Wetekamp says. “They’ve had to give greater visibility to inbound materials, and while they always had  that for critical goods, they may not have the same level of traceability for some of the more indirect goods or smaller components.”

Awareness of the exposure that exists around single-source suppliers has been growing for some time now, Burg says, so it has long been a part of enterprise risk management evaluations for manufacturers. Wetekamp says that during COVID-19, manufacturers have had to understand not only their tier-one supplier risk, but also the second- and third-tier risk because of the extent to which the pandemic has challenged freedom of supply.

COVID-19 was something of a black swan event for the insurance sector, but this didn’t stop insurance businesses from working to actively protect their clients throughout the crisis. According to Brian Gerritsen, manu-facturing practice lead at Travelers, as soon as the pandemic emerged, Travelers’ risk control team proactively connected with agent and broker partners and customers to provide employee safety recommendations and help businesses  understand  the  emerging  risks  associated with the pandemic.“

As part of this effort, we released a robust suite  of  industry-leading  risk  management  resources for businesses to help them manage the  emerging  risks  to  people  and  property  and,  where  applicable,  safely  reopen,”  says Erika   Melander,   manufacturing   practice   lead  at  Travelers.  “We  engaged  with  business  customers  and  their  agents  and  brokers  to  address specific needs based on underwriting and state regulatory requirements.”

One  tool  Travelers  was  able  to  offer  is  a  supply  chain  pressure  test  that  can  help  manufacturers  identify  the  links  in  their supply  chains  that  might  be  most  at  risk.  Melander  says  tools  like  this  complement  Travelers’  insurance  products  and  services  to  address  supply  chain  exposures  beyond  traditional coverage.

The  uncertain  lay  of  the  land  when  it  comes  to  supply  chain  risks  is  neatly surmised in an anecdote Burg tells of a client who  was  dependent  on  manufacturing  in  China, but who felt confident in their ability to  withstand  a  loss  from  a  key  supplier  because they had approximately 10 different suppliers.  However,  Gallagher’s  tools  were  able  to  pinpoint  that  all  of  these  suppliers  were located within a single region that faced catastrophic weather events.

From  his  perspective,  Burg  believes  the  COVID-19  crisis  has  opened  manufacturers’  eyes  to  the  challenge  that  supply  chain  disruption  poses  to  their  business  and  their  ability  to  deliver  a  product.  In  the  example  above,  he  says  the  early  impact  of  supply  chain  disruption  in  China  due  to  COVID-19  made  the  client  think  differently  about  their  contingent  business  income  exposure,  resulting in a deeper conversation that wasn’t being had before COVID-19.

“Manufacturing  businesses  have  faced  each  of  these  challenges  before,”  Wetekamp  says,  “but  now  they’ve  seen  these  block,  bit  by  bit,  next  to  each  other.  And  so  they’re  thinking    about    more    comprehensive    scenarios,  of  the  interplay  of  these  different  risks  happening  at  once  and  about  what  it  really means to fight a war on multiple fronts at the same time.”