Global supply chain risk
To make this article more visual. We have made a video of Mr.Marcus juggling a chain saw, please don’t try it at home. This should give you a feeling how supply chain crisis might feel. We don’t know about you, but for us even looking at this guy puts us into a state of shock.
There are reports by people who examine such things that natural disasters are increasing around the world. Earthquakes and floods, like the 2011 disaster on the Japanese coast, wreak havoc on people and economies. When these events happen in highly populated, business oriented cities, the effects last for years — not only on the local area but on all the companies that depend on supplies from that region.
Risk management involves factors that are managed in all supply chains: production schedules, errors and corrections, waste reduction and just-in-time inventory. Protecting these areas involves not only extensive planning but planning for the unexpected. It is typical to include clauses in contracts that reduce or eliminate penalties to the supplier for “Acts of God,” those disasters and weather conditions beyond everyone’s control.
Unfortunately, that indemnity does not make up the time and products lost because of the disaster. Everyone must start over from the point of the disaster and recover at the pace they can afford. In general, the better the disaster plan a company has in place, the faster and more complete will be its recovery. There is no fast recovery for a plant completely destroyed by a tornado or earthquake. Recovery can take years or even decades.
Some contracts between suppliers and users include a risk sharing clause. If a disaster strikes in the area where the supplier makes goods, the supplier agrees to help mitigate the problems at the end user. The help could be monetary but more likely includes some kind of inventory guarantee. The supplier keeps many critical items in stock in some other part of the world. This kind of risk sharing is analogous to vendor-managed inventory in that the seller takes on all or some of the risk of physical inventory and time delays.
Manufacturers and distributors must not lose forget the risks in their invisible necessities, like electricity and the Internet. Communications is critical for the supply chain, and is more at risk when suppliers could be halfway around the world. Redundant power systems are the norm. Most computer users today are aware of inline circuit breakers available in power cords. Plants, hospitals, and office buildings now have emergency power systems in place, run by diesel or gasoline generators. All this planning is insurance. They hope it is never needed but it is there in an emergency.
This also leads to a discussion of other shortages. Gasoline and other fuels are more expensive than ever. When war threatens, prices go up regardless of the availability of the fuel products. When products are shipped from the Far East, Africa and Asia, fuel and its availability in many countries compounds the problem. Raw materials including precious metals are often at risk around the world for many of these same reasons. If a plant depends on any at-risk raw materials, it must insure the flow of those materials where possible.
There are various kinds of insurance policies for every business. Insurance companies help manufacturers develop plans and determine what supply components are most at risk and which risks could be most costly. Find an insurance company that specifically insures against supply chain types of losses. They can insure against loss of income due to business interruptions of many kinds. They can insure against cargo loss. They even insure future property and purchases.
Every business has losses. They have losses that are obvious and losses they don’t even know occur. Preparation for supply chain interruptions makes sense for every manufacturer because the uncertainty involved and the dangerous possibility of disaster far outweigh the value of taking too many supply line chances.
To learn more about supply chain and global effects on it, go to our Overview of Operations Field .