Manufacturing a product can be challenging in itself; however, an unexpected disruption in the supply chain can be devastating. While many businesses have experienced issues with obtaining raw materials or components, processing disruptions and product delivery, few have an effective plan to address those challenges before they happen. The Insurance Information Institute found 40 percent of businesses fail after a disaster and many more suffer significant financial damage without an effective contingency plan in place.
Sourcing raw material and components is a critical part of virtually any manufacturing process. Procuring the exact quality, quantity, delivery and pricing is necessary and important. Here are five options to consider:
1. Can you get it when you need it? A natural disaster or disruption at a key supplier could bring the process to a halt, backlogging production for weeks or even months. Reviewing agreements and your suppliers’ written business contingency plans is useful. Make sure they have a written plan to recover quickly.
2. Consider contingent business interruption insurance. This coverage gives a manufacturer additional financial help in the event of a covered loss at a supplier’s location. This is especially useful if your business relies heavily on one or two supply sources. Most policies require the covered location to be specifically listed. This type of coverage is designed to provide loss of income and the additional expenses associated with finding another supplier, even paying a premium for the replacement of the raw materials or components.
3. Set up a relationship with an alternate supplier if possible. It is recommended to place some smaller orders to ensure specifications and quality of the initial relationship. In the event of a disruption from your primary source, you already will be set up with the secondary supplier, reducing the time and effort to initiate the flow of the necessary materials. Many manufacturers use specialized equipment in their process. The more customized the machinery, the longer it can take for repair and/or replacement. I’ve encountered equipment that may take three years to replace because of an order backlog and the customization of producing it.
4. Businesses can protect themselves financially by the purchase of equipment breakdown insurance coverage. This type of policy covers sudden and accidental breakdowns. Make sure it includes all production machinery, replacement of income lost and extra expense for expediting production and delivery of the equipment.
5. Protecting the supply chain includes options for delivery and installation of the product. Having options of delivery is important. If the manufacturer typically delivers the product, it might want to occasionally use a common carrier in case its trucks are unable to perform the task. An established relationship that is familiar with the product, routes and delivery process is important to have on standby if there is disruption. Contracting with multiple delivery services also could provide options in the event one source is delayed or disrupted.
Installation of the product can be challenging, especially if it requires skilled craftsmen. Determining what options are available if the primary installers are not available to complete the job is critical in the establishment of a solid contingency plan.
Options to consider, depending on the complexity, include specialty subcontractors, temporary labor and agreements with friendly competitors. As with hiring any subcontractor, a written agreement and proper insurance coverage always should be required.
Planning, contingencies and insurance are all key components of effective supply chain management. A solid contingency plan coupled with a well thought-out insurance program is a large part of being prepared for a disruption.
Establishing contingency relationships with suppliers, friendly competitors, deliverers and installers in advance can save time, money and ultimately the reputation of the business.
Richard Ollis is the president and CEO of Ollis and Co., a risk management, employee benefit and insurance advisory firm. He can be reached at richard.ollis@ollisco.com.[[In-content Ad]]
