When examining supply chain exposures, there are seven important questions to consider. We recently posed these questions to an AFM client* who makes high-end clothing accessories. The answers they provided illustrate the importance of analyzing supply chain risk:
1. Are any aspects of your business impacted by single-source suppliers or one key customer?
Yes. The client procured a special blend of fabric from one key supplier in Asia.
2. Do any single-source suppliers or key customers impact five percent or more of your revenues?
Another yes. The special fabric blend, which comes from this single-source supplier, goes into the client's highest selling item—silk scarves, which account for 41 percent of the client's total revenue.
3. Can these suppliers or key customers be readily replaced with alternates that provide the same pricing, quality, quantity, delivery and revenue stream?
No. The single source supplier could not be readily replaced.
4. What is the time frame to replace single-source suppliers or key customers? Has a business continuity plan been developed and tested?
The client did not have a business continuity plan in place, and estimated it would take a minimum of 12 months for an alternate supplier to replicate the same quality fabric in the required quantities.
5. What is known about the exposures present at your key supplier and/or customer sites?
The client asked for AFM's help in assessing exposures, so our engineers conducted a site visit of the supplier's plant. We found vulnerabilities in both their fire protection systems and housekeeping, which could lead to a significant loss and subsequent interruption of operations.
6. What business continuity plans are in place at your key supplier and customer sites to help you avoid a significant supply chain disruption?
The key supplier did not have a business continuity plan in place. As a result of the client's supply chain analysis and our site visit, the client's supply chain director met personally with the key supplier to help them develop a plan to address the physical hazards at their plant and to develop a contingency plan.
7. Are there any contingency contracts in place in the event of a supply chain disruption? Have they ever been tested?
The client did not have any contingency contracts in place. Therefore, the client began evaluating potential alternative suppliers, keeping a greater supply of fabric on hand in case of a supply chain disruption, and requested higher supply chain coverage limits for the key supplier.
While supply chain insurance coverage is important, so too is management of supply chains. Insurance does not cover potential brand damage and loss of market share, but, we believe effective planning and mitigation efforts can help clients minimize the impact to business revenue in the event a supply chain loss occurs.
AFM's proVision® policy includes coverage for your business's entire supply chain. This applies to both direct and indirect suppliers, and customers, and it includes loss of commissions, profits and royalties.
If you have international exposures, coverage can be extended to your supply chain worldwide. This means full coverage is streamlined through a single proVision policy, making monitoring coverage and claims easier for both brokers and clients.
For more information on this coverage or supply chain analysis, please contact your production underwriter or account engineer.
*For the purposes of this article, certain client details were changed, however, the facts that impact their supply chain management have not been altered.
Note: This information does not constitute, replace or supplement policy language. The liability of AFM is limited to that contained in its insurance policies.