An efficient supply chain is one of the most underrated and misunderstood aspects of business management. Your supply chain, which can be quaint and local or multi-organizational and global, controls the flow of products and information and, therefore, the flow of capital.
As supply chains become increasingly complex and outsourcing activities are on the rise, organizations need to evaluate and actively manage the risks related to them.
Supply chain management involves optimizing operations to maximize both speed and efficiency. Speed is important because customers value fast service. Increasing speed, however, can cause costs to skyrocket, so maximizing efficiency is equally important. The most effective supply chains deliver products as fast and as cheaply as possible without sacrificing quality.
Lowering prices is a standard way to out-compete other businesses, but that’s not always feasible. Supply-chain management provides a way to develop a competitive advantage without having to lower prices. For instance, by developing a more efficient supply chain, one can deliver orders faster to customers. All else being equal, customers will choose the company that meets their needs fastest, giving you a competitive advantage in your industry.
The need to reduce costs is resulting to an increasing likelihood that an organization will outsource various aspects of its activities. Outsourcing does not only include the use of subcontractors to manufacture components, it also includes the provision of services and can result in the relocation of various functions, to different parts of the world, with different suppliers.
Efficient supply-chain management has other cost benefits as well. Eliminating redundant steps, for example, saves salary costs by ensuring workers don’t waste time on unnecessary procedures, or allows you to operate with lower inventories. Top companies have departments dedicated to optimizing supply chain management, giving them a huge cost advantage compared to smaller companies. While it can be difficult for smaller businesses to compete on such a level, improving supply chain management still offers benefits if optimization can shrink processing and delivery times and lower costs.
Supply chain risk is not only a concern for large companies, but increasingly, mid-sized companies are also exposed to it – in fact, smaller companies may suffer disproportionately more from supply chain disruptions.
Supply chain risks extend to any circumstances that can disrupt normal operations within the organization.
Such events may be related to:
- Traditionally insured perils resulting in damage at a supplier or customer premises
- Inability of the supplier to provide services because of non-damage circumstances (shortfall in finance, bankruptcy, industrial action, civil commotion, failure of utilities at the supplier or customer premises).
- Failure of transport, communication, access to supplier or customer premises.
Today suppliers and customers exposed to resources and raw materials becoming increasingly scarce are deeply concerned. Therefore the need for planning well in advance in order to secure low prices and timely delivery. As well as maintaining tight inventory control at every stage, from raw material to the delivery of the finished product to the final customer, whether in transit, in storage, or undergoing process, at owned or third party premises.
Value added at different production stages increases the total cost of finished or semi-finished products way beyond the manufacturing cost i.e. direct materials cost, labor, overhead. How that cost would be recouped should a peril occur?
What if a large incoming shipment was lost setting back production by weeks or months until a replacement arrived? Could a lost shipment cost a seasonal company its annual revenue?
The management of supply chain risk follows the same principles as for any other class of risk facing an organization. Approaches include risk reduction and risk transfer, the main method of risk transfer being through insurance – such as standard, Property Damage, Business Interruption (BI) or Contingent Business Interruption (CBI) policies, or even newly developing supply chain insurance products.
The use of these newly developed products, is Supply Chain Overall cover Policies (S_CHOP), has grown as insureds are looking for “start-to-end”, seamless solutions. The flexibility provided to the insureds via these policies result not only to seamless cover, without gaps, not only to reduced premiums, but also to considerably lower Total Cost of Risk (TCOR). Considering that such a policy allows for the removal of the inventory from a property policy; in many cases, this may subject the inventory to a lower rate, thus saving premium Euros.
Insureds in industry sectors that have significant inventory and/or transit exposures may want to consider the benefits of S_CHOP policies. Clients in the retail, wholesale, food and beverage, energy arenas have historically benefited the most from S_CHOPs.
In the changing market landscape, this is an alternative worth investigating.