What is the cost if your internal supply chain breaks?

What is the cost if your internal supply chain breaks?

If one of your offices, warehouses or plants is rendered inoperative, what happens to the rest of your business? asks Sally Swann Head of Midlands UK Retail, JLT Specialty.

Supply chain risks have been a hot topic in recent years. But risks relating to corporate interdependencies – internal supply chains – are less often discussed, despite being on the rise.

With more companies taking areas of production back in-house, a failure to map out interdependencies could leave companies with unexpectedly severe business interruption and financial losses following disruption to one of their locations.

An incident at one of your offices, warehouses or plants could affect production at many seemingly unrelated locations.

As operations are brought back in-house they often go from being dual-sourced (sourced from two or more places) to single-sourced (produced in a single site), thereby increasing the concentration of risk, and often reducing risk mitigation.

All too often a company only realises its interdependencies when there’s an incident. Suddenly damage at one seemingly stand-alone unit has a knock-on effect on the operational viability of other units and the business interruption cost could be huge.
Imagine a manufacturing company that has component parts made on one or many sites and assembled at another. Without the parts, the final product cannot be made, and without the assembly factory, nothing can be made to sell.

A company with two or more interdependent sites should have an interdependency clause in its insurance policy. More generally, companies should conduct a business interruption review with their broker and insurer, to discuss how their insurance policies would deal with a loss involving interdependent locations.

When buying insurance for interdependent units or locations, companies need to consider:

  1. How to set sums insured for individual entities within the group.
  2. The end-to-end exposure in the event of a loss.

Critical thinking
So what can companies do to better understand their exposures?
Ideally companies would map out and quantify all of their interdependencies working alongside their insurance adviser.

Companies should also establish disaster scenarios and develop associated business continuity plans, so that key staff know how to manage and respond in the event of knock-on business interruption in the fastest, most favourable manner.

At the least, a business needs to understand:

  • What interdependencies are critical?
  • What quantities flow from one location/unit to another and at what frequency?
  • What mitigations are in place if one of these interdependencies is interrupted?

A company is only as strong as its weakest part, so it is important to look more closely at just how interrelated different parts of your company really are.

For more information on managing your risk and insurance programme
please email sally_swann@jltgroup.com

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