Shippers need to take these steps to effectively identify and avoid supply chain risk.
So far in this series, we have discussed many factors that affect supply chain risk and insurance. In this post, I want to share 10 action steps that shippers can take in order to effectively identify and avoid supply chain risk.
Educate yourself on insurance by reading relevant literature (such as our white paper)
Understand INCO terms and who has the liability for your shipments (inbound and outbound) at each stage of the supply chain. Work with your suppliers and buyers to make sure they are clearly delineated in the terms of sale. (For more information, see the book Mastering Import and Export, by Thomas Cook, 2012, American Management Association.)
Design KPIs to incentivize cargo loss avoidance behavior.
Understand the corporate insurance and risk management process in your company. A process for business continuity planning may already be in place. If so, you may be able to piggyback on that process and have a better chance of corporate buy-in for your supply chain insurance needs.
Document how each of your shipments is insured. Are they covered by carrier liability only or does other insurance exist which protects the shipment? Understand the limits of coverage, deductibles and the gaps in coverage.
Assess your risk. Understand the value of your shipments. One company found that they were putting $40 million in product in a single truck. The logistics organization was incentivized to fill the trailer cube, without considering the risk profile. Track losses and document amounts that have been recovered. Understand your global network and the high-risk countries included in it.
Estimate the impact on corporate financials due to losses in the supply chain. Large losses will increase working capital and depress cash flow. You will have to replace the inventory while your cash is tied up in the inventory that was lost. Understand that you may have to sell 10-15 times the loss to break even. And, there could be brand equity implications as well.
Partner with an insurance professional who understands supply chain issues and can help you develop a complete risk management plan. Work with an expert to understand the best options to cover gaps.
Work to mitigate risk by preventing losses from happening. Increase visibility of the end-to-end supply chain and integrate risk-management processes.
Make a decision on the right cargo insurance coverage for your firm. An insurance professional that takes the time to understand your business in depth can recommend the appropriate policy.
Over the last decade, many companies faced extreme supply chain challenges that stretched their capabilities to the breaking point. Both the preponderance of natural disasters and huge economic swings caused extreme challenges across the supply chain.
These challenges have not diminished. Supply chains, which once functioned almost on autopilot, face many dangers today in both the global and domestic market.
In our research on risk in the global supply chain, 100% of supply chain executives acknowledged insurance as a highly effective risk mitigation tool, but in most cases it was not on their radar screen, nor in their purview.
Clearly this calls for establishing a partnership with an insurance company that understands supply chain risk. Such companies possess readily available data on supply chain risk which can be invaluable in assessing and managing supply chain risk.
Insurance solutions providers such as UPS Capital are willing and eager to share best practices and have a vested interest in avoiding losses.
“ Supply chains face many dangers today in both the global and domestic market.”
They regularly see the best and worst of supply chain practices and need to be on the winning side of mitigating risk for their clients, and their own bottom lines.
The types of specialized insurance services that come from diverse insurance industry providers can be an integral component of a company’s risk mitigation approach.
Supply chain professionals we talk to assume that insurance is the responsibility of other specialists in the corporation. In doing so, they miss a great opportunity to selectively use insurance to manage key risks.
Like most other supply chain decisions, this boils down to a cost-benefit analysis.
Even after all of the other risk mitigation strategies have been considered, risk will still exist in critical areas of the supply chain, and those are prime candidates for selective use of insurance.
Dittman’s white paper, Will you be ready when a loss happens to you? can be downloaded here.
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Reprinted with permission of Longitudes, the UPS blog devoted to the trends shaping the global economy.