Many businesses rely on materials and services produced overseas in today’s interconnected industries and distribution networks. This is so they can stay competitive and even have the edge over other local businesses. Of course, because of this trend, many businesses have benefited greatly due to the increased amount of business they can have which in turn grows their profits. However, this intricate network of people and businesses also means that any person or business that goes down in that supply chain will severely affect the network as a whole. A issue better known as supply chain disruption.
What is Supply Chain Disruption?
Supply chain disruption is a type of interference in the flow of processes involving multiple organisations associated with the sales, production, and distribution of goods. As we all know, an intricate working system is essential in the quality maintenance of goods. If one of the entities in the network goes down, the whole system will also go down unless emergency plans are in place.
One example of this is the pandemic that happened back in 2020. Due to the strict COVID-19 policies worldwide, many systems, especially production, have been severely restricted, slowing down or completely stopping many businesses’ manufacturing or operations.
Luckily, there are some things that a business can do to ensure that it can still operate in cases like this, and one of them is supply chain insurance.
What is Supply Chain Insurance?
There are a lot of potential risks and dangers when it comes to the supply chain. The complex relationships between vendors, manufacturers, etc., means that a problem faced by one link in the chain, will have the domino effect on the other businesses.
A disruption to even just one of the entities can do much damage, like restricted distribution, low-quality goods, etc. With an increased demand for high-quality and on-time goods, the need for mitigation has increased to make the supply chain more resilient. This is where supply chain insurance plays a crucial part.
Supply chain insurance covers financial losses from potential operational dangers of supply chain disruptions. It protects organisations and businesses from losing financially throughout the flow of products from production to sales. In short, it’s a very useful nugget that protects your business from financial losses in cases where the supply chain is disrupted. Also, most supply chain insurance is renewable, making it more convenient.
But what is a renewable term? One good example of this is term life insurance. Most term life insurance can be renewed once their duration is up. It will still be the same insurance, complete with its coverage, but this time, the duration will be refreshed.
Contingent Business Interruption Coverage
Contingent business interruption coverage, known as CBI, protects your business from losing profits resulting in an interruption of the insured’s business regarding its physical properties or customers. Take note; however, that CBI requires the event must be one of the covered causes stated in the policy. When you are procuring an insurance policy for your business, it is vital you consider what potential disruption your operation could face.
CBI can also apply for these losses to dependent properties like a distribution center. For example, suppose the policyholder’s business can’t deliver goods to a specific place because a storm destroyed the distribution center. In that case, CBI will be applied to cover the losses from that prevention of distribution.
Extra Expense Coverage
Not only will the supply chain insurance cover the losses from certain situations like that, but it will also cover any extra expense that the business will have for it to be able to continue operating.
Some examples of this type of situation are added costs to receive goods for sale, replacement goods, extra expense for transportation when the usual means are not possible, additional labour and logistical costs, etc. To facilitate coverage for these expenses, the policyholder should keep accurate and reliable data before they can make a claim.
Your procurement department should be able to track any changes in pricing, costs or service levels to accurately evaluate how the business has been affected by any disruption.
Supply Chain Coverage
It might sound redundant to have supply chain coverage when the insurance itself is called supply chain insurance but let us explain. The risks for today’s business operations have been increasing, and many companies are now introducing supply chain insurance. However, there is yet to be standard practice for supply chain insurance. In short, every policy issuer has its version of supply chain insurance. Because of that, we have supply chain coverage.
Supply chain coverage is designed to generally provide an all-risks policy that will compensate the policyholder for lost profits and other related costs caused by any supply chain disruption. It’s like an all-in-one coverage that includes other coverage like CBI and extra expenses.
In addition, this coverage is readily-customisable to include other supply chain disruptions like government-related stoppage of production, social unrest, labour issues, etc.
Final Words
The supply chain is an integral part of any business. It involves a lot of processes like distribution, production, sales, etc. If any organisation goes down in that intricate network, the whole system will come crashing down. However, your business won’t be severely affected if you have supply chain insurance. It’s simple, but it does a lot in certain situations. Make sure your procurement team have a good grasp of the insurance’s available and the type of protection your business will need.
Procurement in many modern businesses involves the successful purchasing of parts, products and services your company needs. Services in a modern business include everything from technology to insurance. If you want to advance your procurement skills or those of your team, IoSCM can help.