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SUPPLY CHAIN

Managing Supply Chain Risks in an Increasingly Interconnected World

Integrating new technologies, diversifying sources, or expanding in response to increased demand means manufacturers must act proactively in responding to the impacts.

The events of the past year have demonstrated just how critical it is for manufacturers to ensure they are proactive about managing risks, especially when it comes to their supply chains. According to data from Chubb and the National Center for the Middle Market (NCMM), around half (51 percent) of middle market manufacturers say COVID-19 has had a negative impact on their supply chains, and a nearly equal percentage (48 percent) believe the pandemic will continue to have a negative impact on their supply chains through 2021.

Even outside of the pandemic, many factors can cause disruption—such as severe weather events, to name just one example—and the reality is that no supply chain is immune.

As manufacturers look to the future, and evolve their processes and procedures, it is critical for them to remember that with every opportunity comes potential risks. Whether they’re looking to integrate new technologies, diversify their sources, or expand in response to increased demand for their products, manufacturers must act proactively to reduce the impacts of these exposures.

Data and the IoT

IoT technologies are becoming increasingly prevalent in manufacturing due to their far-reaching benefits. To name a few examples, IoT technologies can help manufacturers determine where to source shipments, track shipments, monitor quality control and inventory management, and even benchmark different plants or sources against one another to identify opportunities to improve efficiencies.

Perhaps the most notable benefit of many IoT technologies—such as sensors and telematic devices—is their ability to relay information to manufacturers in real time. This instant access to information allows manufacturers to pivot more quickly, if needed, and help minimize disruption more effectively. While real-time access to information certainly is advantageous when it comes to responding to risks, manufacturers must remember that introducing IoT technologies also can heighten certain exposures, especially when it comes to 24/7 dependency on these technologies, and, as such, cyber security is ever more important.

Consider IoT technologies that are used to forge a link between manufacturers and their suppliers—for example, to allow manufacturers to easily track source materials. If a cyber actor were to compromise IoT technologies being used for this purpose and gain access to this digital connection, the cyber actor could cause widespread physical, economic and/or reputational harm across the supply chain that impacts both the manufacturer and suppliers.

As a result, when planning to implement IoT technologies, manufacturers should evaluate their approach to managing cybersecurity threats. Manufacturers should ensure that they have robust, enterprise-wide cyber risk mitigation strategies in place, which may include the following tactics, among other risk prevention techniques:

  • Reinforcing high severity vulnerabilities via effective patch management processes with senior executive oversight.
  • Implementing multifactor authentication (MFA) techniques like fingerprints or pin numbers to prevent bad actors from gaining access to sensitive data or systems should passwords or other credentials be compromised.
  • Maintaining an employee education program so workers understand how they can help protect against cyber threats.

In addition to implementing a strong risk mitigation strategy, manufacturers should work with their insurance agent or broker to ensure they have proper insurance coverage for these evolving risks and  to identify and secure insurance solutions that meet their unique needs; this may include incident response services that help manufacturers deal with the aftermath of a cyber breach, should one occur. Working with their agent or broker, manufacturers should also understand how technology dependencies impact other lines of insurance coverage.

New Sources and Expanding Operations

In case a quality error, facility shutdown or other event prevents a supplier from delivering a promised batch of component parts or materials, manufacturers need to have a “plan B” in place. This is where secondary suppliers come into play. Alternative sources can grant manufacturers the flexibility to obtain what they need—be it the same material or part or a suitable alternative—to continue production.

When seeking out secondary suppliers, manufacturers should consider more than whether new sources can match the quality of their primary suppliers. Manufacturers also should assess how feasible it is to ship parts or materials to and from secondary suppliers’ locations, how cost-effective it is to use secondary suppliers from both a labor and transportation perspective and how to best mitigate potential risks related to bringing secondary suppliers into the fold.

The latter should involve accounting for factors such as:

  • Quality control: Manufacturers must be diligent about monitoring the quality of what their suppliers—both new and existing—are producing. From sensors that can determine whether a component or material meets required specifications to IoT-powered data collection that enables faster response times when a defect is detected, there are many different tools manufacturers can use to ensure quality, either to enhance or replace the presence of boots on the ground at a given location.
  • Severe weather: Manufacturers need to consider whether a supplier’s location may contribute to weather-related delays—particularly during seasonal threats.
  • Geopolitical factors: Manufacturers should assess how the geopolitical climate of a supplier’s location may potentially impact production and transportation needs.

These factors are not only important to keep in mind when incorporating new suppliers—they’re also important to consider when expanding operations. If spikes in demand render the construction or identification of additional production facilities necessary, it is essential for manufacturers to maintain quality control, mitigate potential weather-related property damage, and stay abreast of the geopolitical environment at those locations.

Manufacturers should work with their insurance agent or broker to obtain the insurance coverages they need to stay protected from key exposures. This may include, but is not limited to:

  • Property insurance with business interruption and contingent business interruption coverage: Business interruption coverage helps protect manufacturers against income loss that results from physical loss or damage to property at their own premises that impairs business operations. Contingent business interruption coverage helps protect manufacturers against income loss resulting from an occurrence of physical loss or damage to the manufacturer’s upstream suppliers’ or downstream customers’ property, which impairs the manufacturer’s business operations.
  • Transit insurance: Manufacturers looking to incorporate new sources may benefit from procuring inland and ocean marine transit or cargo coverage that will help protect against physical loss to materials, component parts and finished goods as they are transported from location to location.
  • Political risk coverage: Political risk insurance helps protect manufacturers when it comes to different losses that may arise due to government action, political unrest, and economic turmoil.

Given the global aspects of interconnectedness of manufacturing, an insurance carrier with a robust global footprint can help manufacturers work with their insurance agent or broker to access and understand coverage needs throughout the world. Ranging from boots on the ground risk engineering surveys for new facilities, possessing a deep understanding of how regional regulations may impact production, trade and transportation, or providing visibility and transparency to clients in the event of a catastrophic event, insurance carriers with a broad global reach can offer manufacturers peace of mind knowing that their facilities and their supply chains are in good hands, regardless of how complex they may be.

The Way Forward

As manufacturers look to enhance and protect their supply chains, they must remember that they’re not alone.

Together with their insurance agent or broker and insurance carrier, manufacturers can maintain a high level of confidence in their ability to keep their supply chain strong. With the proper expertise, risk mitigation strategies and insurance solutions to support them, manufacturers can continue serving customers’ current and evolving needs no matter the challenges ahead, delivering their goods to those who seek them across the globe.

Manufacturing