Protecting Businesses Against Global Supply Chain Issues
Companies around the world are facing unprecedented inventory and supply chain issues, which has been brought on by the ongoing COVID-19 pandemic.
In the western United States, ports are filled with cargo ships, and once easy-to-get supplies now require long waiting periods.
It’s an issue that has caused and continues to bring significant challenges for many industries. Unfortunately, it is also likely that these complex global supply chain problems will continue for the foreseeable future. However, despite the challenges many businesses and consumers face right now, today is the perfect opportunity to make changes that will pay off in the future. This includes insurance and how businesses make coverage decisions after taking an in-depth look at supply chains.
For instance, it is important for manufacturers to step back and understand how their supply chains operate and where critical operations exist.
In addition, it is imperative for them to better recognize how their supply chain might need to change if critical operations become negatively impacted.
Global Chip Shortage
Today, microchips have become commonplace in the global economy and daily life. These small intuitive electronic circuits are ingrained in much of society – from cell phones, cars, computers, electronics, and appliances. However, the pandemic, as well as two serious chip manufacturing foundry fires, have unfortunately caused disruption in the supply chain that supports the development and usage of these consumer products. In addition, it has highlighted the need for businesses that incorporate microchips to truly understand their dependencies within the supply chain and design agile contingencies that can account for consumers’ fluid usage and demand for microchip technology in the world.
The chip shortage is one of the main reasons why car dealerships lack inventory, and it’s also a main reason behind low inventories for electronics and appliances at retail stores. In today’s global economy, chips are fundamental building blocks. They’re like currency, wood, or metal, and if any of those components are pulled out from the economy, there are deep impacts across the globe.
With the COVID-19 pandemic, many businesses changed how they normally operate. Many in-office workforces shifted to a remote work environment. Factories around the world shut down as demand decreased in the early days of the pandemic. Factories also temporarily shut down because of supply shortages. As the pandemic continued, more people bought electronics like computers, tablets and even cars. As demand increased, reduced manufacturing capacity couldn’t keep up.
However, while manufacturers saw a cooling in the automotive industry at the outset of the pandemic, there was a tremendous surge in consumer product demand as people shifted to remote work arrangements. With what capacity they had, manufacturers turned to consumer products. This left little capacity within automotive, especially within automotive electronics, when demand for new automobiles roared back. Scalability was further hindered by the fact that many manufacturers meaningfully reduced their workforces in the early days of the pandemic.
Fires Shut Down Factories
Many businesses also rely on a centralized region for chip manufacturing such as Southeast Asia. Therefore, if something happens to these factories, it can significantly impact a business’ production, and it causes a domino effect. When a manufacturing plant in Asia is unable to produce chips or other supplies, it can then affect other vendors in the business’ supply chain.
For example, in October 2020, a fire broke out at Asahi Kasei Microdevices (AKM) in Japan. The fire also caused part of the facility’s building to collapse. This event caused a temporary shutdown and was responsible for creating a shortage in semiconductor chips that car manufacturers around the world needed. Then, in 2021, a fire broke out at Renesas, another Japanese chip manufacturing facility, which impacted over 30% of the global market for chips.
Shipping Container Delays
Another contributing factor to supply chain issues is the delays in shipping containers at ports in the United States. In the second half of 2021, there was a backlog of cargo ships and shipping containers at the Ports of Los Angeles and Long Beach. Both ports account for 40% of imported goods into the country, and a lot of these goods come from Asian-based raw material producers, as well as component and finished goods manufacturers. Because of the congestion at the ports, it created a delay in the return of shipping containers to home ports of origin for new shipments. Therefore, since there are only so many containers in the supply chain system, if a container can’t get back to fill up for the next delivery, it causes delays.
Prior to the pandemic and supply chain issues, the average transit time from Asia to berth at a port in the Western United States was about 30 days. Now, it’s about 50 to 75 days due to increased wait times for berth openings.
Some retailers are taking measures to try to prevent delays by hiring their own ships to help with shipping and product shortages, but not all business have that luxury. Businesses and consumers are now discovering that it all has to do with how globally connected people are, and as a result, if something disrupts the system like a pandemic, it affects the entire process.
Insurance and The Supply Chain
It’s common for businesses to ask if a large supply chain issue affects production and operations, then can large business insurance, like multinational insurance or global insurance, help mitigate costly losses. While it depends on the cause of loss, when it comes to shipping or cargo delays, the answer is typically no. In an insurance contract and policy, supply delays are usually excluded because there needs to be a specific loss. For example, with regards to the fires in Japan, that would generally be a covered loss, which would be triggered through business interruption coverage.
The Need to Review Supply Chains
The pandemic and current supply chain issues have created an opportunity for businesses, insurance agents and brokers to map out and review their supply chains. While it’s a process that many businesses should do every 18 months, most business forgo this aspect of their operation, which is a mistake that’s being proven today due to the pandemic and supply chain issues.
Businesses should be reminded that insurance is a purpose-specific tool, and what’s important is for businesses to understand their balance sheets, cash flow and how those things will be affected if there’s an interruption in business from their supply chains. More than anything, the pandemic and current issues put an emphasis on a need to step up and deeply understand supply chain dependencies. It is imperative for companies to map out their supply chains and truly understand where any risks may be lurking. From there, they can make changes and address the potential issues.
‘In today’s global economy, chips are fundamental building blocks. They’re like currency, wood, or metal, and if any of those components are pulled out from the economy, there are deep impacts across the globe.’
Equally important in protecting against supply chain risks is the need to complete a business interruption worksheet. While it may take time, this can be valuable especially if it’s been a while since a business last did one. The dilemma is that some businesses think they can keep the same business interruption limit they chose in the past. However, the world has changed a lot in the last few years, and whatever the limit was a couple of years ago, it is not a starting point anymore. The new starting point is now starting from scratch and completing the worksheet.
How to Weather Supply Chain Impacts
It’s impossible to predict when the current supply chain issues will get fixed, and experts don’t know if there will ever be another global event like a pandemic to significantly impact so many industries. Despite the unknowns, there are measures that businesses can take to protect their companies. One of the best defenses against a disruption to supply chains due to an infectious disease outbreak or natural disaster is a strong business continuity plan. Creating a plan with a focus on the largest peril event, can help companies be better prepared in the future.
It is essential to partner with sophisticated, experienced brokers and insurers that understand and have experience handling the entire process. This includes looking at the business’ supply chain location by location and identifying what risks may be prevalent to help prepare and mitigate significant risk to operations resulting from these disruptions. It is also important to identify critical suppliers, understand tier level structure in the supply chain, and quantify the risk from a group of credible scenarios. (For best practices The Hartford’s Risk Engineering team offers a technical paper on supply chain risks.)
While every situation is unique, businesses should be making preparations today to mitigate any future issues because at the end of the day businesses of all sizes have complex global supply chains that need protecting.