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Risk management process extends beyond the factory

It is common cause that insurance claims that followed the 9/11 attack were enormous. However, it was only after the dust had settled and claims began arriving at insurers' offices that it became clear the risk associated with suppliers and customers had been hugely under-estimated.

Or more specifically, the impact there had resulted from the chain reaction effect on customers and suppliers linked to the World Trade Centre in one form or another.

These risks had been hugely underestimated and, as consequence, insurers applied stricter underwriting measures to extensions of business interruption policies for covers occurring at the premises of suppliers or customers.

Exercising caution

Moreover, in some cases the tougher stance extends to suppliers of suppliers and customers of customers. As a result insurers now apply low limits to clients loss, cover is often activated after a certain time period and generally insurers are far more careful about granting cover, says Glenrand MIB's David Stratton, director, Risk Solutions, International Division.

This is particularly so if there is a possibility of a loss at a supplier's or customer's premises impacting a number of insurers clients and therefore increasing the insurers loss. A simple example would be where a supplier of components to a manufacturer has a fire which halts his production with the result that supplies to the manufacturer come to a halt.

The period of time over which this might occur and the gravity of the problem would differ depending on accumulated stock levels at both the supplier and manufacturer and the duration of the interruption to the supplier's business. Consider the case of a manufacturer who is committed to risk management and has in place the best controls possible.

His supplier may be less enthusiastic about risk management and a loss could occur which is largely beyond the manufacturer's control. Worse still, since the extension to the business interruption policy requires that the peril causing the loss be insured in terms of the manufacturer's cover, the problem could become even worse if it is not covered.

Where there are a large number of suppliers the manufacturer is less likely to have a problem. He will merely buy from the others.

However, where there is, for example, a duopoly - two suppliers - and one suffers a serious interruption, the other may not be able to cope with the demand. Foreign markets may need to be accessed but usually at higher cost. With the suppliers extension in place this additional cost would be covered.

If no alternative source of supply can be found the manufacturer may well find itself unable to produce its product.

The resultant loss of sales will also be covered by the supplier's extension, assuming it will respond. In a worst case scenario, assuming the suppliers extension did not respond, a company could even go out of business as a result of an occurrence which was beyond its control.

It is important, therefore, for businesses which are reliant on others for the supply of critical stocks to address the potential risk associated with their suppliers. In other words the risk management process extends beyond the factory.

Moreover, the same process can be applied to customers, since if a customer has major interruption his supplier may well have a problem on his hands.

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