by Catherine Bolgar / 8 December 2010
What’s likely to be your biggest obstacle in keeping your company moving? The weather.
Bad weather was the top cause of business disruption in the past year, cited by 53% of the 310 companies from around the world that responded to a survey by the Business Continuity Institute, a Caversham, U.K.-based professional organization for business resilience and risk management.
Fully 83% of respondents said they had some kind of supply-chain disruption in the past year; the average was five disruptions.
“Most organizations had some interruptions last year, and some were reporting an average of more than one a week,” says Lyndon Bird, BCI’s development director. “That would suggest a problem in the supply chain.”
After weather, the next most common reasons for disruption were IT and telecommunications outages, cited by 43% of respondents, and failure by outsourcers to deliver, at 34%.
Over half of the companies said the problems resulted in lost productivity, while 20% said their brand or reputation took a hit from the incidents. That translates to the bottom line: nearly half of the respondents said supply-chain disruptions cost between €10,000 ($13,680) and €500,000 in the past year, and another 10% said the costs exceeded €500,000.
“The fact that 10% of companies say they increased costs as a result of disruption of €500,000 or more has to be a message that it’s worth investing resources in this area,” says Nick Wildgoose, London-based supply-chain product manager for Zurich Financial Services, which sponsored the survey for BCI. It’s difficult to completely assess all the costs related to a disruption — for example, pinpointing the cost of lost sales when a disruption makes a customer go elsewhere — so the survey numbers probably underestimate the extent of the problem, he adds. “It shows that we can’t just say we will carry on. Risk should be in our decision-making process.”
Supply-chain disruptions have been rising as companies have pursued outsourcing, low-cost suppliers and just-in-time and lean manufacturing techniques, BCI’s Mr. Bird says. Half of those surveyed said they use these techniques, and they are more likely to experience disruptions — 83% of those using low-cost countries reported a supply-chain problem. The sectors most likely to use these practices are retail (100% use just-in-time and 83% consolidate suppliers), and manufacturing (73% use just-in-time and lean manufacturing). Those sectors also reported high levels of disruptions: 100% of retailers experienced disruptions, with an average of 10 a year, while 64% of manufacturers had at least one disruption and 45% had between one and five incidents.
Retail and manufacturing have different relationships with suppliers, explains Mr. Bird. Retailers have few critical suppliers; if a store runs out of one brand of beans or gadgets, it will sell another. Customers might be annoyed but are unlikely to refuse to ever come back. On the other hand, the supplier of a store’s refrigeration equipment might be more critical than the suppliers of the foods inside the freezers. “Retailers need to look closely at those suppliers they think are critical,” he says.
In manufacturing, spare parts, tools or factory capacity are viewed as too expensive, Mr. Bird continues. Thus, more so than in other industries, manufacturers are on a high wire, relying on their suppliers as a safety net. Yet, 27% of manufacturing respondents never review business-continuity plans with key suppliers, and 73% haven’t ensured that any such plans would really work. Among all sectors, 15% of respondents never review business-continuity plans with key suppliers and 50% didn’t make sure that any suppliers’ plans actually would work.
Mr. Bird thinks it’s because manufacturers continue to take a traditional IT-focused view of business continuity, in which backing up data is sufficient. Indeed, the financial-services industry is the most focused on business continuity, possibly because of its dependence on information technology, and because its suppliers are more obviously linked to IT, where the business continuity practice was born.
“Many companies miss the point, which is how important the supply chain is to business continuity and to your mission and if they [suppliers] can stop you from doing your mission. It’s not just what they are supplying and at what price,” he says. “You have to say to suppliers, ‘How do you guarantee that the contractual agreement we have will be met in event of an interruption?’”
The move toward lean organizations and lean supply chains has become “slightly infectious,” says Mr. Wildgoose of Zurich. “If your competitors are doing it, you feel like you have to do it. But you have to strike a balance. If you have a disruption through logistical or other issues, the shutdown in production will be costly. There’s been a blind spot to this potential risk.”
And although the weather and natural catastrophes may be unpredictable, he disagrees that it is not possible for companies to look at their critical suppliers in terms of data that show areas susceptible to calamities like floods, hurricanes and earthquakes. “For a chief financial officer or somebody to stand up and say we couldn’t have foreseen this disruption to a critical supplier, I don’t think that’s true if it’s in a place that is prone to volcanic eruptions or hurricanes or the like.”
He points out that business continuity isn’t meant to predict or completely avoid disruptions but to make sure that business keeps running despite them, without scrambling frenetically in a crisis. “Maybe you don’t know that there will be a flood cutting off a key supplier factory in France, but you have a plan for if there’s a strike, and you can use that to continue operations,” he says.
Top executives might not even be aware of all the disruptions that have hit their businesses, because managers maintain silos and may not want to admit their failings, Mr. Wildgoose says. Sometimes the whole company turns a blind eye: 41% of respondents to the survey said their organizations did not record, measure or report on supply-chain disruptions that incurred unexpected costs, hurt revenue or reduced productivity.
The problem with that is that “there is always some kind of lesson to be learned from a disruption,” he says. “The best companies do record their disruptions and try to learn from them.”
Disclaimer: The information on Supply Chain Insurance in this publication was compiled from sources believed to be reliable for informational or educational purposes only. It is not an insurance contract. The insurance policy is the contract that specifically and fully describes coverage. The description of the policy provisions gives a broad overview of coverages and does not revise or amend the policy. Any and all information contained herein is not intended to constitute legal advice and accordingly, you should consult with your own attorneys when developing programs and policies. We do not guarantee the accuracy of this information or any results and further assume no liability in connection with this publication including any information, methods or suggestions contained herein. Please contact your local Zurich office for details about the relevant products and services in your country.
USA: Insurance coverages underwritten by individual member companies of Zurich in North America, including Zurich American Insurance Company. Certain coverages not available in all states. Some coverages may be written on a nonadmitted basis through licensed surplus lines brokers. Risk engineering services are provided by Zurich Services Corporation.