Provided that external, unforeseeable circumstances not susceptible by supplier have an impact upon the proper fulfilment of a delivery commitment towards the customer, the question is typically arises who will be liable for any disturbances caused by this.
The reason: In late January 2017, there was a fire at a supplier in the Czech Republic and the comparatively simple component could no longer be supplied – and apparently not sourced elsewhere, either. The consequence: production came to a standstill.
The greatest risk for companies: interruption to operations and supply chains!
At 46%, interruptions to operations and supply chains ranked number one in the 2015 list of global risks. Damage caused by fire and explosion was not far behind in third place at 27%. Fatally, both risks often go hand in hand resulting in not just serious material damage but also partial or even total breakdown in operations. If supplied components critical to production suddenly become unavailable and cannot be sourced alternatively, this can trigger serious supply chain disruptions for customers and even the customers' customers.
This can create a vicious cycle in which the extinguished fire spreads into a metaphorical blaze for production and logistics disruption. It can result in high costs and long term problems through cancellation of orders or contracts. This can then quickly lead to reductions in earnings and market share and damaged reputations. In extreme circumstances this can threaten the very exisitence of a company.
Many companies have reacted to this problem and are paying close attention to the special risk that serious supply chain failure can present. Such supply chain risk management plays an ever increasing important role in emergency planning (Source: Allianz Risk Barometer 2015).
Interruptions to operations are a major cost factor when damages occur.
Short interruptions or standstills in the supply chain, such as those caused by machine malfunction or short-term logistical issues, can generally be brought under control quickly. When serious damage occurs however, for example due to a fire at a production location, the consequences are often far more severe. Despite the implementation of emergency operations or the use of logistical alternatives, damage caused by interruption to operations can cost millions and make up a considerable proportion of the total damage. This kind of cost distribution is really not exceptional: damages from interruption to operations made up a significant proportion of the ten biggest damages events since 1962. In some cases, the damages from interruption to operations were even greater than the actual material damage.
Damage proportion from interruption to operations in the ten biggest damages events since 19621)
1) Source: Damage prevention in non-life insurance 2015/2016, report by the GDV asset damage prevention committees
One third of damages are caused by interruption to operations!
The impact of operational interruptions on damage costs is not only evidenced in the most serious incidents, it is also borne out in analysis of overall damage statistics. On average operational interruption accounted for 33%2) of total damage costs between 1996 and 2015. It is very clear; if you can’t produce, you can’t deliver…..and if you can’t deliver loss of earnings occur. A vicious cycle develops that requires considerable financial staying power and can only be broken with quick reactions and a targeted recovery strategy.
2) Source: Damage prevention in non-life insurance 2015/2016, report by the GDV asset damage prevention committees
The chain reaction picks up pace: interruption of supply chains.
Interruption to the company directly affected by a fire damage is of course not just limited to them alone. With complex supply chain networks common place, especially for production, the damage can be widespread and the whole supply chain can be affected. It is important to be aware of existing contract clauses which include recourse claims and the loss of major orders is another serious risk. As highlighted earlier, interruption to operations and supply chain has been estimated to be the greatest risk to companies at 46% (Allianz Risk Barometer 2015)
Single source in the supply chain can become a risk catalyst.
It is not generally a single cause, such as a fire that can bring a company to it knees it is often a combination of factors. These factors have often received too little attention in the supply chain and they have the ability to trigger other major disruptions. One example can be a focus on single source supply. Whilst this may offer benefits such as significantly reducing cost, if a disruption occurs a lack of alternatives can be a severe issue. The situation experienced by a car manufacturer mentioned earlier is a perfect example of this scenario. Automotive expert Professor Ferdinand Dudenhöffer makes his positon on these risky supply chain structures clear in our interview ‘It is idiotic for a car manufacturer to use a single source’ complains the founder and director of CAR – Center Automotive Research at the University of Duisburg Essen.
Supply chain collapse due to lopsided logistics.
It is not only the production aspect that is worthy of consideration when evaluating supply chain risks. The transportation of goods to be delivered can also be held up and bring production to a standstill. Single-source logistics should also be avoided as far as possible, for example by consciously dividing transport between rail and road. If a rail track suffers disruption, then at least part of this can be covered in the short term by HGV transportation. Of course, this also depends on the type and scope of products being supplied.
Recognise supply chain risks, establish consequences, develop emergency plans!
Production workflows and manufacturing processes within a company are today mostly part of a complex, wide-ranging and often international network of material, product and data streams, combined with services. It is therefore not only necessary to check the direct suppliers – the supply chain should be examined in its entirety. IT-supported analyses are nowadays available to help identify the risks of interruption to operations, illustrate highly complex connections and dependencies and point out alternatives. With this information, targeted measures and even effective emergency plans can be implemented. It is important to establish the consequences, as an interruption to operations at just one link in the supply chain can lead to a revenue collapse that can very quickly threaten a company’s existence. Insurance can only cover financial damages and losses in these cases. As a rule, loss of market share is uninsurable and much harder to recover! Companies should therefore demonstrate foresight in their actions and examine production processes, as well as supplier and customer connections, very closely.
Supply chain risks – keep these five facts in mind:
- With a share of 46%1), interruption to operations and supply chains was number one in the 2015 list of global business risks
- On average, interruptions to operations accounted for 33%2) of damages costs between 1996 and 2015
- Single-source supply and lopsided logistical arrangements can exacerbate disruptions in the supply chain
- Via IT-supported analyses, it is now possible to uncover and minimise hidden risks in the supply chain
- Arm yourself with up-to-date and appropriate emergency plans and make use of professional expertise from specialist companies!