Zurich Warns on Supply Chain Vulnerability

LONDON, Jun 22, 2009 (A. M. Best via COMTEX) -- ZFSVF | Quote | Chart | News | PowerRating -- An increasing number of companies need to examine their vulnerability to disruption to their supply chains, according to Zurich Financial Services Group.

?The key message is that risk is not being factored well into risk management at the moment,? said Nick Wildgoose, global supply chain product manager at Zurich. ?Supply chains are becoming more and more important ? and more critical to a company?s performance than ever.?

In a Zurich report on supply chain disruptions, Wildgoose points out that many organizations have been cutting costs due to the impact of the ongoing global recession. Some of these savings are becoming operational weak links.

?Almost all companies these days are supply-chain reliant,? Wildgoose said in an interview. ?There are some big companies out there that are approaching 100% reliance on supply chains, and there?s a movement to increase this trend as a part of a drive to lower costs.?

The global recession is savagely biting in many places. Wildgoose pointed to China as particularly badly hit, with Guangdong province losing tens of thousands of small businesses to bankruptcy in the second half of 2008 alone.

Wildgoose said companies need to understand what a supply chain disruption would do to their business. He added that insurance is an important part of a company?s tool box when it came to minimizing the impact of such disruption.

Supply disruption can be an expensive business, and Zurich's report cites a number of costly lessons. It mentions an international electronics company that maintained a single source of supply for a critical component. After a fire at the supplier?s plant the company lost $400 million (287.5 million euros) in sales and as a result had to shut down an entire business line.

An international consumer electronic goods manufacturer and supplier had some manufacturing problems at a plant that made a key component for one of its systems. According to Zurich, this led to the company reducing its profit target from 130 billion yen (964 million euros) to 80 billion yen.

Zurich found that the number of statements by chief executives concerning supply chain incidents that have negatively impacted results has risen from 370 in 2003 to 787 in 2007.

Wildgoose added that supply chain disruption can be hard to measure, especially if a company?s reputation has been damaged by an accompanying scandal. He pointed out that shoe manufacturer Nike?s reputation has not yet completely recovered from the news that some of its shoes were being made in factories in China that some alleged were little more than sweatshops.

According to Wildgoose, finding a solution to supply chain problems is not that hard. Companies needed to start off by examining their supply chains and looking at basic exposures.

?The initial steps to deal with these problems are easier than many companies think,? Wildgoose said. ?There is a silo mentality in some places. Companies need to start the journey by changing from being reactive to proactive.?

According to Wildgoose, many policies that deal with supply chain insurance are often limited to cover for natural catastrophes, such as flooding or earthquakes. He said Zurich?s new supply chain policy, announced at the recent Association of Insurance and Risk Managers conference in Bournemouth, U.K., is more comprehensive and covered all risks.

(By Marc Jones, London news editor: marc.jones@ambest.com)

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