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Supply Chain Risks Need to Be Prioritised in the Outsourcing Revolution

By Alex Balcombe, Partner at Harris Balcombe 

Outsourcing has come into its own in recent years. More people than ever before are opting to work for themselves and offer their services on a contractual basis.

For businesses that don’t have the capacity or expertise to handle certain processes internally, outsourcing is a blessing. Businesses are seeking technology resources to give them the competitive edge, and hiring manufacturing companies to produce their goods.

Yet the fact that they are no longer simply selling on their own merits opens them up to risks. Businesses are relying on other companies, their operations, people, reputations and decisions to fulfil their own supply chain. If inventory or services are not received on time, it can have a huge domino effect.

The challenge?Getting more companies to undertake contingency plans, insure themselves against the risks of outsourcing and understand the policies that they need to takeup. Being confident in your network of smaller businesses which all have an impact on your bottom line, is crucial.

So, what do you do?

Identify Risks

Companies just don’t operate in isolation anymore, yet supply chains are rarely brought up as priorities in board rooms. What happens if your biggest supplier has its own disaster, isn’t able to get a delivery to you in time and the goods you rely on fail to arrive? This could result in higher costs by having to switch to an alternative provider or even loss of business.

Before you even think about insurance, it’s smart to prioritise a contingency plan. In tumultuous and unpredictable financial times, and as global supply chains continue to grow in complexity, so too do risks. From top to bottom, having a deep understanding of your supply chain is invaluable.

Undertake a comprehensive review of all of the potential drawbacks or situations that could arise externally. By identifying these high-risk areas, you can make sure that you prioritise mitigation strategies, and have a flexible response plan should any of these problems occur. You should document this process in a risk management document, which will help you to develop realistic, cost-effective strategies should a disruption arise.

Resilient Strategy

If you do encounter a bottleneck situation, where key components you usually source from are not available, the company with the better resilience strategy will thrive.

Conduct safety training, have a proactive plan in place, and have other available suppliers on hand. If your key overseas supplier has a logistics issues, finding a replacement at the drop of a hat can be near on impossible if you don’t have a plan in place. For each risk to your global supply chain, you need a contingency strategy in place. It’s also wise to test any plan of action before any problem happens, to allow you to make the supply chain as resilient as possible when facing a disruption.

The Insurance Question

If you depend on many different players to meet deliverables, how do you insure yourself in case they fail to fulfil their work and your business suffers?

One of the most greatly misunderstood types of insurance is business interruption. Some think that any costs associated with business recovery will be picked up by interruption insurance – but this is not true. Business interruption insurance only covers your company operations – you need a supplier extension clause.

A supplier extension insures for the interruption to the supply of goods or services from third parties. It’s also worth noting that you will only be covered if the supplier is hit by something that you have already insured yourself against.

Even if you have the right insurance, the most challenging part of quantifying interruption claims to your supply chain is still the same as if it was a ‘traditional’ disaster such as a fire. This means proving how you would have fared had the incident not occurred.

Insurers may scrutinise your circumstances to, put simply, try to pay you as little as possible, working with a team of professionals to check you have met all of the conditions of your policy.

A specialist claims consultant can help you with the whole process and pick up on crucial points. They can advise on the best course of action, help you to understand your circumstances, minimise further business loss and assign you a team of experts to help. They will also handle all of your paperwork for you, to save you the headache, and negotiate with insurers to prevent any delays or disputes.

Use insurance as a method to control supply chain risks, but don’t use it as an excuse to avoid planning. If you come up with a strategy to stop your business from falling foul to supply chain problems before they arise, you can avoid bottlenecks further down the line. All businesses rely on suppliers and service providers, but the status of them is getting more and more complex. Take the case of Carillion, which highlighted how the collapse of one company can have such a big impact on supply chains.

We’re in the age of efficiency and we’re constantly being measured against productivity. Outsourcing reduces overhead costs, supports innovation, offers global access to talent, enables you to quickly implement new technology and focus on other tasks. However, you do need the reassurance that if a disruption does happen, you have a resilient plan in place now to act quickly, not hastily react.