Friday, 9 December 2011
Global business continuity survey shows sharp rise in supply chain problems
Almost nine out of ten companies, or 85%, have suffered such a supply chain interruption in the past twelve months according to a survey, conducted by the UK-based Business Continuity Institute (BCI) and sponsored by Swiss insurer, Zurich Financial Services, together with the supply chain division of German logistics company, DHL.
BCI talked to 559 companies in 62 countries to carry out the survey. The annual study, published this year for the third time, has shown the highest level of companies reporting supply chain interruptions to date.
Last year only alone 72% experienced at least one disruptive incident. “The increase is certainly due to the high frequency of natural catastrophes in the last twelve to 18 months,” Christoph Willi, board member of Zurich Germany told Commercial Risk Europe. The earthquakes in New Zealand and Japan affected about 20% of the companies in the survey. The study did not include the heavy flooding in Thailand in October because it was finished before then.
As in the previous year’s study, most of the companies (51%) named bad weather conditions like flooding and tornados as the main cause for supply chain interruptions, followed by breakdowns of IT and telecommunication systems (41%).
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However, new risks for the supply chain are on the rise: Companies are increasingly worried about problems with human resources.
The loss of qualified staff at the supplier’s site—ranked 14 in the previous survey—jumped to rank six on the list of the most important causes for interruptions. Companies from continental Europe worry in particular about this risk. For these enterprises it even ranked third among the leading sources of supply chain disruptions.
“In markets where the economy is booming, there is a war for talent,” explained Mr Willi. “Highly qualified staff are scarce. People are very quickly enticed away from their company by more favourable working terms,” he said. Another reason is cost saving measures at suppliers. “Sometimes they cut too much talent or invest too little in training of their employees,” said Mr Willi.
Companies are, however, able to counter this trend. “They cannot influence the staffing policy of their suppliers directly, but they can enforce quality standards,” he said. The companies can for example ask their suppliers about their investment in training and let this factor influence their choice of suppliers.
Disruptions of the supply chain can have harsh consequences.
Nearly half of the companies in the survey suffered a loss of productivity, about 38% faced higher production costs and 32% suffered revenue losses. In the long run, stakeholders may lose confidence, the company’s reputation may be damaged and regulatory scrutiny may increase. About 14% of the companies in the study suffered overall financial damage of between €1m and €10m because of supply chain interruption. For 2%, the costs even reached between €51m and €100m and 1% reported costs in excess of €100m.
It is crucial for companies to know their supply chain in detail. Some 40% of the interruptions did not happen at the direct supplier, but further down the chain, for example at the second or third tier supplier.
Zurich emphasises the need for proper supply chain risk management since this is a precondition for its new business interruption policy. As with competitor Allianz, broker Willis and others, the insurer offers a policy that also covers interruptions that were not caused by direct damage at the supplier’s site.
That means that the company will also receive compensation when it does not obtain the necessary parts for production in time because of flooding, blocked roads or ash clouds that stopped air traffic.
The demand for such policies rose in the German industry when the ash from Icelandic volcano Eyjafjallajökull grounded aircraft in March 2010 and was renewed when an earthquake and tsunami hit Japan in March 2011.
The transparency of supply chains is a crucial topic for insurers. After the Thai floods, reinsurer Munich Re announced it would cancel all contracts with companies which refused to give details about their supply chain within 18 months, much to the anger of German risk managers.
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