Thursday, 23 August 2012
Indian power failures leave supply chains in the dark
The power failures that hit northern India earlier this summer have highlighted yet another supply chain exposure for European business and are proof themselves of the ill effects of poor supply chain risk management.
Train lines were affected during the Indian power outage
The succession of power blackouts that struck towards the end of July brought to the fore potential exposures faced by businesses that rely on offshore outsourcing to deliver key services to their customers worldwide.
Nick Wildgoose, Global Supply Chain Product Manager, Zurich said: “The recent power cuts in India have highlighted the fact that there are more risks to a supply chain than natural catastrophes. They also demonstrate the risk of a geographic concentration of suppliers just like the floods in Thailand did.”
India has a multi-billion dollar slice of the offshore outsourcing business, including a high concentration of service provision, such as call centres to financial services, high-tech and telecom, manufacturing and retail businesses. Companies in the Americas and Europe are among their largest customers.
A major power failure on July 31 left hundreds of millions of people and many businesses in northern and eastern India without power, making it one of the worst power outages in history. It was the second blackout in two days.
The power cuts have led to more questions being asked about the risk to businesses caused by interruptions to their supply chain, following the major supply chain events of 2011.
The power outage in India may have itself been caused by a supply chain problem.
“India is experiencing difficulty in building new power stations because of a shortage in coal supply and did not have a contingency plan or backup arrangements, so was forced to urgently buy additional power from its northern neighbour Bhutan,” explained Zurich.
A Business Continuity Institute survey sponsored by Zurich found that 85% of organisations across 62 countries recorded at least one supply chain disruption in 2011. Over 50% of those surveyed had more than one supplier interruption in 2011.
As such supply chain risk management is high on the corporate agenda. It has been one of the hottest topics in risk management since the devastating losses caused by the disruptive events of last year.
“Customers are realising that they can reduce costs of disruption and gain competitive advantage by understanding their critical supply chain risks better. Companies can suffer a decline in stock price compared with industry peers following a supply chain disruption as a result of lower sales and higher costs. Historically, nearly 40% of companies never fully recover from an extended supply chain interruption and eventually go out of business,” said Mr Wildgoose.
Supply chain exposure is increasingly being recognised as a key issue for companies and their shareholders, he added.
There has been much debate about the adequacy of cover for business interruption as a result of supply chain failures. Much has been asked of the merits of insurance that doesn't cover interruption resulting from non-physical damage.
Zurich said in a statement that, in contrast to other solutions on offer, its Supply Chain Insurance product provides 'all risks' cover that extends to lower tier suppliers.
It added that its offering covers ‘non-physical’ damage from threats such as power outages, cyber risks, labour issues and political risks and can also include insolvency of a supplier.
The policy can also cover the increased cost involved in recovering from supplier outages, so companies do not have to use their valuable cash flow to fund unexpected extra expenses incurred following a disruption, said the insurer.