Building a Strategy to Safely Manage Supply Chain Risks

Maintaining supply chain integrity is a high-wire act with a small net, buffeted by myriad exposures from basic quality assurance and control to conflicts, coups and catastrophes in far-off lands. Add in macroeconomic factors, such as inflation and labor shortages, and the process of aligning all the variables productively and profitably becomes exponentially more difficult, experts say.

The construction sector, due to its size and scope, is more exposed to supply chain woes that can cause concern for insurers than industries that do not consume similar volumes of raw materials or require as much skilled labor.

Building construction insurance programs that include contingencies for supply chain disruptions and related risks can help protect contractors and others, they say.

Kevin Bates, group head of risk and insurance for Australian construction company Lendlease Corp. in Sydney, said a robust supply chain should include secondary and tertiary supply options and opportunities, which create a “strong competitive tension” that translates to improvements in quality, speed, safety.

“There’s a need for everybody to raise their game. It’s competitive. People want to win the work and they know that things like safety, quality and reliability are points of differentiation,” said Mr. Bates, who is also a board member of the Risk & Insurance Management Society, Inc.

Redundancy and contingency planning should be a part of a well-designed supply chain, said Dallas-based Cheri Hanes, who heads the subcontractor default insurance risk engineering team at Axa XL, a unit of Axa SA.

To weather challenges, “you must really understand your supply chain, because it’s much more complex than you think. If it’s simple, that means it’s not redundant,” and potentially more exposed to disruption, she said.

“Where possible, redundancy is always a good idea, or at least having contingency plans in place,” said Cincinnati-based Pat Stoik, chief risk officer for Overhaul Inc., which specializes in in-transit supply chain risk management. “Route planning, proper security protocols for transit and storage, visibility of the goods while in the supply chain, and contingency plans contribute to successful navigation of the supply chain.”

“The risk manager and the supply chain team should work very closely to make sure that the risk handling matches the supply chain activities being followed,” Mr. Stoik said.

Larger companies should have risk management capability within the supply chain management function, said David Shillingford, an adviser to Troisdorf, Germany-based Everstream Analytics.

“There is an opportunity for insurers to work more closely with companies that are mapping their end-to-end supply chain to develop or extend supply chain risk transfer mechanisms,” he said.