Businesses develop and thrive on symbiotic relationships, in which the entities rely on the continued operational viability of each other,(or even exclusively beneficial relationships. Few businesses, however, consider the risk and exposure of losing that relationship due to an unexpected calamity.
Contingent business coverage is a type of business interruption coverage will protect the “dependent business” from an external business income exposure. There are four (4) types of dependent business ISO endorsements:
- Contributing Premises, such as the businesses that deliver materials to the insured;
- Recipient Premises, such as the businesses that receive the insured’s products;
- Manufacturing Premises (businesses that make products for delivery to the insured, and
- Leader Premises, such as businesses that bring the customers to the insured.
In lay terms, 1) suppliers, 2) buyers, 3) providers, and 4) drivers.
Supply chain enterprises should not stop at just purchasing this important coverage, but also carefully understand the intricacies of their interrelationships and have contingency plans in anticipation of a calamity.
William Austin, of Austin & Stanovich Risk Managers, LLC, recently wrote an article for IRMI, Supply Chain Exposures – What it Means to A Risk Manager, and explained that contingent insurance may not always provide coverage for loss of income or increased operating expenses. He advised that risk managers should not stop at acquiring the best coverage available for a dependent business, they should also have a good back up plan to keep the supply chain running while coverage is discerned.
Proper attention to each step of the risk management process is critical to identify all appropriate issues related to supply chain exposures. Wikipedia defines business continuity planning (BCP) as "the creation and validation of a practiced logistical plan for how an organization will recover and restore partially or completely interrupted critical (urgent) functions within a predetermined time after a disaster or extended disruption." BCP must be conducted with input from all levels of the organization. BCP is used whether the issue is how the organization will recover from a localized disaster and interruption at one of its locations or the issue is a supply chain disaster at a key supplier or customer. BCP, when used correctly, can be a dynamic process to identify supply chain exposures and can serve as a template for loss control strategies (i.e., alternate suppliers, customers, etc.).
The creation, modification, and implementation of a business continuity plan may be the most efficient risk management technique for SCM in any organization for both its short- and long-term success. While risk financing, such as contingent business interruption insurance, may provide needed funds during a time of interruption, it will last for a finite time—a period likely much less than the actual period of interruption. BCP is the template for recovery and will likely continue in place long after its insurance is exhausted, assuming the organization had insurance prior to the loss. BCP may also outline timely and efficient ways to maintain the supply chain at the time of a disaster and diminish the need for business interruption insurance.
The risk management process and BCP rely on common processes in order to be successful to the organization from risk identification to loss control to continually testing the process.
As Austin finally notes, today’s risk management professional cannot merely rely on his or her knowledge and understanding of the organization’s varied and unique suppliers and customers. They must understand the bottlenecks and supply chain problems that will likely occur in the midst of catastrophe and have a plan that will keep the chain moving.