Reducing supply chain disruption

16 January 2019

Food manufacturers are acutely aware of the cost of a product recall, but what steps should they be taking to minimise the impact of disruption to the supply of the raw materials they need to produce their products?

The expression ‘may you live in interesting times’ is derived from an ancient Chinese curse, but it feels particularly relevant in 2018 on the back of a surge in nationalism across the globe, political uncertainty in Europe and the opening skirmishes of what many fear will become a fully fledged trade war between the world’s two largest economies.

In an era of unprecedented globalisation where the supply chains of UK companies are more complex and geographically diversified than ever before, the risk of supplier disruption cannot be ignored.

Food manufacturers are especially vulnerable as ingredients are sourced from locations across the world and the source of individual ingredients might not be immediately apparent.

Research conducted by analytics firm Achilles found that 19 per cent of large food manufacturers could not determine the name or address of all their suppliers and more than half said they had no plan in place to find this information in the future, despite many believing they would be exposed to mounting legislation and/or reputational damage from a lack of visibility of their supply chain.

In the past, food manufacturing companies have taken a rather relaxed view of their potential exposure to supplier disruption.

A study published by the Chartered Institute of Purchasing and Supply in 2008 found that international terrorism and civil contingencies requirements had relatively little impact on awareness of insurance requirements, with 28.8 per cent of respondents saying they had business interruption cover in place.

Identifying the risk for food manufacturers

A decade on, how can food manufacturers assess business risk and vulnerability from international disruption?

According to Simon Clayton, a Senior Partner in the credit, political and security risks division of JLT Group, the first step is to look at the country or region in which the supplier is based in terms of its economy, political and social stability, and the legal and regulatory environment.

“This will help establish which types of cover might be needed,” he says.

“It is also important to assess the company’s experience in the market, country and/or region, and how it has managed previous similar situations to establish their ability to operate in that environment.”

In addition to country risk ratings matrix, JLT uses a terrorism mapping tool that includes geopolitical risk data associated with each location.

“This is important because while the client may not be a target, it may be co-located with a higher profile business that may be impacted by a terrorist event,” says Clayton.

There are various insurance products that address supplier disruption caused by political risk.

A company shipping goods into the UK might want to consider pre-shipment cover for risks such as embargos or frustration of the contract that prevents the delivery of the goods as well as post-shipment cover, which addresses issues such as non-payment.

Then there is mark-to-market cover, which effectively covers the difference between the contracted price of the goods and the price of the goods at the date they are sold.

The relevance of this type of cover will depend on how the company accounts for its sales, explains Clayton. “A major event could see the market price fall below the contracted price.”

Trade disruption cover should also be considered to mitigate loss of profits following an event.

“This is a broad-based cover that extends to marine and cargo perils as well as some of the political risk that prevent a contract being fulfilled,” adds Clayton.

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Related insurance policies

In addition, food manufacturers are advised to think about the tie-in between their marine cargo coverage and their credit and political risk policies, because these policies are inter- related, he continues. “Companies need to consider whether there are any gaps in cover and where one of these policies could be broadened to close out that gap.”

The lack of clarity on the UK’s trading relationship with its former European Union partners post-Brexit is an obvious challenge for food manufacturers who source products from Europe, many of whom will be concerned about how customs checks might impact the cost and delivery time of their supplier deliveries.

Uncertainty over future trade relations requires prioritising the elements of the supply chain that companies can control, says Clayton. “Factors such as managing the diversity of supply and strategic investments as well as the backstop that insurance can provide,” he concludes.

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For further information please contact Simon Clayton on +44 (0)20 7558 3706