The winter season can pose numerous risks for manufacturers. In addition to a busy holiday season, this time of year means severe winter weather in many regions of the U.S. and abroad that can impact a company’s sourcing efforts and supply chain.
“A disruption in goods and services that your company relies on can be devastating to your business,” says Matt Marcella, industry lead, commercial accounts at Travelers Insurance in Hartford, Connecticut. Mitigating risk is a must, he says.
Among the measures to consider are:
Backup plans. “Even if your company — or a part of your company — isn’t located in a severe-weather area, your suppliers or their suppliers might be,” Marcella says. “So, this time of year, it’s important to think about the downstream and upstream effects that weather can have as well as production impacts.”
Inclement weather can affect supplier’s plants as well as delivery of their goods. “Ask whether you are getting key components from one supplier or from one area of the country. You also will want to consider the difficulty of getting those parts from another supplier,” Marcella says. “Consider whether the parts are specialized or readily available, and if a supplier goes down, the time it will take to find another. Think about secondary suppliers you could tap.”
Business-continuity planning. What would you do if your plant had to shut down due to severe weather? Do you have reciprocity agreements set up? If so, where? Can another company — perhaps even a competitor — fulfill orders so customers’ demands are met? A reciprocity agreement should stipulate that once things get back to normal, you will resume fulfilling the contract, Marcella says.
“It’s better than leaving a customer high and dry, which could potentially cause you to lose that customer forever,” he says.
A reciprocity agreement “can be one of those awkward things that you hope to never have to put into practice,” he adds, “but again, I think any business owner will tell you that, at the end of the day, they want to fulfill their customers’ needs and make sure that they have the desired product.”
Marcella continues: “The risk-mitigation process is thinking of all the different avenues about what can go wrong and how you’re going to respond. That’s why we really do encourage the formalization of those plans, not only having them written down, but to the best of your ability, testing those.” That doesn’t necessarily mean switching suppliers just to see how smoothly the process goes, he notes. Instead, it means running mock drills — for example, with a key machine. If it goes down, how long will it take to repair or replace? What backup machine options are available?
Insurance. In addition to business-interruption coverage, contingent business-interruption coverage can enable companies to recover lost revenue. Such coverage is valuable, Marcella says, “if a supplier were to have a covered cause of loss that prevented you from being able to produce your product. That’s really out of your control, but (with the insurance), you can protect yourself to some degree.”
Another product to consider is manufacturer errors and omissions coverage. “It’s important for manufacturers to think through the measures they have in place to mitigate their product causing a financial loss to a customer (as opposed to bodily injury or property damage),” Marcella says. “A lot of manufacturers think they would never run into that type of situation.” But the cause doesn’t have to be a defective product, he says: “It could be a result of a breakdown in supply chain management or a misunderstanding.”
He offers this example: A customer tells a manufacturer it needs a machine that produces 100 widgets an hour. The manufacturer makes the machine and sells it to the customer, but it produces only 80 widgets an hour. “So now that customer can’t fulfill its contractual obligations to customers,” Marcella says. “So, it says, ‘We’re now 20 percent behind because this machine doesn’t make what you said it was going to make — and now we’re suffering a financial loss.’ That’s exactly what manufacturer errors and omissions coverage is meant to respond to.”
The busy winter season, coupled with severe weather, can play havoc on manufacturing supply chains, but backup and contingency planning as well as the right insurance coverage can help mitigate risk.