THE COVERWISE BLOG

Supply Chain Disruptions & Business Interruption Cover

Supply chain risk management is the top area for Australian businesses to improve upon, according to a recent survey by the Australian Securities and Investments Commission.

Alarmingly, the survey found 44% of companies surveyed were not doing anything to manage supply chain or third-party risks.

In this article, we’ll explain how to audit your business for supply chain risks and bolster it against possible future disruptions.

Supply Chain Disruptions and Insurance Coverage

As we saw during the pandemic, and now with the growing regional conflict in the Middle East, supply chain disruptions can spring up quickly. Bushfires, cyberattacks, cyclones, and other disasters are also capable of wreaking havoc.

Whether your business relies on a key supplier or has diversified, you may still be vulnerable. Disruption to your business could include:

  • Loss of turnover, particularly if you can’t sell particular services or products
  • Damage to your premises due to an insured event
  • A slimmer market share as your customers shop elsewhere
  • Inflated costs as you source other suppliers at short notice
  • Reputational damage through poor reviews, bad media coverage and consumer confidence.

Business interruption insurance could cover the loss of your sales if a supply chain incident means your business is out of action. This policy can also come in handy in covering extra costs your business incurs to keep operating, including:

  • Rent
  • Power and other utilities
  • Staff wages
  • Business loans
  • Temporary relocation costs
  • Costs incurred if your supplier’s premises are damaged.

Understanding Business Interruption Insurance

Business interruption insurance helps mitigate the risks of having to shut your business down for a few days or months due to an insurable event. It aims to compensate you for income loss and extra costs of running your business after this event.

Policies differ, so talk to us for clarity about which events trigger your policy.

It’s important to know the exclusions. For example, disruptions affect a product or component within your supply chain, which would trigger a product liability insurance policy. As well, a business interruption insurance policy would not cover:

  • Closing your business voluntarily
  • Losses resulting from machinery or equipment breakdown
  • Losses that occur after the indemnity period
  • Losses due to labour strikes and legal or regulatory changes
  • Claims of lost income that you can’t substantiate.

Calculating Business Interruption Insurance

Consider these tips to work out comprehensive protection for your business:

  • Understand the risk profile of your business by identifying possible, natural, technological, or artificial hazards
  • Examine your financials, including P&L statement, balance sheets, and cash flow
  • Work out your insurance policy indemnity period – you can set a realistic period for your business to get back into action
  • Calculate your gross earnings and future revenue, keeping in mind business cycle trends
  • Add extra expenses you could encounter – think utility bills, staff overtime pay, rent, and loan repayments.

Preparing for Future Supply Chain Challenges

Next, here’s how to bolster your business against future supply chain challenges to ensure smoother operations.

  • Optimise supply chain visibility, ideally using inventory management software, Internet of Things tracking solutions, and vehicle-to-vehicle connectivity to identify delays and other issues in real time
  • Assess your vulnerabilities regularly (every fortnight, month, or quarter), scrutinising every step of your supply chain, including after changes in suppliers, their financial situation, material costs/availability, or emerging risks
  • Develop and rehearse contingency plans (yes, plural!) for each serious threat, creating protocols for every division of your business
  • Diversify your procurement with back-up vendors you verify and who also have diverse supply lines, and multiple locations
  • Stockpile wisely, such as when your business is experiencing a growth spurt, launches a new product line, or gets wind of potential disruptions (think peak activity periods, extreme weather events)
  • Source independent logistics expertise for deeper insights into your risks and strategies.

Be sure to bolster your disaster readiness with scenario planning. That involves identifying where the risk emerges, aggregates, and how risk multipliers are problematic. Then plan and mitigate the risks.

As well, digital supply chains add another level of risk – they increase the cyberattack surfaces, according to the Australian Signals Directorate. Consider how resilient your SME is to information and communication technology risks from within your supply chains, including:

  • Data breaches
  • Unpatched vulnerabilities of the software that third parties use
  • Malware
  • Cyber risks relating to fourth parties, who are indirectly linked to your business, such as your suppliers outsourcing to other suppliers.

Fourth-party verification is challenging because it means your business needs visibility into your suppliers’ networks. It could involve asking for and testing your third-party vendor’s key plans for business continuity and crisis management. But this verification boosts the cyber resilience of your business.

Stay ahead of supply chain disruptions with the right business interruption insurance for your business. Contact us for expert guidance.

Useful Links

See how the Federal Government is managing and advising on critical supply chain vulnerabilities
https://www.industry.gov.au/trade/office-supply-chain-resilience

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