Preventing unexpected costs when your customer or supplier has an issue

By Tim Weymouth, Associate Director, ACII, AIoL

Businesses involved in product manufacturing often find themselves in the middle of a supply chain. They rely on suppliers for raw materials or components and utilise their efforts to produce and sell the final product to clients.

In a metaphorical sense, this chain, or flow, can be compared to water flowing from a mountain top to the sea, nourishing the environment it passes through. However, what happens when there’s a blockage upstream, preventing water and materials from reaching their destination? Similarly, what if there’s an overflow of water or product with nobody to receive it downstream?

The good news is that your insurance policy can come to your aid. If a supplier or customer experiences damage as defined in the policy, you may be eligible to make a claim under the Business Interruption section of your insurance. Most insurers offer an unspecified customer/supplier extension to cover such situations.

For suppliers, this coverage can help offset the increased costs of transporting raw materials from alternative suppliers located further away or the price hike resulting from the loss of economies of scale. As for customers, it can encompass expenses like renting additional warehouse space until they’re able to receive the goods or specify an alternative delivery location.

Insurers generally will only give a modest limit (GBP100k to GBP250k is common) for unspecified suppliers/customers and it can often be geographically limited as well. So, what about if your business has a major customer or supplier who buy or supply 90 percent of goods or services to your business? If one of these was to suffer extensive damage, then this in turn could cause seriously implications for your company. In situations like this, your broker should look for a specified supplier/customer extension which provides increased indemnity limits to enabling your business to adapt its supply chain.  With this in place business can continue with at a more normal pace.

Arranging specified supplier cover through your insurance broker is just one aspect of a broader supply chain risk management strategy. Ensuring the resilience of your supply chain in the face of potential disruptions is crucial for the uninterrupted flow of “water” through your business. In a world that is constantly influenced by global events, the possibility of supplier issues, like the Nokia and Erikson* example, has never been closer. Businesses with flexible supply chains that can be diverted and adapted to overcome challenges are more likely to survive, while those with a more rigid supply chain model are likely to find themselves overwhelmed with excess finished products or depleted of essential raw materials.

At Aston Lark, we offer comprehensive advice in this area, taking into account the holistic management of supply chain risks. Reach out to us to learn more about how we can help your business navigate these challenges effectively.

*https://www.srscan.com/managing-supply-chain-risk-the-nokia-and-ericsson-case-study/