I read an interesting article* the other day about a supply chain issue Ford is having because one of their key suppliers suffered a fire loss. Ford said the disruption could cause a reduction of up to 15,000 trucks being manufactured per week and would have an “adverse impact” on its financial results.
Ford is a colossal company and to see how a single supplier could have this much impact on its financials is mind numbing. Many of my clients in the Life Science space are beholden to one or two suppliers and finding alternative suppliers and vendors can be both difficult and time consuming given the highly regulated industry of Life Sciences. For many Life Science companies (both pre-revenue and revenue generating) this could potentially put them out of business. This is the Black Swan event, both hard to quantify and catastrophic.
There is a solution, but it is often overlooked or at best underestimated. The solution can be solved through the use of the Property Insurance policy and making sure there are adequate limits under Contingent Business Income.
The approach I use with my clients when designing their program is to first take a deep dive into their supply chain and identify worst case scenarios. I like to ask few questions to get the process started. Who are my client’s key suppliers? Who are their suppliers? If a supplier goes down can my client quickly move to another supplier or facility? How much product does my client have in reserve?
Once we identify weakness or vulnerabilities in the supply chain we then start looking at the economics of each vulnerability. This is part math and part art. We start at what would be the worst possible scenario, what could put my client out of business. An example would be a company with a single product using a single supplier for a key ingredient and the supplier goes down with no backup facility or vendor in place. How long would it take to get another supplier? If this scenario played out, what would be the economic cost to the client? Once we identify this scenario it becomes my job to develop different program options that best fit the risk tolerance and economics of my client.
I had one client who was very conservative. They had a recently approved product and were expecting significant sales from that product. They had no other product on the market and they used a single manufacturer with no backup facility in place. We determined the quickest a backup facility could be identified and validated was 8-10 months. The client had about 4 months of product in reserve. We created options that ranged from 4 months of protection to 24 months. We also looked varying deductibles based on their reserve amounts. In the end the client moved forward on a program that would protect their business income for a period of up to 12 months if the third party facility went down with a deductible of 30 days.
The more difficult situation to quantify is the R&D organization with X amount of dollars and a burn rate of Y who has a trial interrupted because of supply chain issues. There are no sales but there would be a real economic loss if the trial is interrupted. This is not necessarily business income, but can still be protected in the same exact way making sure the proper wording is on the policy form to protect R&D expenses.
Out of all the issues I see every day, this is often the most overlooked or the limits are inadequate because a deep dive on the exposure was never contemplated. If Ford has a supplier that can cause an “adverse impact” on their financial results, how good do you feel about the protection you have if one of your suppliers suffers a loss?
*http://www.autonews.com/article/20180509/RETAIL/180509786/ford-f-series-production-cut-supplier-fire
MattCorc 