Control Your Suppliers, Control Your Profits

Unforeseen events can interrupt a vendors supply chain, leaving buyers in the lurch

Who controls your profits and customers, you or your suppliers? The truth is your suppliers do if you haven't properly reviewed their operations plan. Loss history is filled with examples of supplier interruption that caused devastation to downstream production and marketing strategies.

Unforeseen events to your suppliers can interrupt your supply chain and severely impact your profitability and more importantly, your customer base.

This vulnerability is especially true if you outsource or use just-in-time inventory. You may have a solid contingency plan in place for your operations, but what about your suppliers how will they handle business interruption and how will their preparedness, or lack of it, impact you?

Obviously the best defense against such incidents is duplicate suppliers or stockpiles of key inventory easier said than done. There are many considerations such as supplier loyalty, efficiency, economy, consistent quality, ISO 9000 compliance and dependability that actually make single “just-in-time” suppliers attractive under normal conditions.

The next best defense is mandating that your suppliers follow the same high standards of loss prevention and disaster recovery that you insist on in your own facility. Of course this requires openness and cooperation between you and your supplier. And if you depend solely on that supplier, it may depend on you as its sole or key customer and therefore have similar interests in mutual protection measures and contingency plans. If you have a loss that shuts down your production, they lose a key customer consuming their output.

In reverse, what if you are the sole supplier for a company and its ability to use your output is critical to your need to produce? What happens to your operation if that company experiences extended business interruption? The bottom line is cooperative contingency planning and sharing of loss prevention technology benefits everyone.

To determine your suppliers' loss prevention philosophy and their commitment level toward loss prevention and control, find out if they have a loss control or safety manager on staff; if they follow best loss prevention practices; if their facilities are adequately protected and maintained; their loss history; and if their facilities are located in areas frequently known for heavy snow loading, hurricanes, tornados, flooding, earthquakes and mudslides.

How does a risk manager or insurance buyer go about getting this type of information about their suppliers? Depending on the criticality of your supplier, and the comfort level you are looking for, getting this information can range from basic and relatively easy-to-obtain risk profiles, to a sophisticated, in-depth risk analysis. (See “Buyer Checklist” for suggestions.)

Once you have this information you will be in a better position to evaluate your potential threats and exposures from a contingent business interruption standpoint and develop an action plan to meet your needs. This may range from something as simple as having a written agreement with another vendor to supply you with the materials you need while your supplier is down, to requesting that your supplier make significant risk improvements to its facility to reduce loss potential.

When evaluating your suppliers' loss prevention features and exposure to loss, you should be aware of a few points:

Loss prevention is mostly a matter of anticipating and controlling dangerous behaviors. For example, excellent housekeeping with good control of oils and flammables will help prevent or reduce the occurrence of fire. A cutting and welding permit system will help assure that proper precautions are taken before any potentially hazardous “hot work” operations are undertaken.

Automatic sprinklers with an adequate water supply for combustible construction and/or combustible occupancy can effectively control fires with water. This is especially important as it has been found that fires controlled by sprinklers applying water in modest amounts near the fire cause less damage than fires that are battled with an indiscriminate, full-force fire hose.

Also keep in mind that a reliable alarm system will assure that the fire department and other important personnel are notified immediately when problems occur; an emergency action plan to respond to any reasonably foreseeable event with well-trained personnel will help reduce the extent of damage and disruption of business; and a disaster recovery plan with identified alternate sources of processing and equipment will help expedite the resumption of normal business after a loss.

Ralph Tiede is vice president and manager of Liberty Mutual Propertys loss prevention department in the Weston, Mass. office.

Sidebar #1:

Flag: Buyer Checklist

Head: Get The 411 On Suppliers

How does a corporate insurance buyer go about getting information on their suppliers? Here are some options to consider:

Get a risk profile of your suppliers' operations.

This should include their corporate loss prevention philosophy, disaster and contingency plans, critical interdependencies between production facilities, loss history, a description of their operations, and a building summary identifying significant buildings and protection systems (automatic sprinklers, for example) designed to reduce their exposure to loss.

Obtain a copy of their property insurance carrier's most recent loss prevention report.

Note the number and type of recommendations submitted, the dates originally submitted, and your suppliers' plans for compliance. Extensive recommendations that have been resubmitted year after year may indicate a potential problem requiring further follow-up on your part.

Have your own in-house safety or loss control department visit your suppliers' facilities to observe their operation and review their loss prevention programs.

A quick walk-through of your suppliers' facility will give you a pretty good idea of their exposures, loss prevention attitude and physical protection features.

Ask your property insurance company, agent or broker if they have the ability to evaluate your suppliers from a contingent business interruption standpoint.

Many property insurers, agents and brokers have loss control experts on staffs who can do this.

Contract a professional loss control consulting company to complete a detailed risk profile and loss analysis of your suppliers? operation.

Many consulting companies offer this service on a fee basis.

Sidebar #2:

Flag: Horror Stories

Head: Dont Believe In Murphys Law?

If you still think you dont have time to research your suppliers contingency plans, or that you dont need to, take a look at a few examples of “Murphys Law” in action. These suppliers didnt believe the adage that “anything that can go wrong, will go wrong” applied to them, so they didnt plan for the worst.

A 15,000 square foot, one-story steel frame building had noncombustible walls and a wood roof deck. The building did not have a sprinkler system. Molten metal from a ladle accidentally spilled among stored wooden pallets, resulting in a fire that was not discovered for 15 minutes, even though employees were working in the building.

By then the fire was too large for fire extinguishers and the company called the fire department. By the time it arrived, the building roof was in flames. Five hours later the facility was a total loss. The owner could have avoided this $700,000 loss with simple material protection measures and automatic sprinklers.

A heavy machine parts manufacturer experienced a $300,000 loss when high winds severely damaged a 30,000-square-foot area of the roof. Water accompanying the windstorm did extensive interior damage to machinery and equipment as well as coiled and sheet steel.

The owner could have avoided the incident by adequately anchoring the roof, with proper fasteners concentrated in corners and along edges.

A specialty metal tubing manufacturer suffered $250,000 in damage when heavy snow accumulated on its roof, drifting to an area where a lower roof intersects a higher one. The roof collapsed in that area, allowing large quantities of snow into the building where it melted and damaged machinery, equipment and finished product.

The owner could have avoided this situation if the roof had been designed to withstand greater than normal loads wherever lower and higher roofs were joined.

What is the moral of these stories? Don't wait for a loss to occur to find out that one of your primary suppliers will no longer be able to meet your production needs. Knowing the strengths and weaknesses of your suppliers and having a realistic contingency plan in place will help keep your business operating and protect your customers and your marketshare.


Reproduced from National Underwriter Edition, April 29, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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