Companies around the world are facing unprecedented inventory and supply chain issues brought on by the COVID-19 pandemic, political unrest and other current events.
Ports in the western U.S. are filled with cargo ships holding shipping containers that are waiting to deliver goods. Once easy-to-get supplies now require long waiting periods. It’s an issue that doesn’t just impact one type of business, but it’s causing significant challenges for many industries.
Despite the challenges businesses and consumers face right now, professionals at The Hartford believe today is the perfect opportunity to make changes. Making changes now will pay off in the future, such as:
- Updates within the insurance industry and how agents and brokers discuss coverage
- The need for businesses to make insurance decisions after taking an in-depth look at supply chains
“Despite recent events, we’ll likely see complex global supply chains for products for the foreseeable future,” said Alfred Bergbauer, head of Captives, Multinational, Programs and TPA Services at The Hartford. “But the pandemic and other current events really highlighted the need for businesses to truly understand dependencies within their supply chain and design agile contingencies that account for the fluid world around us. It is important for manufacturers to step back and understand how their supply chains operate, where critical operations exist, and how the chain might need to change if a critical operation become negatively impacted. In today’s world, a small loss event impacting any critical area of the chain may have significant balance sheet implications.”
Why Is There a Global Chip Shortage?
The chip shortage is one of the main reasons why you don’t see many cars on dealership parking lots. It’s also the main reason behind low inventories for electronics and appliances.
“Chips are everywhere. It’s a fundamental building block in today’s world right now,” said Andrew Zarkowsky, technology industry practice lead at The Hartford. “They’re like currency, wood or metal. If you take any of those global components out of the economy, there are deep impacts across the globe.”
With the COVID-19 pandemic, many businesses changed how they normally operate. Many in-office workforces shifted to a remote work environment. Factories around the world shut down as demand decreased in the early days of the pandemic. Factories also temporarily shut down because of supply shortages. In fact, Ford announced it was closing a manufacturing plant in Mexico during the first week of November because of supply shortages.1
As the pandemic went on, more people bought electronics like computers, tablets and even cars. As demand increased, factories couldn’t keep up.
“While manufacturers saw a cooling in the automotive industry at the outset of the pandemic, there was a tremendous surge in consumer product demand as people shifted to remote work arrangements,” Bergbauer explained. “With what capacity they had, manufacturers turned to consumer products. This left little capacity within automotive, especially within automotive electronics, when demand for new automobiles roared back. Scalability was further hindered by the fact that many manufacturers meaningfully reduced their workforces in the early days of the pandemic.”
Jim Charron, underwriting director for the technology industry practice at The Hartford, explained that because so many products rely on chips, it’s affecting society as a whole.
“It’s almost like metal – it’s something we count on and expect to have. When it’s not here, it affects the companies, and that really magnifies the impact,” Charron said.
Political Unrest Fracturing Supply Networks
Already experiencing issues brought on by the pandemic, political unrest is placing additional strain on an already stressed supply chain.
“The ongoing Russian-Ukrainian conflict is another cause behind increased shortages,” said Kenneth Travers, technical manager for Risk Engineering at The Hartford. “We expect the Russian invasion of Ukraine will magnify any impacts to supply chains given existing vulnerabilities brought on by the pandemic.”
The war is requiring companies to modify and restore supply chains quickly to avoid a reduction in the flow of certain raw materials and components.
Countries and areas outside of the immediate war zone will see fractured supply networks because of obstructed paths of:
- Vessels
- Trucks
- Aircraft
There are already disruptions to certain global supply chains because of disrupted operations in Ukraine, such as:
- Blocked ship and port access to and from Ukraine
- Intentional discontinuation of Russian goods purchased from government and commercial entities
- Critical sanctions placed on purchase and flow of many goods and services
Travers also explained that “certain industries are already seeing the impacts from the Russian-Ukrainian War, especially auto and semi-conductor manufacturers.”
“Ukraine and Russia are key sources for minerals used in manufacturing car parts, such as palladium and platinum,” he noted. “Volkswagen already announced a production suspension at its main factory for electric cars and they’ll be forced to shut down production at other manufacturing centers due to parts shortages.”
Fires Shut Down Factories
Many businesses rely on a centralized region for chip manufacturing, located in Southeast Asia. If something happens to these factories, it can significantly impact a business’ production. When a manufacturing plant in Asian can’t produce chips or other supplies, it then affects other vendors in the business’ supply chain.
“It’s a domino effect,” Zarkowsky explained.
A few events in 2020 and 2021 played a key role in the ongoing chip shortage and supply chain issues.
In October 2020, a fire broke out at Asahi Kasei Microdevices (AKM) in Japan. The fire also caused part of the facility’s building to collapse. This event caused a temporary shutdown and was responsible for creating a shortage in semiconductor chips that car manufacturers around the world needed.
In 2021, a fire broke out at Renesas, another Japanese chip manufacturing facility. This impacted over 30% of the global market for chips.
Shipping Container Delays Contributing to Supply Chain Issues
Since the second half of 2021, there’s been a backlog of cargo ships and shipping containers at the Ports of Los Angeles and Long Beach. Both of these ports account for 40% of imported goods into the country. A lot of these goods come from Asian-based raw material producers and component and finished goods manufacturers. Because of the congestion at the ports, it also creates a delay in the return of shipping containers to home ports to support new shipments.
“There’s only so many containers in the supply chain system,” said Travers. “If the containers can’t get back to fill up for the next delivery, you have delays.”
Travers explained that before the pandemic and supply chain issues, the average transit time from Asia to berth at a Western U.S. port was about 30 days. Now, it’s about 50 to 75 days due to increased wait times for berth openings. Some retailers are taking measures to try to prevent delays by hiring their own ships to help with shipping and product shortages.2
“It all has to do with how globally connected we are. We have an impressive supply chain and it functions great when everything is running smoothly,” Travers said. “But if you throw a curve ball to the system, sometimes it’s something that doesn’t significantly impact the end user. A global event like the pandemic, though, really affects the entire process.”
Can Insurance Help Businesses With Supply Chain Issues?
It’s a common question: If a large supply chain issue affects a business’ production and operations, can large business insurance, like Multinational Insurance or global insurance, help? It depends on the cause of loss, Bergbauer explained. When it comes to delays? The answer is no.
“In an insurance contract and policy, delays are usually excluded. You need a specific loss,” Bergbauer said. “With the fires in Japan, that’d be a covered loss. So, business interruption coverage gets triggered.”
The Need To Review Supply Chains
Bergbauer noted that the pandemic and current supply chain issue created an opportunity for businesses, insurance agents and brokers to map out and review their supply chains. It’s something many businesses should do every 18 months, but don’t, he said.
“Insurance is a purpose-specific tool. Businesses really need to understand their balance sheets, cash flow and how those things will be affected if there’s an interruption in business from their supply chains,” Bergbauer said. “More than anything, the pandemic and current issues put an emphasis on a need to step up and deeply understand supply chain dependencies.”
Zarkowsky agreed, adding companies need to map out their supply chains to truly understand where any risks are. From there, they can make changes to address them.
Charron emphasized the importance of including supply chain reviews as part of a disaster recovery plan. He discussed how more businesses are using cloud infrastructure to operate but cautioned about disruptions.
He noted Facebook’s outage in October, where the company’s servers went down for eight hours. In that amount of time, it’s estimated that it cost the company more than $60 million.3
Completing a Business Interruption Worksheet: An Essential Part To Protecting Against Supply Chain Risks
Equally important in protecting against supply chain risks is the need to complete a business interruption worksheet. While it may take time, Zarkowsky added that completing a business interruption worksheet can be valuable – especially if it’s been awhile since a business last did one.
“Some businesses think they can keep the same business interruption limit they chose in the past, but the world has changed a lot in the last few years,” Zarkowsky explained. “Whatever the limit was a couple of years ago, that’s not a starting point anymore. The new starting point is now starting from scratch and doing the worksheet.”
Because businesses have complex global supply chains, Zarkowsky said it’s essential to partner with sophisticated, experienced brokers and insurers.
“A specialized broker can walk their client through the entire process. They should look at the business’ supply chain location by location and identify what the risks are,” he said.
How To Weather a Supply Chain Impact
It’s impossible to predict when the current supply chain issues will get fixed. We also don’t know if there will ever be another global event like the pandemic that has significantly impacted so many industries. Despite the unknown, there are measures that businesses can take to protect their companies. One of the best defenses against a disruption to supply chains due to an infectious disease outbreak or natural disaster is a strong business continuity plan. Travers recommends businesses create a plan with a focus on the largest peril event so the company is best prepared. To do this, it’s important to:
- Identify critical suppliers
- Understand tier level structure in the supply chain
- Quantify the risk from a group of credible scenarios
We know every situation is unique, but we’ve put together 13 best practices that can help reduce a business’ supply chain risks:
- Develop a components taxonomy.
- Identify sources of components and materials.
- Determine the location of sources.
- Identify any single or sole source suppliers.
- Identify potential alternative producers.
- Distinguish potential logistics chokepoints.
- Detect any internal production capacity for replacement.
- Expand purchasing relationships.
- Expand buffer stocks of materials and components.
- Relax just-in-time criteria.
- Establish multiple locations for buffer stocks.
- Identify and implement alternate logistics routes.
- Develop a supply chain business continuity plan.
1 Reuters, “Ford to Suspend Production at Mexican Plant Due to Shortages – Union”
2 The Wall Street Journal, “Biggest U.S. Retailers Charter Private Cargo Ships to Sail Around Port Delays”
3 Ars Technica, “Facebook’s Outage Likely Cost the Company Over $60 Million”
The information provided in these materials is intended to be general and advisory in nature. It shall not be considered legal advice. The Hartford does not warrant that the implementation of any view or recommendation contained herein will: (i) result in the elimination of any unsafe conditions at your business locations or with respect to your business operations; or (ii) be an appropriate legal or business practice. The Hartford assumes no responsibility for the control or correction of hazards or legal compliance with respect to your business practices, and the views and recommendations contained herein shall not constitute our undertaking, on your behalf or for the benefit of others, to determine or warrant that your business premises, locations or operations are safe or healthful, or are in compliance with any law, rule or regulation. Readers seeking to resolve specific safety, legal or business issues or concerns related to the information provided in these materials should consult their safety consultant, attorney or business advisors. All information and representations herein are as of March 2022.
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