Global supply chain disruptions: anticipating future challenges and taking early action

January 17, 2023

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By Carlos Mantecas, MBA, engineer, marine surveyor and director of marine and transportation

Companies around the world felt the last several years impact of COVID-19, geopolitical conflicts, delays and inflation. To conduct business as usual, they had to contend with these unruly factors and find ways to adapt their operations, especially when it comes to trade and distribution. In our interconnected economy, the global supply chain was significantly impacted by these unpredictable events.

COVID-19 risks

It was not surprising to visit a shop and find empty shelves during the COVID-19 lockdowns. When families were at home and schools and shops closed their doors, consumption habits changed. Services like travel and hospitality gave way to that of goods. The demand for electronic devices to communicate skyrocketed; the use of multimedia content increased, as did the purchase of at-home sports equipment. The lockdowns had significant consequences for one of the main manufacturing countries of consumer goods in the world: China. GDP growth slowed to 2.2% in 2020 from 6.1% in 2019. This problem was repeated in 2022 with the Chinese government’s zero COVID policy.

Geopolitical conflicts

In early 2020, the UK left the European Union (EU). The consequences of Brexit for trade with the rest of the EU meant an increase in administrative procedures (with its consequent delays in deliveries) and a shortage of drivers due to obstacles in work and immigration permits. Supply chains have also been affected by Russia’s invasion of Ukraine and the ensuing conflict. Thus, today, we are suffering from an increase in the price of raw materials (mainly food, fertilizers and energy) and temporary closures in the Black Sea, including limitations on insurance coverage of ships in the area.

Logistical disruptions and delays

Due to changes in consumption patterns, rapid spikes in demand and COVID-19 closures throughout the last several years, the transportation and logistics sector has experienced challenging obstacles. For example, at the end of 2021 in the Los Angeles port, 115 ships were anchored but delayed for unloading, and there were 115,000 empty containers waiting to be returned to Asia.

Delivery times have increased and with it, the risk of damages — some of which are excluded in insurance policies. This exclusion doesn’t prevent an incident from occurring, as we have witnessed damage to food and pharmaceutical products, delays in the implementation of projects due to a lack of supplies and more. Not to mention the rising price of products as a result.

Inflationary pressures

For a year we have witnessed the highest rates in decades across the Western world. The main problem for the policyholder is the underinsurance that may incur during just one year. Sums insured in the policy will not change in a period of 12 months, but the assessment/value of these properties will indeed increase. It is the duty of policyholders to review this with the broker to adapt to the new increased value. Other considerable consequences are the increase in claims for civil liability insurers or in the case of replacement value clauses. The estimated extent of damages must be reviewed as well as the premium, otherwise, the loss ratio will be inaccurate.

In an unpredictable environment, companies must anticipate future challenges and be prepared to take early action, especially when if circumstances are unavoidable. The role of the risk manager is a key point in this situation and their recommendations must be thoroughly taken on account. They will take care of risks, coverages and insured sums in the policies of the different lines of business you may have. Before supply chain disruptions occur, make sure your organization has a clear business continuity plan in place. Identify critical suppliers, diversify your providers and conduct your due diligence. Monitor sanctions, and how they might affect operations around the world. Know when to activate business continuity plans. Above all else, develop and invest in long-term partnerships.

Tags: Business continuity, COVID-19, Geopolitical tensions, inflation, marine, marine exposures, policyholder, Property, Restoring property, Supply chain, Supply chain disruptions