Sandy: Global sup­ply chains turned out to be the Achilles heel of global econ­omy

The Pak Banker - - Front Page -

MU­NICH

Hur­ri­cane Sandy brought life in New York to a stand­still. Sit­ting in front of our tele­vi­sion screens, we all be­came wit­ness to how vul­ner­a­ble mod­ern so­ci­ety is to nat­u­ral catas­tro­phes. Wall Street was sub­merged in water, Man­hat­tan’s sub­ways were flooded and air­ports were closed. Thou­sands of homes and busi­nesses were left with no elec­tric­ity or heat­ing for days on end and sus­tained con­sid­er­able dam­age.

But for com­pa­nies, the ma­te­rial dam­age only ac­counts for part of the losses. The “in­vis­i­ble” dam­age, namely the rev­enue and profit lost as a re­sult of a dis­rup­tion, is a far heav­ier bur­den for them to shoul­der. Of­ten, the full mag­ni­tude of th­ese losses only be­comes ap­par­ent some time later. As a re­sult, it is vir­tu­ally im­pos­si­ble to put a fig­ure on the macroe­co­nomic and in­sured losses caused by Sandy at the moment – which is also re­flected in the wide range of es­ti­mates that are be­ing thrown around. Past ex­pe­ri­ence, how­ever, tells us that busi­ness in­ter­rup­tion and con­tin­gent busi­ness in­ter­rup­tion (CBI) – which pro­vides in­surance cover in the event of a fail­ure of a key sup­plier caused by phys­i­cal dam­age – typ­i­cally ac­count for 50 to 70 per­cent of over­all catas­tro­phe losses.

In­sur­ers have to cough up, via P&C in­surance poli­cies, not only for the re­pair work to build­ings and fac­to­ries, but also for a large chunk of the fi­nan­cial losses. Of­fer­ing pro­tec­tion against nat­u­ral haz­ards like th­ese is at the core of our busi­ness model. But of­ten, even a gen­er­ous claims pay­ment is only of lim­ited use to com­pa­nies if their com­peti­tors have eaten into their mar­ket share in the mean­time, or if con­fi­dence among in­vestors has suf­fered. This is why com­pa­nies have to do ev­ery­thing in their power to get back to busi­ness as soon as they can for their own good.

Global sup­ply chains turned out to be the Achilles heel of the global econ­omy. Be­cause ev­ery sin­gle link in the chain has been built to en­sure max­i­mum cost ef­fi­ciency, sud­den down­time can have far- reach­ing im­pli­ca­tions. The erup­tion of the Ice­landic vol­cano Ey­jaf­jal­la­jökull, which grounded air traf­fic across Europe for sev­eral days in 2010, the earth­quake dis­as­ter in Ja­pan and the flood­ing in Thai­land one year later have high­lighted just how vul­ner­a­ble our mod­ern man­u­fac­tur­ing and pro­cure­ment net­works are. Th­ese events have prompted a re­think at many com­pa­nies. At­tempts are be­ing made to strike a new bal­ance in the con­flict be­tween low costs on the one hand, and re­dun­dancy on the other. Com­pa­nies are mak­ing more of an ef­fort to iden­tify crit­i­cal sup­pli­ers and an­a­lyze their pro­duc­tion lo­ca­tions. If, for ex­am­ple, an Asian sup­plier has its man­u­fac­tur­ing

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