May 29, 2018 Ford’s Risk Management Lessons

Ford’s crisis highlights the damage of a supply chain interruption. Luke Foley shares four strategies to plan for and mitigate this risk.

by Luke Foley, ARM, Producer, Graham Company

On May 2, a fire shut down the Meridian Magnesium Products plant in Eaton Rapids, Michigan. It was just one plant, in one location – but it created a global supply chain nightmare for Ford and other top automotive manufacturers.

The plant was the sole supplier of three critical parts to Ford, forcing the company to shut down three production plants and cease all production of its popular F-150 Series pickup trucks. As a result, 7,600 workers were temporarily laid off, an estimated 35,000 vehicles were not produced, and Ford lost around $1.6 billion in revenue from the lost output, according to analyst estimates.

Ford’s supply chain crisis represents one of the biggest risks facing all manufacturing businesses today: The danger that a key supplier is shut down due to a natural disaster, cyberattack, or devastating incident such as a fire.

With today’s international supply chain, manufacturers are more exposed to more weather-related risks than ever before, wreaking havoc on suppliers, distributors and shipping channels. Just last year, powerful hurricanes, monsoons, earthquakes, typhoons and wildfires swept the globe. And even in locations with relatively stable weather, such as Michigan, fires and equipment-related explosions remain a high risk.

As Ford demonstrated, any disruption to the supply chain – big or small – can have a dramatic impact on the manufacturer. There are several ways that manufacturing executives can plan for and mitigate these risks, although they cannot be prevented or even fully insured against. Here are a few tips for protecting your business and minimizing supply chain risks:

Negotiate with sole suppliers. Obviously, sole suppliers represent a much bigger risk to your supply chain and production, as there are no secondary suppliers available in the event of a crisis. But in these circumstances, large manufacturers often have the leverage to negotiate directly with those key suppliers. When possible, develop a contractual agreement stipulating that the supplier will pay a significant monetary fee to help cover the manufacturer’s loss if they are unable to supply the required parts.

Review your supply chain. To minimize risk, you must first identify which suppliers are more likely to suffer disruption, and which will have the greatest impact on the company. While areas prone to natural disasters represent an obvious focus, cyberattacks and fires can happen anywhere. In fact, Resilinc reports that explosions and factory fires are the most common cause of supply chain disruptions. And although automotive manufacturers have sophisticated supply chains, it doesn’t mean they have full visibility into the second- or third-tier suppliers. Just last year, BMW was forced to slow production around the world because a second-tier supplier could not deliver critical parts for Bosch’s steering gears.

Develop a thorough contingency plan. This emergency preparedness plan draws on the risks identified in your supply chain, outlining steps to maintain or quickly resume operations. When applicable, this should include contracts with secondary suppliers and distributors for contingency purposes. When negotiated in advance, these contracts can be set at much lower rates than when a company is forced to seek solutions in the midst of an emergency. Although we don’t know what Ford’s contingency plan included, the company did have a week’s worth of supplies on hand in its plants and 84 days of inventory available at its dealerships, which bought some critical time.

Make sure your losses will be covered. Many manufacturing executives are turning to Contingent Business Interruption (CBI) insurance to help mitigate the impact of a disaster affecting suppliers, distributors and receivers. While standard Business Interruption insurance covers your financial loss if a disaster directly affects your properties, CBI insurance expands this coverage to include lost revenue resulting from a supply chain interruption. No insurance policy is one-size-fits-all, so it’s critical to work with your insurance broker to ensure the policy can adequately cover your unique risks.

Unfortunately, it’s common to have coverage limits that are far too low for your risk exposure. For example, your property policy may have a blanket limit of $100 million, but a sub-limit offering just $250,000 for CBI insurance. Further, most policies don’t automatically include international coverage. If some or all of your suppliers and distributors are located overseas, it’s critical to request this coverage and ensure it is part of your policy. With a good broker, it’s possible to negotiate for a policy that covers exactly what you need to help protect your business operations from the unexpected.

Just this week, Ford has finally resumed operations in all three of its affected plants, with the critical parts temporarily produced by a Meridian plant in England. The last three weeks have demonstrated just how important it is to assess and plan for supply chain risks. With a thorough contingency plan, secondary suppliers and insurance, manufacturers can be prepared to minimize the impacts of disasters and supply chain interruptions.

Luke Foley, ARM is a producer at Graham Company, one of the country’s largest insurance brokers. He can be reached at LFoley@Grahamco.com.

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