The recent shortage of CO2 shined a light on supply chain disruption and the need for businesses to ensure they have a robust risk management approach to handle the financial and reputational fallout.
A shortage of CO2 might make for good headlines when it comes to crumpet and beer shortages, but the temporary closure of three of the UK’s CO2 producing plants inflicted significant pain on many of the country’s food and drink manufacturers. Used for a wide range of manufacturing processes from packaging, to the fizz in drinks, as well as the slaughter of animals, the recent country-wide squeeze on CO2 supplies threatened to wipe out manufacturers’ already tight margins, raise costs for consumers, and even force some companies into consolidation or out of business altogether.
While key firms across the bakery, meat processing, alcoholic and non-alcoholic drinks sectors all reported some impact on production, there was also a knock-on effect for grocery retailers and wholesalers, and pub chains as the CO2 crisis exposed the pressures in the supply chain. The margins for food and drink companies are so tight, with manufacturing and delivery finely structured to peak demand periods, that disruption like this can inflict a significant hit on sales as well as contractual penalties with little chance of insurance picking up the costs. “The CO2 crisis is one such event where business interruption insurance is not available because the shortage is due to planned events – plants going into maintenance programmes – as opposed to fortuitous events such as a fire or flood disabling plants,” says Norman Andrew, Food and Drink Practice Leader at Aon. “It highlights the need for organisations to look at their risk management programmes, reflect on vulnerable areas within their supply chain and potentially improve both crisis planning in dealing with the immediate response, and longer term continuity planning to make sure such issues can’t stop or restrict the business’s daily operations.”
A top ten risk
Aon’s Global Risk Management Survey 2017 lists supply chain failure in the top ten risks for the food processing and distribution, and beverage industries. While many might see it as a top ten risk, only 58% of food processing companies surveyed say they have plans in place for supply chain disruption. Compare that to 82% who have plans in place for product recall for example and it’s evident that there is work to do when it comes to managing supply chain risk effectively. “The food processing industry appears to have weaknesses in quantifying risks and anecdotally this matches up with our client interactions, especially around the quantifiable impact of supply chain disruptions,” says Philip Songhurst-Thonet, UK Head of Enterprise Risk Management & Consulting at Aon. Correcting this is important given supply chains are becoming more global and increasingly volatile.
A problem for businesses however is a failure to look at the end-to-end nature of supply chains. Says Songhurst-Thonet: “I think too often we see supply chains less integrated and too silo’d in the way they are approached within organsations. It’s not often that IT will talk to supply chain for example, or supply chain will talk to legal. I’m sure people within businesses were aware of the CO2 risk but at the same time they may not have appreciated the knock on effects it could have or the criticality of the suppliers.” There is also a lack of transparency between the client organisation and their suppliers as a whole adds Songhurst-Thonet. “The supply chain today is too often seen as a linear chain rather than an eco-system where businesses are interconnected and interdependent on each other.”
Managing the risks in the supply chain
To better manage the risk, companies must see supply chain issues as part of a wider integrated risk management framework and should be thinking about where their own CO2 issue might be says Martin Haines, a Business Resilience Consultant at Aon. “The best companies will look at this issue and ask ’where’s our pinch point in the supply chain? How long can we last with a limited supply of a particular material or product? What are the financial implications of a shortage?’” Others steps include finding out what the company has done around the development of buffer stocks for example.
Managing the crisis
Given the interconnectedness, when a business loses a supplier, it doesn’t take long until it presents a real crisis to the organisation and the need for clear management and communications becomes essential. It is why companies need to develop a crisis management programme rather than a plan says Haines. “A programme ensures you look at what might cause a crisis, ensures trained staff are ready to respond, while senior leaders understand and practise their strategic role and communications are coordinated.” Reputationally the CO2 problem doesn’t attach the same emotion that the horsemeat scandal had in 2013 but the potential for brand damage still exists if the situation isn’t handled properly says Haines. “KFC’s recent chicken supply issue could have been very damaging but the company were on the front foot; they apologised unreservedly but also accepted the nature of the chicken shortage and got the tone exactly right in their crisis communications.”
Understanding the insurance implications
From an insurance perspective, it’s clear that business interruption cover would not apply for the CO2 crisis but business interruption extensions are available to cover suppliers for some eventualities. The trigger for an insurance policy to pay out will normally be damage of some kind, although non-damage business insurance extensions are available for named perils such as denial of access. “While insurers are willing to consider extending policies – they need risks to be well mapped with good crisis management plans in place – businesses can’t be over reliant on insurance,” says Andrew. “It’s important to ensure the breadth of the policy wording is as wide as possible, but there will be events – like the CO2 crisis – where businesses have to respond themselves.”
Handling the next CO2 crisis
While the immediate CO2 crisis has largely run its course, the real test will be whether companies put in place the protocols that will stop such an incident interrupting their operations in the future? “This summer the problem was CO2. Next year it will be something different. Companies need to get a line of sight down their supply chain” says Haines. And while some companies are managing their supply chain issues very well adds Songhurst-Thonet, for others, there is still work to do. “It needs a more integrated approach to risk management. Business interruption insurance can be used in some circumstances but in a nutshell, it is key that companies understand their supply chain mapping; understand the criticality of particular suppliers; and come up with realistic scenarios where they can quantify the impact of a supply chain failure.”
Starting from the assumption that no supplier is too big to fail, or let down its customers, continuity planning is critical and is a key area where working with a partner can pay real dividends concludes Songhurst-Thonet: “A trusted adviser can provide many businesses with the analytical tools and capabilities that they might not have when it comes to risk management. It’s why we see ourselves as more of a risk partner as we look to help our clients minimise issues such as supply chain risk in an integrated fashion.”