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India power failures raise questions about supply chain exposures

The recent prolonged and widespread power failures suffered in Northern India have highlighted the potential exposures to businesses which rely on offshore outsourcing to deliver key services to their customers worldwide.

India has a multi-billion dollar slice of the offshore outsourcing business, including a high concentration of service provision, such as call centres, to financial services, high-tech and telecom, manufacturing and retail businesses, with companies in the Americas and Europe among their largest customers.

The power cuts have led to more questions being asked about the risk to businesses caused by interruptions to their supply chain, following the major supply chain events of 2011. The Japan earthquake alone was assessed as having a total insured loss impact of $22-39 billion (US) by Eqecat.

Nearly all companies have experienced some sort of disruption to their supply chain, with a Business Continuity Institute survey sponsored by Zurich finding 85% of organisations across 62 countries had recorded at least one supply chain disruption and over 50% had more that one supplier interruption in 2011. As a result, the issue of Supply Chain Risk was identified at the World Economic Forum last year as a ‘key risk area’.

Zurich created its Supply Chain Insurance product in response to customer needs in this area which were not being addressed by traditional insurance policies. For example, traditional covers would not pick up non-damage disruptions to supply chains, such as those caused by the 2010 volcanic ash cloud, the blockage of Chile’s main port, or electrical outages in India and southern Japan.

As part of Zurich’s award-winning offering, a full supply chain risk assessment is carried out across 23 areas of risk with critical suppliers. The supply chain risk assessment is a value added service that identifies and helps quantify vulnerabilities, providing valuable insights and mitigation options for the customer into their key value chains.

In contrast to other products, Zurich’s policy provides ‘all risks’ cover that extends lower tier suppliers. Zurich’s supply chain insurance has very few exclusions, and is not restricted to property damage. It covers "non-physical" damage such as power outages, cyber risks, labour issues and political risks and can also include insolvency of a supplier. The policy can also cover the increased cost involved in recovering from supplier outages, so companies do not have to use their valuable cash flow to fund unexpected extra expenses incurred following a disruption.

Nick Wildgoose, Global Supply Chain Product Manager, Zurich said:
"The recent power cuts in India have highlighted the fact that there are more risks to a supply chain than natural catastrophes. They also demonstrate the risk of a geographic concentration of suppliers just like the floods Thailand did.

Zurich has built up years of experience of offering a Supply Chain Risk Assessment and Insurance product, and we are constantly improving it to make sure it addresses our customers’ needs and complex risks. Customer reaction has been very positive especially as supply chain exposure is increasingly being recognised as a key issue for companies and their shareholders.

Customers are realising that they can reduce costs of disruption and gain competitive advantage by understanding their critical supply chains risks better. Companies can suffer a decline in stock price compared with industry peers following a supply chain disruption as a result of lower sales and higher costs. Historically, nearly 40% of companies never fully recover from an extended supply chain interruption and eventually go out of business".

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