Firms underestimate supply risks

7 January 2010

7 January 2010 | Jake Kanter

Major UK companies have a poor understanding of supply chain risks they have acquired during the recession, a study by research company Mactavish has found.

Interviews with senior figures at more than 250 firms found supply chain risk and other dangers have risen sharply during the downturn as businesses have made unprecedented changes to operations.

The report said managers did not fully recognise these risks, with many focused on continuing to cut costs and restructure processes. Some 65 per cent of the firms questioned have failed to review how risk factors are explained to insurance suppliers, leaving companies not fully covered.

It added that insurers and brokers have also underestimated the issue, sparking widespread under-pricing of risk insurance.

Industries are incurring risks in different ways. Manufacturers are among the worst exposed. Outsourcing and supplier failures have risen sharply in this sector. As a result, firms have been forced to source from a single supplier and have suffered reduced stock levels.

In the construction industry, contractual disputes have risen and negotiations have become more pressured. The fight for business is so intense, some suppliers are winning deals they are not qualified to complete, one respondent noted.

In addition, cutbacks in health and safety spend and less pre-qualification checking is encouraging “suicidal bidding practices” as vendors cut corners.

Retail firms are also dealing with more fragile supply chains and a contraction in the credit insurance market means some have experienced demands for payment and reduced vendor choice.

“Major business changes and great uncertainty around commercial risks have been caused by the recession, but nobody has really focused on this yet,” said Mactavish CEO Bruce Hepburn.

“Some companies are not properly insured, and insurers are carrying greater risks than they realise. Investors could end up bearing the cost of losses. The issue should not be underestimated.”

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