How do you begin to develop a well-thought-out contingency plan?
First, identify those key relationships with suppliers, vendors and manufacturers. Are you dependent upon just one or two of those to make your product?
Second, develop a plan that you would implement in the event that one of those companies shut down. How does that affect your business? What type of monetary loss would you suffer? Can you find a secondary vendor to replace that one? In that scenario, large companies do have an advantage because they are able to spread their risk over a larger spectrum than a smaller company can.
Then, the plan needs to be constantly monitored. As the business environment you are operating in changes, your contingency plan constantly needs to be evaluated and updated. You need to review annually, at a minimum.
If you are getting raw components from a country and the political climate there changes, you immediately need to evaluate how that will affect your business model. You need to be able to potentially outsource that stream of income to another, stable environment.
What else can businesses do to protect themselves from contingent losses?
You need to evaluate your company to see if you have that exposure. If you have identified that you have a problem, transfer that risk to an insurance carrier by purchasing coverage.
If a company’s spread of risk is small and it is not dependent on one particular supplier, and could easily move its business to another firm, it doesn’t have the same level of exposure as a company that gets a key component from only one company.
How can companies limit that exposure to contingent losses?
First, find another supplier. If you can’t, then you need to transfer that risk through purchasing insurance coverage.
Then, it becomes important to look at the terms and conditions of the policies. You may need to manuscript the coverage to fit your needs.
Finally, identify the limit of coverage you need. Make a business decision based on the cost of that coverage, whether you insure it or self-insure it.
Shane Moran is a vice president at ECBM Insurance Brokers and Consultants. Reach him at (610) 668-7100, ext. 1237, or [email protected].
