How to manage supply chain risk in the construction sector

Construction firms need to gain a deep understanding of their supply chains to mitigate risks and this article is provided by Zurich Insurance.

The construction sector faces particularly complex supply chain risks, and firms are under increasing pressure to manage, mitigate and transfer them effectively.

Supply chain risk is an issue across the entire commercial sector, as highlighted in the 2013 Supply Chain Resilience Survey from the Business Continuity Institute. Canvassing opinions from more than 500 companies in more than 70 countries, the report found that 75% of firms had suffered at least one significant incident of supply chain disruption in the last year.

Given that some 9% of these disruptions came at an individual cost of around £1million, disruptions can negatively impact a firm’s reputation and delay relevant projects. It is easy to understand why supply chain disruption is a top priority for risk managers.

And, for risk managers in the construction sector, supply chain risks are notoriously complicated. Construction firms manage many different projects and each will have their own individual supply chain. Within each of these supply chains there are then commercial, design, logistical, quality and safety risks to identify and manage.

Increased activity levels

The improving global economy has significantly increased levels of construction activity and this has put additional pressure on the availability of materials, components and skilled labour.

This issue is then compounded because so many of the products and components used in construction are manufactured on a just-in-time basis. When something goes wrong, there is little time to put it right, and the knock-on effects can throw an entire project off schedule.

Zurich has developed a wealth of supply chain risk management expertise and combines this with a sophisticated range of supply chain and subcontractor insurance covers, to make sure risks are effectively identified, mitigated and, where appropriate, transferred.

“We have a range of solutions and we are very keen to sit down with brokers and work towards the most suitable solution,” says Nick Wildgoose, Global Supply Chain Product Leader at Zurich Global Corporate.

“I think there is a great opportunity to collaborate with brokers and their clients about how we can work with them to mitigate and overcome the problems they face, and to do so in a way that combines the best of what all parties have to offer.”

Companies in the construction industry face risks at both an enterprise level and an individual project level.

Supply chain health check

  • Do you know who your critical suppliers/subcontractors are and how much their failure would impact your company’s profits?
  • Have you fully mapped your critical supply chains upstream to the raw material level?
  • Have you integrated risk management processes into your supply chain management?
  • Do you have routine timely systems for measuring the financial stability of critical suppliers?
  • Do you understand your tier one production facilities and logistic hub exposures to natural catastrophes?
  • Is supply chain risk management integrated into your project risk management approach?
  • Do you record the details of supply chain incidents and the actions you put in place to avoid future incidents?
  • Do your tier one suppliers have business continuity plans that have been tested in terms of their viability?
  • Have you provided risk training to your supply chain management team?
  • Is risk on the agenda at performance meetings with your strategic suppliers/subcontractors?

At an enterprise level, they are exposed to macro risks, such as disruptions in the global steel or cement markets. In addition, many contractors will use the same subcontractor for numerous projects and so an issue with one company can have an impact across their entire business.

Where brokers can help construction clients understand these enterprise risks, they can drive improvements in consistency across all of a firm’s commercial operations and so improve the underlying performance.

But this does not mean individual projects do not have their own supply chain risk challenges, and it is essential that the peculiarities of each and every project are thoroughly assessed and appropriately dealt with.

Identifying enterprise and individual project level risks

At both the enterprise and individual project level, Zurich has a range of tools and techniques to identify the risks that any particular supply chain holds within it.

For example, are suppliers based in areas of political uncertainty? Or are they located in regions vulnerable to natural catastrophes, or where climate change is increasing the risk of flood? And how financially strong are subcontractors and suppliers? What are their own attitudes to risk management and mitigation? Have changes in legislation altered the risks faced and are all parties in the supply chain on top of these changes?

Zurich has created 10 simple questions that provide initial ideas on how you might improve your risk management in this area. Through in-depth risk assessments, Zurich wants to work with its brokers to make sure clients fully understand their potential supply chain risks.

Research on the construction industry from data and analytics specialist Achilles, says 40% of companies source only in the UK, and 20% of those that source globally have no supply chain information beyond their direct suppliers. The importance of understanding supply chains beyond the tier one suppliers and contractors, was powerfully emphasised in the latest Supply Chain Resilience Survey.

It found that 42% of supply chain disruptions were caused by firms in tier two and below. Without an understanding of how these lower tier firms operate, and the supply chain risks they represent, it is very difficult for construction businesses to proactively manage their operational performance.

I think there is a great opportunity to collaborate with brokers and their clients about how we can work with them to mitigate and overcome the problems they face and to do so in a way that combines the best of what all parties have to offer Nick Wildgoose, Global Supply Chain Product Leader at Zurich Global Corporate.

Zurich’s supply chain cover

Zurich’s supply chain insurance policy provides indemnity for losses generated by firms from failure of named suppliers and supplies. It provides cover on an ‘all risk’ basis, with limited exclusions, rather than asking policyholders to specify exactly what risks they want to insure.

But, in return for this cover, Zurich wants to engage with brokers and their clients, and make sure they understand their critical supply chains. This not only allows effective underwriting of the cover, but it also generates valuable information on the supply chain risks construction firms face, and lets them improve their overall risk profile.

Zurich also has a Subguard policy, which provides sub-contractor default insurance and indemnity to the main contractor for remedial/completion costs that arise, including provision for indirect costs such as delay penalties.

The construction sector has some specific supply chain risks to contend with, and Zurich has developed significant expertise in dealing with them. Its work in other sectors such as technology and automotive, where there has been a lot of investment in risk management, allows Zurich to bring learning from other areas into the construction arena.

At a time when supply chain risks in the construction sector have never been more complex, a robust approach to risk management and mitigation will make a tangible commercial difference.