From Food to Chip Shortages: How Supply Chain Woes Should Provoke Insurance Responses
Across many sectors of the economy, there seems to be something or other currently in short supply, whether that is food on supermarket shelves, materials for construction sites, laptops for business, TVs and home entertainment equipment, or labour for farms, hospitality businesses, HGV firms or coach operators. Overreliance on global supply chains, for both goods and labour, has left many sectors in turmoil.
Whilst the UK’s situation has been compounded by Brexit, the general problem is one being experienced worldwide. US car manufacturing has ground to a halt, because the sector has proved to be over-reliant on one rather older type of computer semi-conductor chip, which is in short supply post-pandemic and not a priority for chip manufacturers making more profit by producing and selling bleeding-edge chips to major tech companies.1 These are also flexing their greater buying-power muscle, in order to gain their supplies as prioritised customers.2
The fact that chips are now largely produced in the Far East and not in Silicon Valley is another issue causing bottlenecks in car production, leading to certain marques having to drop some features, such as a passenger-side lumbar support or a navigation system.3 With so many parts of vehicles reliant on chips for their functionality, the lack of stock availability has become a massive issue.
The UK’s food supply chain has been on the point of collapse, due to NHS App ‘pings’, urging self-isolation following Covid-19 contact. In early summer, this tied up the supply chain, due to a lack of drivers to take food from farm to factory or storage depot to supermarket.
Other food supply chain issues have been caused by delays to food imports – hardly surprising, as 45% of the food consumed in the UK is imported.4 Brexit has seen some supply chains cut off, also leading to a loss of EU workers, who were previously not only picking fruit and vegetables, or driving HGVs, but often working in hospitality-sector kitchens.
Many EU nationals left the UK in the second quarter of 2020 and have not returned. Many workers cannot now work in the UK, as new immigration rules favour highly skilled workers within the new points-based system, and because many jobs, ones where the UK has too few workers are simply not on the list of occupations for which visas can be granted.
Some imported goods are still being impacted by the Suez Canal blockage that occurred in March 2021, which has had a knock-on effect on shipping and the location of ships around the world. Other goods are simply in short supply globally, especially in the construction industry, leading to rapid increases in price for materials such as plywood and fabricated steel, and a lack of availability of materials, including cement and timber.5
One answer, as many countries are realising, is to shorten supply chains and become less reliant on global supply. The US and EU are already making plans to increase home-grown chip production.
All of this demonstrates what can occur within a business’s macroenvironment and impact its capacity to supply goods and services to customers. Such a situation can lead to a variety of different exposures to risk which might not occur under normal circumstances. Some of these cannot be covered but some can.
Looking at the marine shipping side of things, general delays in goods’ arrival are not typically covered by a marine cargo policy. However, should those delays result in physical product damage, you can typically claim on the policy and, if you are involved in global importing and exporting, it is well worth discussing how else marine cargo insurance can protect you.
One key cover is goods-in-transit insurance, especially as global cargo theft figures are rising sharply.6 A haulier or freight-forwarder’s policy may offer your goods little or no protection, whilst any payout entitlement may only be to a set limit per ton carried and nowhere near cover the value of your goods. You could also potentially try to pursue a claim in another country, wherever your forwarder is based. Making sure you cover your goods in transit, at sea, on land, in the air and in warehouses en route, is vital. The more attractive goods become, due to global scarcities, the more they are likely to be stolen.
Having to ‘make do and mend’ with components, parts or labour that can actually be accessed, could lead to faults in production and product quality, which could then result in product recalls. Such recalls can be hugely expensive exercises, requiring costs such as transportation, destruction of product, resupply of the product, reputational damage limitation and new marketing costs. Without product recall insurance to cover these, the losses to the business could be significant.
Then there is the impact on cash flow, if you cannot sell goods as anticipated. This could be because a customer cannot take delivery, or due to not physically being able to get goods to them, or because the price of raw materials and the measures you have to take to secure them, such as buying in bulk and paying for storage, eat into your cash reserves. At such times, being paid on time becomes critical, but this can also be a major challenge, if the whole supply chain is under pressure.
One way to add security to supply chain relationships is to take out trade credit insurance, which protects against non-payment risks, covering your ‘receivables’ – the monies that will typically comprise 20-80% of a company’s assets, depending on the sector, and which it expects to receive in exchange for goods or services supplied.7
Trade credit insurance will basically cover these assets and ensure that, should a customer not pay or become insolvent, invoices are paid as anticipated, so there is no suffering of payment delay or loss of income. The insurer will also help identify which customers present the greatest risk, enabling the insured business to strengthen its supply chain and resilience.
Getting better control over all the unknowns in the supply chain may never have been more important, as the world still tries to get to grips with COVID-19, rebuild after the pandemic, lockdowns, keep up with global demand that has been unleashed since the crisis lessened, and deal with issues such as global shipping threats and political change and unrest. If you need help keeping your business operating as normally as possible, insurance might just supply you with more solutions than you realised.
2 https://www.theverge.com/2021/6/23/22547826/chip-shortage-cars-playstation-5-gpus-semiconductors-time-foundaries-tsmc 3 https://eu.freep.com/story/money/cars/2021/06/15/car-chip-shortage-2021/7688773002/