There has been some interesting commentary lately in the business press about the desirability of risk insurance for companies as a protection against losses from a variety of hazards. For example, CFO Magazine recently touted the value of risk insurance. Other business-advisory sources mention buying insurance too as one of several risk-management strategies. Getting a risk-insurance policy is an interesting idea, but it occurs to me that firms already have a form of risk insurance: procurement.
Certainly, potential risks that could cause havoc abound. Commodity price spikes, supplier bankruptcies, catastrophic climate events such as hurricanes and tsunamis – they’re all among the major risks that businesses face and that procurement has to plan for to keep components and materials coming into their receiving departments so their production lines keep running. And, recent events remind everyone that political unrest is another major risk for businesses.
There have been nationwide protests in the US in the wake of the failure of a Ferguson, MO grand jury to indict a white police officer for killing a black teenager. Riots have disrupted businesses, especially in Ferguson itself. Countless retail shops, restaurants and other local establishments have burned or been looted, damaging the local economy. So far, at least, there has been little news of damage to the hundreds of manufacturing facilities in nearby St. Louis, but that is of little consolation. When human lives, and businesses of any kind, are damaged, the community is damaged too.
The unrest in Ferguson is but a small example of the type of political instability that holds risks for local businesses and the global economy. Hong Kong, China, Vietnam, Thailand, the Middle East, and parts of Africa and Latin America are experiencing or have recently experienced instability that ultimately can affect supply chains. And then, of course, there is Russia’s entrance into Ukraine. Consultancy McKinsey’s recent Economic Conditions Snapshot identified geopolitical instability as a top risk to global growth. In fact, McKinsey’s September’s survey was the third consecutive one in which executives most often cited political turmoil as a threat.
So, maybe buying risk insurance makes sense. But remember, the best insurance, at least when it comes to protecting your supply chain, is your own research and planning. Robert Monczka, consultant, author, former procurement executive, and professor emeritus at Michigan State University and Arizona State University, tells me that CPOs must be “constantly watching the uncertainty in the world, political and social, as well as changes in technology and the ways products are produced.” The world doesn’t stand still, he says, and CPOs have to be ready to change their supplier networks quickly.
That kind of vigilance and agility may well be the most cost-effective risk insurance of all.