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Supply chain disruption and the Suez Canal

What the ship blockage taught us about the new reality

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Container ship Disrupted supply chains. Rising fuel costs. Massive insurance claims. In the aftermath of the recent Suez Canal blockage by one of the world’s largest container ships, the Ever Given, the resulting impact has been staggering. Experts agree, however, that this may be only the beginning.

The event cannot be looked at in isolation. Each year, this critical shipping route has $9 billion-$13 billion in global trade going through its waters. With a rising number of so-called black swan events, macro risks such as COVID-19, the SolarWinds breach, BREXIT, recent trade wars and now the canal blockage, the financial instability of supply chains has become apparent. Many organizations have an insufficient focus on proactive and informed supply chain risk management when it comes to business continuity and the protection of consumers, brand reputation and shareholder value.

As these events become more common, management and board members can no longer lean on the unexpected nature of black swan events as an excuse for an outdated supply chain risk management strategy. A structured, data-driven approach to supply chain resiliency is necessary for businesses that want to weather the storms, grow market share and create value. These leaders must embrace sophisticated supply chain risk management capabilities and integrate them into their management cadence to come out on top.

Important steps to mitigating risk
 
Structure and data
A structured, data-driven approach to supply chain resiliency is necessary to weather storms and grow market share.
It’s imperative to have modern solutions and transparency in every aspect of the supply chain, starting with the systemic identification of supply chain risk factors. Once risk factors are identified, the use of unlimited data sources combined with AI-driven supply chain risk management capabilities should be used to quantify each one. Only then can companies begin to understand how much risk they are truly underwriting. From there, organizations can set up a robust business continuity framework that helps achieve supply chain resiliency in the face of any unexpected crisis.

Ensure proper insurance coverage One piece of supply chain resiliency is proper insurance coverage. Companies with complex supply chains involving domestic and international partners or suppliers should evaluate their coverage with the lens that the unexpected black swan events are becoming the norm. Supply chain insurance provides business interruption coverage without requiring physical loss or damage, similar to non-damage business interruption coverage. It can extend coverage for loss resulting in a delay or disruption in the receipt of products, components or services from a supplier. This coverage can include a host of unexpected events such as pandemics, strikes, civil or military action, political risk, regulatory actions or other significant delays in supply due to events such as natural disasters.

 
Insurance
Proper insurance should cover a host of unexpected events, from pandemics, strikes and civil or military action, to political risk, regulatory actions and natural disasters.
Boards and company management can set the tone within their organizations by preparing for business interruption coverages. Data vital to validate a claim once an incident has occurred, or any relevant information, should be readily available to the insurer when a claim is submitted under this type of coverage. This data will range from historical production and sales records to annual budgets and forecasts. The claim adjuster may ask to verify records by ticking and tying numbers to the general ledger or to tax returns to ensure completeness of the reports. All of this data should be readily available.

When submitting a claim, it’s important to be transparent and collaborative in your response. Include your broker in the conversation, open lines of communication early with your insurance carriers and keep those lines of communication open with a regular cadence of touch points and updates.

Changing economic conditions in many industries are impacting the usual year-over-year predictability of financial results in many businesses. Unusual assumptions in forecasts are becoming the norm. As a result, a thorough explanation of why sales forecasts may have been different than previous years is vital to the success of a smooth claims submission. Hire outside counsel to maintain privilege and prepare for litigation in the event of claim denials or stalled negotiations of a settlement.

Manage liquidity Another important factor for companies to address is to review and refine how to manage liquidity as part of supply chain resiliency and business continuity strategies. An immediate impact of the Suez Canal blockage will be the implications of increased freight costs as the disruption ripples through the supply chain. With the pandemic and other significant natural disasters, many businesses are struggling with maintaining profitability — especially those with low cash reserves or unstable cash flows. This makes their near-term outlook particularly vulnerable.

Businesses should be proactive in assessing their ability to withstand disruption, from both an operational and a financial standpoint, and act decisively to mitigate risks. In the short-term, management needs to tackle questions in the following cash flow management areas:

  • Working capital management: Analyze the company’s cash-to-conversion cycle, including payment terms, timing and frequency of key customers and suppliers; invoicing process to customers; management of accounts receivables and payables; inventory management; and other cash preservation options.
  • Forecasting process: Challenge key assumptions, identify quick mitigating actions and develop an action plan for building a simulation with different scenarios to understand actual/potential needs in the short term.
  • Liquidity management: Financing strategy: Review key terms, covenants and options for re-negotiating terms with banks and identify alternative sources of financing.
  • Investment strategy: Review capital expenditure program and key terms of financial instruments and sale options for non-core assets.
  • Process and cost optimization: Identify quick wins and opportunities for immediate cost optimizations; revisit variable and fixed costs.
  • Tax compliance and planning: Review the current tax position and any optimization opportunities.

Increase stakeholder communication
 
Proactivity
Management needs to tackle questions in several cash flow management areas to be proactive in withstanding disruption.
An additional factor for resiliency is stakeholder communication. Management must stay in communication with lender and backers. Communicate early and often to explain the situation and the action you propose. Transparency and open communication will serve both parties well and could be the fastest source of additional liquidity.

Take the first step today As enterprises around the world face a potential tidal wave of supply chain disruption, it is important to transform business operations to mitigate the risks today and in the future. You can take steps now to be better prepared and come out on top.

Contacts:

Jonathan EatonJonathan Eaton
Leader, National Supply Chain Practice
T +1 704 632 3523


Bill FaselBill Fasel
Managing Director, Restructuring Services
T +1 312 602 8834


Frederick KohmFrederick Kohm
Partner, Forensic Advisory Services
T +1 215 376 6040


Paul MelvillePaul Melville
National Managing Principal, Corporate Finance
T +1 312 602 8360