U.S. businesses and their suppliers are facing a major threat to revenue – a union worker strike at U.S. ports on the west coast. These ports happen to handle 40% of all U.S. container imports. As a result, the Canadian National Railway is seeing a significant bump in their cargo, specifically within U.S.-bound imports. Alternatives like this are effective while precipitating a major change in operations, but redirects to Canada are not a full proof contingency plan. How can suppliers and businesses better manage risk?
One major tactic to offset risk is to consider business interruption insurance. Business interruption insurance offers some protection from unforeseen circumstances. In this case where union workers go on strike, this insurance in theory would grant the supplier and buyer the ability to reassess their logistics without a significant financial loss during the disruption.
Additional protection can be possible through a force majeure clause in contracts. As mentioned in Source One’s all-you-need guide to procurement, Managing Indirect Spend, this clause provides an exemption from liability in the case of extraordinary events, such as war, natural disaster, or even a union strike. For example, in the Summer of 2010 some suppliers affected by the closure of European airports due to the ash from an Icelandic volcano relied on force majeure because they could not supply goods in a timely manner. This was not ideal for buyers, but many were able to terminate the agreement and seek other suppliers to avoid a financial crisis.
Proactively managing risk can also involve establishing manufacturing closer to the U.S. In a practice known as nearshoring, many U.S. companies have been seeing benefits from working with Mexico and other Latin American manufacturers. This option offers lower shipping (by sea and land) and labor costs. Previously, China was a target for a large portion of U.S. outsourcing; however with a drastic shift in wages demanded, intellectual property compromises, and rising fuel and shipping costs, Mexico is becoming a more enticing option.
Although every supply chain is different, there are a great deal of scenarios where proper risk management can lead to cost efficiency and savings in unpredictable scenarios. Through prepping for the unexpected, companies and suppliers that utilize the U.S. west coast ports can secure profits and the public opinion of their brand can be protected.
News courtesy of: http://www.cnbc.com/id/101844372