How to manage supply chain risk in the construction sector

The construction sector faces particularly complex supply chain risks, and firms are under increasing pressure to manage, mitigate and transfer them effectively. Nick Wildgoose of Zurich Global Corporate offers advice to risk managers, including a ten-point supply chain checklist.

Supply chain risk is a challenge across the entire commercial sector. This was highlighted in the 2013 Supply Chain Resilience Survey from the Business Continuity Institute: canvassing opinions from more than 500 companies in over 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.

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

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.

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, it is important 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?

There are many factors to consider, and Zurich has created 10 simple questions to help risk managers ensure they have a robust supply chain:

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?

Research on the construction industry from data and analytics specialist Achilles, shows that 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.

It is important that insurers, brokers and their clients engage with each other to 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.

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.

Nick Wildgoose, is global supply chain product leader at Zurich Global Corporate.

Nick Wildgoose - Zurich