From one small spark: Stopping business interruptions before they start

Natural threats to business are increasingly evident, with news updates frequently carrying reports of floods, storms or earthquakes jeopardising production facilities. But natural disasters are not the only significant threat businesses must contend with. Direct or indirect results of human error or oversight can pose substantial risks to business resilience. Swiss Re Corporate Solution estimates indicated that property losses stemming from man-made perils in Asia-Pacific exceeded natural hazards in 2020.

It is an unfortunate truth that even a small misstep – the improper storage of combustible material, or a lack of detailed inspection of or poorly maintained electrical equipment – can be responsible for fire, explosion or breakdown that results in long spells of downtime or interruption to production lines and business in general. A mishap like this may cost a company dearly in terms of lost time or profit. At worst, it could have more dire consequences, such as the loss of lives.

While business interruptions (BI) and disruptions to production lines may seem localised, the intricacy of global supply chains means there are very few isolated incidents nowadays. Whether they occur at the company’s own production facilities, raw material or parts suppliers, or even external utility providers supplying power or other vital services to operations, outages could have a prolonged ripple effect across businesses and locations.

With the pandemic magnifying the impact of adverse events on severely strained supply chains, businesses need to leverage engineering skills and methodologies to conduct an unbiased assessment of their vulnerabilities. Such assessments of unforeseen incidents can spur businesses to take proactive steps to minimise the severity of such occurrences, or even the chances of them occurring.

Even as more stringent regulations, tighter systems for checks and balances, and the adoption of technology have made the production process safer in many respects, research indicates BI is becoming more frequent, or at least more costly, for many companies.

Take for instance, an analysis of claims in the Willis Energy Loss Database, reveals that BI contribution to losses in the chemical industry was on an upward trajectory between 1981 and 2020. Over the last five years alone, BI accounted for nearly 70% of total losses.

The likely reasons for this jump are multifold – ranging from the increasingly complex nature of global supply chain networks, more technical and specialised production equipment, and the heightened emphasis on the ‘just in time’ approach to production by many manufacturers. Additionally, as manufacturers increase equipment run life, the risk of incidents rises and drives the need for closer and more frequent inspection and maintenance.

Incidents like fires are now more likely to result in a longer recovery time and more widespread impact as they echo throughout the supply chain. For example, in 2020 a fire at a specialist facility in Japan manufacturing components for the high-end audio industry brought production to a halt. It took nearly six months before the recovery began. A similar incident at a factory that was a crucial link in the global automotive supply chain severely disrupted production, with recovery estimated at four months.

A report by Resilinc showed factory fires were the biggest source of supply chain disruptions in 2020, up 67% year on year and beating out even the pandemic. What’s more, the vast majority of these business interruptions (83%) were caused by people.­¹

Amid these trends, there are multiple measures organisations can take to prevent or reduce ‘human-made’ risks and insulate themselves from losses.

Integrating international best practices and loss control standards into engineering and building design is an important approach. Emergency shutdown systems and fixed fire protection systems, supplemented with suitable risk mitigation protocols such as structured maintenance and inspection programs, can go a long way towards preempting and preventing incidents. They also reduce the fallout and broader impacts should an incident occur.

Protection systems themselves aren’t infallible and need to be subject to regular review, testing and improvement. Risks during downtime can be managed through initiatives such as a formal fire protection impairment program.

In addition, robust training and awareness building among staff is essential to making safety a consistent practice. Aids and tools like hot work permits and loss prevention guides can educate workers and help ensure standards are consistent.

Considering how high the stakes are and the complexity of some of the equipment and techniques involved, it’s advisable to solicit expert advice on loss prevention strategies and processes. It’s important to seek out partners who are not only certified in terms of international codes and standards, but supplement theoretical knowledge with extensive resources and on the ground experience with risk engineering services that reputable insurance providers can leverage.

Comprehensive work in the field builds knowledge of best practices, as well as the ability to assess the criticality of equipment, and identify and overcome bottlenecks. ‘Bolting on’ these capabilities by striking the right partnerships can help risk managers develop strategies that reduce the likelihood of extended downtimes, and foster supply chain resilience in their organisations.

For inquiries about our risk engineering services, please contact us here.

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