Last November, a global study of 3,000 small and mid-size enterprises (SMEs) found that only one in seven SMEs think their business would be significantly affected if they lost their main supplier.
Overall, 39 percent of SMEs consider themselves at risk from the loss of their main supplier, yet 55 percent believe it would not influence their day-to-day business.
Meanwhile, the “2015 Supply Chain Resilience Study” by Zurich and the Business Continuity Institute (BCI) found that while 74 percent of companies experienced at least one supply chain disruption in the last year, only half of those disruptions were known to originate from Tier 1 (immediate) suppliers, and 72 percent of respondents admitted they did not have full visibility into their supply chain.
“Supply chain risk is a blind spot for a lot of organizations.” — Karl Bryant, senior vice president at Marsh Risk Consulting
“This makes us believe that SMEs probably underestimate their supply chains risk exposure, and we urge them to reassess this,” said Nick Wildgoose, Zurich’s global supply chain product leader. He added that visibility and resilience along supply chains are major sources of competitive advantage.
BCI warned that organizations could be “driving blindfolded into a disaster.”
Companies at most risk are those reliant on “sole source” suppliers — one-of-a-kind manufacturers whose components are either of unique quality or are unavailable elsewhere in the market.
In today’s lean manufacturing era, fewer companies keep spare inventory, so if a critical component ceases to be available it can quickly prevent a company from producing its core product or service, leading to lost revenue, diminished service, dissatisfied customers and, in extreme cases, business closure.
Supply chain risk lurks in many forms. According to the BCI, IT and telecoms outages, adverse weather, and for the first time, cyber attacks/data breaches are
the top three causes of supply chain disruption. Another emerging risk is “business ethics,” which placed in the top 10 for first time.
“Supply chain risk is a blind spot for a lot of organizations,” said Karl Bryant, senior vice president at Marsh Risk Consulting.
Complacency that suppliers have everything under control can be a problem, said
Ken Katz, property risk control director at Travelers.
“When a risk exists outside your own four walls and you are focusing on your core business there is reduced visibility to the potential destruction it can cause,” Katz said.
To make matters worse for SMEs, smaller companies are likely to feel the effects of a supply shortage first as suppliers will invariably prioritize their biggest accounts if outflow is reduced.
“I’d love to see companies with six months’ supply, or matching supply against their expected downtime and their assets, but that’s a losing battle — no one wants inventory these days,” said Bryant.
Former RIMS President Rick Roberts, director of risk management and employee benefits at Ensign-Bickford Industries (EBI), said supply chain disruption is a “huge issue. People who’ve never had a problem often sit back and don’t pay much attention, but up-front work is critical because when a problem hits it can be major.”
Roberts, whose company is both a customer and supplier, said some of EBI’s customers require his company to keep a number of months’ worth of supply as inventory as part of their agreement. However, few SMEs have the leverage to wield this kind of influence.
To fully understand their supply chain exposures, Bryant suggested SMEs conduct a “value segmentation” exercise, identifying mission-critical areas of their
business, such as those that generate the highest margins or growth.
Then, Katz said, they should conduct a “business impact analysis,” simulating the repercussions of vital components being undeliverable.
It is also essential for SMEs to get to know their suppliers’ finances and quality of work as best they can, he said.
Bryant said that companies should compile a matrix of their supply chain in as much detail as possible, including suppliers of suppliers, and if possible, the exposure of suppliers’ plants and operations (as opposed to regional offices) to natural catastrophe such as flood or earthquake.
SMEs should ask all their suppliers what business continuity plans and insurance they have in place, and get clarity on exactly how they will be treated should the supplier run into problems.
However, warned Bryant: “It can take a lot of man hours to send out questionnaires, follow up on them and pull the information together in a meaningful way, and many smaller companies don’t have the resources to invest in that kind of process.”
Nevertheless, this is information that empowers risk managers to make informed continuity plans. This could include, for example, finding alternative single source suppliers or new methods of production in case a sole source supplier fails to deliver, or even potentially acquire that supplier to ensure it stays in business.
There must also be a communications strategy for dealing with clients and negotiating delays. “You need a good explanation that is more sophisticated than ‘we can’t help you, I’m sorry’,” said Bryant.
Continuity planning, he said, requires a coordinated approach between risk and operational departments to ensure that gathered data is optimally leveraged. According to the BCI, only 54 percent of SMEs currently have a business continuity plan, compared to 74 percent of large organizations.
It also found that nearly six in 10 SMEs don’t insure losses from supply chain disruption, even though contingent business interruption (CBI) insurance would compensate for lost revenues during a supply problem.
This usually applies only to an insured’s first tier of suppliers, and can only be acquired if the SME has business interruption coverage.
Roberts would like to see more insurers extend coverage to second tier suppliers. “It can be expensive, and you can’t always see the benefits of being proactive — but when you get hit with a loss you’ll wish you had been prepared.” &
Deficient Bridges Could Mean Supply Chain Woes
In its 2015 report on the nation’s bridges, the American Road & Transportation Builders Association (ARTBA) labeled 58,500 U.S. bridges — roughly 10 percent — as structurally deficient.
Nearly half of those — 27,486 — have some sort of load restriction. While a slight improvement over 2014, the issue still represents potentially serious supply chain risks for many businesses, and the problem will not be going away any time soon.
“The good news is that we’re definitely seeing a reduction in the number of structurally deficient bridges out there,” said Alison Black, ARTBA senior vice president, chief economist and author of the report. “[But] at this pace, it will be over 20 years before we solve this issue.”
Between 2014 and 2015, 7,200 structurally deficient bridges were removed from the list, but those repairs and replacements, while representing long-term progress, can mean even more acute restrictions or outright closures in the short term.
And meanwhile, another 4,625 bridges were added to the list.
Supply chain interruptions from bridge restrictions can affect a wide variety of businesses.
“Things that have to be refrigerated, such as dairy, those kinds of industries, [or] retailers that might have a large distribution facility where you have a lot of concentrated economic activity in a very narrow space, those may be the businesses more likely to be affected,” said Vince Morgan, a partner in the law firm of Pillsbury Winthrop Shaw Pittman LLP who specializes in insurance law and risk management.
Clark Schweers, the leader of BDO’s Forensic Insurance and Recovery practice, added that specialty manufacturers who use volatile chemical compounds that require special care could also be impacted.
“It really impacts all industries in one way or another,” he said.
Bridge restrictions can also force trucking companies to reduce load sizes.
“It may be that you used to get two truck deliveries a week of a particular commodity … and now, because of weight restrictions, you have to get four trucks that each have lower weight loads. That adds to your expense and can disrupt your supply chain system,” Morgan said.
Closures or restrictions can also interrupt business by impeding customer access.
The ARTBA report does not include the nation’s 77,000 railroad bridges. According to Black, a 2007 GAO report said there is “little information publicly available on the condition of railroad bridges and tunnels.”
While road bridge workarounds can cause delays and increase business costs, Schweers pointed out that railroad bridges are often “a single source supplying multiple facilities that are reliant on those railroads,” making workarounds more elusive and supply-chain interruptions more problematic.
According to Schweers, traditional supply chain studies do look at transportation logistics, “but there probably has not been enough focus on the transportation infrastructure.”
“It starts with your business continuity plan and building a resiliency around that,” said Morgan.
“If there is a vulnerability from a transportation standpoint then you need to identify it and look at avenues to mitigate it before it becomes a real problem.”
Businesses can check with their state departments of transportation for information about transportation restrictions that could impact them.
“The information is based on bridge inspection reports, which happen every two years, so definitely checking in with the state DOT is the best way to get information about specific bridges,” Black said.
Schweers and Morgan advised businesses to check for gaps in their coverage. A single word or syllable can mean the difference between a loss that is covered or not.
According to Schweers, “the ingress/egress area, whether you have the word ‘prohibit’ or the word ‘inhibit,’ that one word right there can have a vastly different scope or meaning in terms of potential recovery within your insurance policy.”
Policies covering ingress or egress that is prohibited but not inhibited would cover losses from bridge closures, but not losses from weight or other restrictions.
“If you’ve got impairment language in the ingress/egress or civil authority provisions of your policy, that is going to trigger coverage,” said Morgan. “If you have prohibition language, you might have a harder hill to climb to get a covered loss.”
Morgan said there are rare instances of policies manuscripted to exclude specific bridges.
“It tends to be a specific case where a business is very dependent on a particular bridge and [the insurer] may have questions about the soundness of it,” he said. “But those are the kinds of things you need to look at in your policy and find out before it rises to an actual problem for you.”
Schweers agreed. “Having those discussions with your carriers and with your brokers outside of an actual loss is really a best practice and something that we would recommend for all parties, to sit down and explain the risks to the business and try to determine whether or not the policy would be triggered in a given situation.”
Compounding: Is it Coming of Age?
The WC managed care market has generally viewed the treatment method of Rx compounding through the lens of its negative impact to cost for treating chronic pain without examining fully the opportunity to utilize “best practice” prescription compounds to help combat the opioid epidemic this nation faces. IPS stands on the front lines of this opioid battle every day making a difference for its clients.
After a shaky start cost-wise, prescription drug compounding is turning the corner in managing chronic pain without the risk of opioid addiction. A push from forward-thinking states and workers’ compensation PBMs who have the networks and resources to manage it is helping, too.
Prescription drug compounding has been around for more than a decade, but after a rocky start (primarily in terms of cost), compounding is finally coming into its own as an effective chronic pain management strategy – and a worthy alternative for costly and dangerous opioids – in workers’ compensation.
According to Greg Todd, CEO and founder of Integrated Prescription Solutions Inc. (IPS), a Costa Mesa, Calif.-based pharmacy benefit manager (PBM) for the workers’ compensation and disability market, one reason compounding is beginning to hit its stride is because some states have enacted laws to manage it more effectively. Another is PBMs like IPS have stepped up and are now managing compound drugs in a much more proactive manner from an oversight perspective.
By definition, compounding is a practice through which a licensed pharmacist or physician (or, in the case of an outsourcing facility, a person under the supervision of a licensed pharmacist) combines, mixes, or alters ingredients of a drug to create a medication tailored to the needs of an individual patient.
During that decade, Todd explains, opioids have filled the chronic pain management needs gap, bringing with them an enormous amount of problems as the ensuing addiction epidemic sweeping the nation resulted in the proliferation and over-consumption of opioids – at a staggering cost to both the bottom line and society at large.
As an alternative, compounded topical cream formulations also offer strong chronic pain management but have limited side effects and require much reduced dosage amounts to achieve effective tissue level penetration. In fact, they have a very low systemic absorption rate.
Bottom line, compounding provides prescribers with an excellent alternative treatment modality for chronic pain patients, both early and late stage, Todd says.
Time for Compounding Consideration
That scenario sets up the perfect argument for compounding, because for one thing, doctors are seeking a new solution, with all the pressure and scrutiny they’re receiving when trying to solve people’s chronic pain problems using opioids.
Todd explains the best news about neuropathic pain treatment using compounded topical analgesic creams is the results are outstanding, both in terms of patient satisfaction in VAS pain reduction but also in reduction potentially dangerous side effects of opioids.
The main issue with some of the early topical creams created via compounding was their high costs. In the early years, compounding, which does not require FDA approval, had little oversight or controls in place. But in the past few years, the workers compensation industry began to take notice of the solid science. At the same time, medical providers also were seeing the same science and began writing more prescriptions for compounding – which also offers them a revenue stream.
This is where oversight and rigor on the part of a PBM can make a difference, Todd says.
“You don’t let that compounded drug get dispensed when you’re going to pay for it without having a chance to approve it,” Todd says.
Education is Critical
At the same time, there is the growing, and genuine, need to start educating the doctors, helping them understand how they can really deliver quality pain management to a patient without gouging the system. A good compounding specialty pharmacy network offering tight, strict rules is fundamental, Todd says. And that means one that really reaches out to work with the doctors that are writing the prescriptions. The idea is to ensure that the active ingredients being chosen aren’t the most expensive sub-components because that unnecessarily will drive the cost of overall compound “through the ceiling.”
IPS has been able to mitigate costs in the last couple years just by having good common sense approach and a lot of physician outreach. Working with DermaTran Health Solutions and its national network of compounding pharmacies, IPS has been successfully impacting the cost while not reducing the effectiveness of a compounded prescription.
In Colorado, which has cracked down on compounding profiteering, Legislative change demanded no compound could be more than $350.00 period. What is notable, in an 18-month window for one client in Colorado, IPS had 38 compound prescriptions come through the door and each had between 4 and 7 active ingredients. Through its physician education efforts, IPS brought all 38 prescriptions down 3 active ingredients or less. IPS also helped patients achieve therapeutic success (and with medical community acceptance). In that case, the cost of compound prescriptions was down to an average of $350, versus the industry average of $788. Nationwide IPS has reduced the average cost of a compound prescription to $478.00.
Todd says. “We’ve still got a way to go, but we’ve made amazing progress in just the past couple of years on the cost and effective use of compound prescriptions.”
For more information on how you can better manage your costs for compound prescriptions, please call IPS at 866-846-9279.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with IPS. The editorial staff of Risk & Insurance had no role in its preparation.