The generally soft global commercial property insurance marketand reduced number of major natural catastrophes during the pastyear may help corporate insurance buyers stay on budget. It mayalso give them an opportunity to improve risk management programsand prepare more effectively for potential disasters.

One lesson learned from the series of large-scale naturaldisasters that occurred in various parts of the world in recentyears is that managing catastrophic risk requires more thaneffective planning and crisis management. Good management alsorequires a thorough knowledge of a company's most significantrisks. For example, businesses that depend on complex internationalsupply chains cannot underestimate the implications of a regionaldisaster event or the potential downtime of a key supplier.

To prepare for such events, risk managers and supply chain andoperations executives must take great care in quantifying exposuresand then prioritize them based on magnitude and probability

By knowing precisely the values at stake, they can prioritizeand apply resources against the firm's most seriousvulnerabilities. Risk quantification also uncovers opportunitiesfor cost savings, identifies potentially serious gaps in insurancecoverage, reveals critical business interdependencies and canimprove the overall efficiency of a company's supply chain.

Three essential steps to quantify supply chain risk are:

1. Financial impact evaluation. Assess thepotential financial consequences of a supply chain disruption (bothnegative and positive). These include identifying products most atrisk (most profitable or most vital), impact of an interruption ofthose revenue streams, increased expenses to mitigate loss andremain in business, short-term reduction in operating costs whensuppliers are down, and market share implications.

2. Process mapping. Create a managementchecklist for quantifying supply chain risk, including:

- mapping the entiresupply chain from raw materials through components to finishedproduct and customer purchase/delivery;

- analyzing risk bysupplier, location of facilities, power sources, potentialpolitical exposures, distribution points, shipping and transportproviders and routes, and related infrastructure concerns;

- identifyingmitigation strategies, including availability of excess inventorywherever it may be located;

- chartinginterdependencies, and

- developing andquantifying worst-case scenarios.

3. Develop a team approach. Depending on thetype of firm, industry, and nature of supply chain, the team shouldinvolve any or all of the following:

- supply chainmanagement

- risk management

- operations

- accounting/finance

- marketing andsales

- communications

- transportation/shipping/logistics/inventory management

- legal/governmentrelations

- informationtechnology

- human resources

- productdevelopment

- procurement, and

- seniormanagement.

Effective supply chain quantification can be a focused step aspart of an overall enterprise risk management (ERM) initiative andmay be structured to fit within the ERM framework. In this contextas well, risk quantification also helps firms prioritize their riskmanagement investments more effectively, a critical benefit inlight of limited risk management resources. Additionally, forcompanies in highly regulated industries such as pharmaceuticals,the quantification process also can help provide documentationnecessary to satisfy regulatory requirements.

As risk managers develop strategies to manage their exposures tocatastrophes, they need to understand the breadth of their businessinterruption (BI) coverage and contingent BI and recognize thelimitations of those insurance policies as well. In addition toreviewing your insurance program, re-examine your businesscontinuity program as well as your contractual relationships withsuppliers.

Today, it's not enough simply to look at the volume of trade youdo with any individual supplier and use that as a proxy forassessing the value of that relationship to your firm. Althoughvolume in financial terms might be useful for establishinginsurance limits or credit lines, it's important to look at whatwould happen if that trading partner were to go down due to acatastrophe or other reason, or if it was unable to provide aproduct because its suppliers are down.

It may be that you have a large volume of trade with onesupplier, but if that relationship is disrupted, you can readilyfind alternatives elsewhere. On the other hand, you may haveanother relationship with a smaller vendor where the volume oftrade in financial terms is much less. However, the componentor material provided cannot be readily replaced, and even ashort-term outage can potentially result in a major hit to yourfirm's financial performance.

Even after you've taken the time to understand, assess, andquantify your exposures and worked to address your serious supplychain risks on a priority basis, you need to recognize that this isa dynamic process. Revisit your supply chain risk management andinsurance program periodically, and make adjustments as economicand financial conditions evolve.

Program modifications also may be required to reflect changes incommercial insurance market conditions and attendant coveragereductions or restrictions sought by your insurers.

You also may need to make program adjustments to accommodatechanges in your organization's structure, mergers and acquisitions,and to reflect any developments that lead to an increase ordecrease in customer demand for a specific product, group ofproducts, and other market dynamics.

Today, assessing supply chain exposures goes well beyond simplyknowing about potential catastrophic property risks, such ashurricane, earthquake, tsunami and flooding. Product recalls,tampering, political insurrections, cyber events, worker actions,trade embargoes, terrorism, pandemics, and other events all cancause supply chain disruptions with potentially significantfinancial consequences.

Understanding exactly what's at stake from a potential outage –regardless of cause – is the key to effective supply chain riskmanagement and disaster planning. Whether you ultimately needto strengthen supply chain resiliency, purchase insurance, orallocate added resources, quantification will give you theframework for taking actions that provide the greatest benefits tothe business and its stakeholders, and do so on a cost-effectivebasis.