Filed Under:Risk Management, Corporate Risk

How to mitigate risk in the supply chain

Contractor verification is a key element of effective supply chain risk management. (Photo: iStock)
Contractor verification is a key element of effective supply chain risk management. (Photo: iStock)

In today’s litigious society, taking preventative measures to ensure a workforce is safe, compliant with regulations and simply using good common sense is essential to efficient supply chain management.  

For example, imagine a scenario where a contractor is hired by a gas company to remove natural gas lines. The contactor, who is well-known and trusted by the gas company, hires a two-person sub-contracting company to assist with the project. However, one of the sub-contractors accidentally forgets to check three gas lines prior to cutting them. This easy oversight results in catastrophe. Two contractor employees are now suffering from severe burns and in need of immediate medical attention.

But what if neither company has Workers' Compensation or Employer Liability Insurance? Who is on the hook for the damage?

Contractor lawsuits are frightening, and in this particular scenario, the lawsuit would go to the company who hired them. This means the controlling employer of the project (in this case the gas company) is now responsible for paying $3.42 million to settle both cases. This type of financial loss can kill a business.

Unfortunately, these types of lawsuits are all too common and in industries where between 50% to 75% of past employees are contractors, the safety risks are exponentially magnified. When that much of the employee workforce is outside immediate company supervision, it’s just not enough to assume safety compliance. 

Wrongfully, many companies do not consider the legal ramifications of hiring sub-contractors without a verification process in place. The example above is the exact type of disaster to make a company step back and assess the strengths and weaknesses of their supply chain management process.

How could this occurrence have been prevented? Without the right contractor prequalification ahead of time, it couldn’t have.

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Contractor standardsSteps to take

These cases occur far too regularly. In fact, suppliers and contractors often fail to meet minimum contract terms and conditions, including safety criteria.

Proper evaluation is the answer to mitigating supply chain risk. Loss control in efficient contractor and supplier relationships is most effective when companies do the following:

    • Communicate. Set proper safety expectations before the contract is awarded that clearly state the guidelines by which their work will be monitored. Hold regular contractor safety meetings and stay up to date with the project and its progression to ensure alignment with the guidelines in place.
    • Evaluate. Use objective criteria, such as the Insurance Experience Modification Rate and Total Recordable Incident Rates to determine how the contractor’s performance is measuring up to stated expectations. Conduct supply chain risk management audits on subjective and objective criteria such as written policies and past performance to verify that written protocols are being implemented. Rank the suppliers into low, medium and high-risk categories based on their trades. This enables the ability to assess the services performed and how the contractor has addressed proof that a safety program is implemented for medium and high-risk trades.
    • Select. Once the criteria against which contractors will be evaluated has been established, be clear to contractors that all elements of qualification will be weighted and that price is not the only factor on which they will be judged. Select contractors as strategically as possible and reward top performers with improved relationships and more business, if they can demonstrate a dedicated ability to meet the supply chain criteria.
    • Monitor. Enforce company-wide standards by keeping a real-time database of all contractors in a regularly updated format. The database should be shared across the organization to ensure that all necessary users are able to access contractor information (particularly qualification criteria and whether they currently meet requirements) any moment of the day. The database should be able to produce reports and control information for data efficiency.

Having a viable contractor verification system makes all the difference. Consider an alternative situation where a contractor is injured by another contractor while calibrating scales. Unlike the first example, however, the company used a prequalification system beforehand and both contractors are properly insured with the correct insurance endorsements in place.

This time, the lawsuit is between the contractors, as is the settlement. Both contractors have no right of claim against the company because the prequalification system collected and verified that both contractors had the required insurance coverage. The company has zero liability and no responsibility to pay.

The payoff is worth the effort. The result of the contractors meeting regulatory and contractual requirements is reduced risk and cost savings. With instant information and readily-available qualification data made possible by a real-time database, a company can rest-assured that their contractors are verified, the workforce is safe and their company is adequately protected from lawsuits.

Contractor verification is a win-win process for both the company and the employed contractors, as well as a key element of effective supply chain risk management.

Related: Human trafficking could be risk in your supply chain

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