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Manufacturing Risk Management in a Global Economy: Quarter 3 Risk/Reward with Tom Precia

business-circuits-computer-1476321My guess is you’re reading this on a computer, tablet, or smartphone. Take a moment and give that device a good, close look.

Go ahead. I’ll wait.

Do you have any idea where that device, and all of its internal components, came from? Let’s say it’s an iPhone. There are components in there from at least a half dozen countries. There’s China, of course, where the iPhone is assembled, but inside are parts from Singapore, the Netherlands, South Korea and elsewhere.

 If one of those components failed and caused you harm, where would you turn?

You’d turn to Apple, of course. Because in our global economy, claims for product liability come to the manufacturer. The various makers of the pieces and parts might be scattered all over the world, which can make the original sources difficult to trace.

If your company is a manufacturer, it’s imperative to know where your parts, components, or ingredients come from, and how to hold their manufacturers accountable. Because whether you make engines, cell phones, or frozen TV dinners, once your product enters the stream of commerce, you could be liable for any injuries or property damage caused by defects in that product.

It would be wonderful if your supply chain extended no further than the city limits, but that’s not the world we live in. You probably use parts or ingredients from manufacturers all over the country, and likely all over the world. This can present a challenge, because when you are dealing with international businesses, you are dealing with different cultures and different worlds.

How can manufacturing companies take advantage of the global economy while carefully managing their risk? 

The best defense starts with a good contract. Review your indemnification agreements to make sure your suppliers are legally obligated to defend and indemnify you when their product leads to a loss. The contract should not only include defense and indemnity, but also language that also holds the supplier responsible for attorney fees, withdrawal and recall expenses, and other costs associated with the loss.

Once you have a strong contract in place, pursue equally strong insurance coverage from your suppliers. Make sure they provide you with a certificate of insurance outlining general liability and product recall coverage. Review that coverage to make sure the limits are adequate, the insuring company is sound, and perhaps most importantly, that the coverage applies in the parts of the world where your product will be sold and used.

Finally, know your suppliers. Make the extra effort to build a relationship with key personnel in the organizations with which you do business. If you need to present them with a claim, you will be more successful if you are on a first-name basis with the people who will need to respond.

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Establishing and maintaining your supply chain can be difficult enough. Ensuring your parts are appropriate, available, and priced right is an immense job. But if you don’t ask the right questions about liability and insurance coverage, even the best components at the best price can be a nightmare.

Our global economy has opened up tremendous opportunity for manufacturers to grow and diversify. At the same time, however, barriers like time zones, distance, language, and culture can translate to increased risk. By crafting a good contract, pursuing strong insurance coverage, and getting to know your suppliers, your business can expertly manage manufacturing risk while seizing every opportunity.