A recent article in the Wall Street Journal highlighted the plight of Lumber Liquidators who has been struggling to deal with the fallout from a scandal that was caused due to the use of formaldehyde in its wood. You may have seen this on a “60 Minutes” program in early March. If you are a retailer after reading this article and watching the 60 Minutes TV spot you must be asking the question. How well do I know my 3rd party vendors and what process, if any, does my organization have to contain a similar event?
Before answering that question the following should be considered:
The first thing is the product liability. The article in the Wall Street Journal states that for Lumber Liquidators the cost to repair the 3% of households that have higher than allowed level of formaldehyde by WHO will be approximately $3M. This is in addition to the fact that the company has suspended all sales of the product supplied by their Chinese vendor. While there is some coverage throughout the standard Commercial General Liability (CGL) policy there is also Product Liability insurance that is meant to, specifically, insulate the company from a financial loss due to bodily injury or property damage. The question is how your company is insuring this risk.
Second and no less important issues the article addresses are reputation and shareholder value. Senior management should consider the impact of loss of shareholder value and the reputational damage their organization. For Lumber Liquidators this resulted in its stock tumbling and shares continuing to edge down to 27.07 cents. In addition, there are over 100 lawsuits the company is now facing with numerous allegations against them all stemming from the defective wood.
If you are a director of a company you should take a closer look at your Directors and Officers Liability policy to understand whether or not you are covered.
Last, but by no means least, is physical risk mitigation. That means understanding what process your company has to physically audit your vendors and insure that they are providing the necessary documentation (certificates of insurance, proper ISO certifications, etc.). Questions that should be asked here include:
- Who is managing this process?
- How many times a year are we auditing our vendors?
- Is the information received providing the transparency needed to properly mitigate the risk of your company?
If this article has created more questions for you are not alone. The area of supply chain risk is something The ALS Group continually monitors and is one all C-suite executives should be concerned about.
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