Manufacturing risk
The purpose of a credit insurance policy is to cover your credit risk, i.e. the risk of a customer failing to pay after the delivery of goods or the performance of services.
In some sectors, the lead-time between the placing of the order and delivery (or, in the case of a service, the performance) is such that there is a risk the customer’s solvency may deteriorate during such time. This can impede the proper completion of the contract – for example in the event of legal insolvency. In addition, some goods are produced for a particular customer or branded with its name, which makes them very difficult, impossible even, to resell to a third party in the event of default by the ordering customer. This is called the manufacturing risk and represents the potential cost to the company in the event the contract is interrupted before delivery of the goods or performance of the services.
The seller commences production or performs the first services as soon as the order is placed. During this phase and prior to delivery of the goods or the end of the services, the seller must bear all costs related to production, which we define as the cost price (research, product design, purchase of raw materials, cost of labour, first services, etc.). The further the seller progresses in its production or services cycle, the higher its cost price rises. The manufacturing risk guarantee does not normally cover the profit margin the seller expects to make from the contract.
Under what circumstances may a contract be interrupted?
- If the customer is declared insolvent (commencement of insolvency proceedings)
- If there are political problems in a country which prevent any more goods from being shipped or services in progress from being completed.
- If a natural disaster prevents continuation of the production process or services.
The manufacturing risk guarantee does not cover interruption or termination of the order at the customer’s request.
How can you limit your manufacturing risk?
- By demanding substantial down payments and interim payments, depending on the production process, in order to cover your cost price.
- By reducing your manufacturing lead-time
- By avoiding stocking specific goods for too long prior to delivery
- By integrating cover of your manufacturing risk into your credit insurance policy. The manufacturing risk guarantee is provided by way of a specific rider to your policy, for an additional premium. It is not provided by all credit insurers under the same terms, either contractual or in terms of pricing. The longer your production process, the higher the cost of cover. Cover can be taken out for a specific operation or for all operations if they all carry this type of risk.
We can analyse your manufacturing process to help you determine if you need cover for this type of risk. Contact us
