As manufacturers and builders increasingly depend on materials and components outsourced from suppliers around the world, maintaining and protecting the safety of their supply chain is challenging, experts say.

For example, Mattel Inc. in August 2007 recalled about 20 million toys—including Sesame Street characters, Dora the Explorer figures and Barbie doll accessories—after learning that the paint used on them by Chinese subcontractors contained lead. It also recalled millions of toys with magnets that potentially could fall off, creating a choking hazard.

Risk managers can minimize supply chain risks involving materials and components through detailed risk assessments on critical areas of their supply chain, monitoring methods, risk transfer, and through the use of risk management fundamentals, among others, experts say.

Supply chain safety for material and components can plague even the most sophisticated risk manager who has in-depth knowledge of an organization's operations and risks, said Louis Roi, executive vp at Arthur J. Gallagher Risk Management Services Inc. in Chicago.

“When they don't have a proprietary interest in their suppliers, it becomes critical,” he said.

Supply chain issues for risk managers in the food manufacturing industry is one of the biggest concerns, with recent claims reaching $40 million, he said.

The risk has been created because a company has chosen to go to an area of lower cost, said Jeffrey Beauman, vp of all risk underwriting at Factory Mutual Insurance Co., which does business as FM Global, in Johnston, R.I.

If costs are small because of different levels of safety controls and regulations locally than in the home country, whether that is Europe or North America, “then you'll have to put some other steps in place to do a quality check as those parts or components arrive in your warehouses in your home shore,” Mr. Beauman said.

This year's earthquake and tsunami in Japan revealed some of the risks of running a lean supply chain, according to Tom Teixeira, supply chain practice leader at Willis Group Holdings P.L.C. in London.

“As a result of having a lean supply chain in place, it made them increasingly dependent on one or two suppliers. If those suppliers stop trading overnight, everything stops,” he said.

Companies concerned about the safety of materials and components outsourced from their suppliers need to create conditions within their partnerships to gain direct access to suppliers, Mr. Teixeira said.

“It's all about commercial language that gives you the right to go on site...to make sure they are following the procedures you've laid out as part of that contractual agreement and making also sure that they're promulgating that across their tiers and to the supply chain below them,” he said.

The more robust contracts mandate suppliers to follow quality procedures and gives the company access to undertake relevant audits, Mr. Teixeira said, noting that while this is an expensive process, it's something worth doing.

“That tends to minimize the risk in a way, increases transparency and provides the customer with a better understanding of a real risk,” he said.

When it comes to the risk of supply chain, it comes back to the fundamentals of risk management, Mr. Beauman said, noting that FM Global views that the majority of loss can be prevented.

“It comes down to visualizing why am I getting this deal and, as a consequence, what new risks are being introduced to my product that I wouldn't have had if I was responsible for the manufacturing and I was doing all the specifications.”

Gary Lynch, global leader of supply chain risk management for Marsh Risk Consulting in New York, said an organization's enterprise risk management program can been useful in setting the framework to monitor, elevate and report on supply chain risks, but often risk managers are left with questions on how to execute against the risk.

Companies need to define the supplies critical to its revenues and margins and assess the supply chains and the resources that support it, Mr. Lynch said. Once the pinch points have been identified within that supply chain, a risk manager can look at the actual solutions of loss control and risk transfer.

“We've actually seen our clients obtain a certificate of insurance where product recall is established. They want to see that their suppliers have purchased product recall cover,” Mr. Roi of Arthur J. Gallagher said.

“You're starting to see risk managers monitoring these certificates of insurance probably to a much higher degree than ever was before,” he said.

If the outsourced supplier doesn't have the money to put up the amount of insurance the company wants per the contract, the company buys an excess layer for their supplier and passes the costs on to the supplier.

“They are actually providing excess insurance for their suppliers, on behalf of their suppliers; because there is not enough insurance that is provided to appease them. Or they'll establish minimum requirements that that supplier obtain, for example, a $10 million umbrella,” Mr. Roi said. “Then they are passing on that cost to that supplier or they are removing them completely.”