Hurricane Risk: Exploiting the Quiet Before the Storm

171016 October cover

Hurricanes have human names and the havoc they inflict is intensely personal. Harvey, Irma, Katia, Maria and Nate have wrought devastation on people across the Caribbean, Mexico and the southeastern United States during a catastrophic few weeks that have left thousands homeless and a cleanup bill that may stretch into the hundreds of billions of dollars.

For supply chain leaders, the trail of destruction is a further reminder — if one were needed — that proactive risk management and mitigation strategies are essential to ensure a resilient supply chain and limit the financial damage from disruptive events like hurricanes. As my colleague Kevin O’Marah put it in a recent blog: “Normal operations won’t work in extraordinary situations.”

Not surprisingly, perhaps, given the intensity and number of recent storms as well as a big earthquake in Mexico, concerns about natural disasters have grown in the supply chain community. New SCM World survey data collected during September shows that more than a quarter of practitioners are “very concerned” about this category of risk — the highest level since we started asking the question in 2012.

In industries such as logistics, retail and consumer packaged goods, the proportion most worried has doubled in the space of one year. And in healthcare and pharmaceuticals, 28% now say they are very concerned, compared with just 11% in 2016 (see chart).

This finding is understandable given the sector’s extensive manufacturing operations in Puerto Rico, which was badly hit by Hurricane Maria. Baxter and Bristol-Myers Squibb are among the firms that have reported plant damage, leading the U.S. Food and Drug Administration to warn about potential drug shortages
% of respondents saying ‘very concerned’ about impact of earthquakes, floods, etc, on supplier facilities

Caught Flat-Footed

Back in August 2005, Hurricane Katrina caused massive destruction along the Gulf Coast and left 80% of New Orleans under water. That experience stress-tested the supply chains of companies such as Procter & Gamble and Walmart, and led Cisco Systems and others to invest in capabilities that could better anticipate and respond to natural disasters.

Fast forward 12 years and this time it was the city of Houston under water from unprecedented rainfall caused by Hurricane Harvey. However, some companies don’t appear to have the learnt the lessons of Katrina, or subsequent disasters, and have been caught flat-footed.

CPG firm Newell Brands, for example, reported in early September that its profit would be down this year as a result of a shortage of resin. Most of its resin suppliers are based in Texas and Louisiana and their plants were closed.

According to a story in The Wall Street Journal that quoted a spokesman for Newell, the company was “working to find alternative resin suppliers ‘with some early success,’ but it said the costs will be higher.”

Waiting until the disruption happens to start looking for alternatives is too late. By that time, competitors will most likely have snapped up existing inventory and spare capacity at unaffected plants.

Being Better Prepared

What should companies do to avoid being caught out like this? Good practice includes the following:

  • Know your supply base. Visibility of suppliers is the foundation of risk mitigation efforts. This entails mapping specific sites and locations for tier-1 suppliers, and understanding sub-tier dependencies for key commodities (such as resin), and especially those that are single-sourced.
  • Understand recovery times. If a facility is forced to close, whether one of your own or that of a supplier, how long is it likely to take to bring back online or get alternate locations up and running? And how long could your supply chain survive without this output? In the case of Hurricane Harvey, an analysis of 300 sites affected in the Houston area by supply chain risk specialist Resilinc found that the average recovery time for manufacturing plants was likely to be 19 weeks, with six to eight weeks for suppliers to start shipping from alternate locations.
  • Monitor potential disruptions. Subscribing to an alerting service — preferably one mapped specifically to your supply chain footprint — can provide advance warnings of risk events, whether in the form of hurricanes, port strikes, road closures, political unrest or supplier troubles.
  • Develop an internal playbook. A well-designed process to evaluate potential threats, communicate them to key stakeholders and escalate the most serious ones is as essential as a finely tuned disaster management plan. The authority to make alternate purchasing decisions quickly also needs to be clearly defined, since speed of execution is often vital in a crisis situation.

Computer and printer maker HP has done a nice job of embedding these elements into its business continuity planning methodology and visualizing potential risks across its extended supply chain. SCM World community members can watch a new webinar on HP’s approach.

Unlike earthquakes, hurricanes come with advance warnings — a week or more ahead, with constantly updated forecasts about their likely path. The geographies at greatest risk are also well known, even if the frequency is unpredictable (Harvey was the first major hurricane to make landfall in the U.S. since 2005).

So there really is no excuse for not having a hurricane risk strategy, and not being ready to put pre-defined mitigation plans into action as events like those of recent weeks unfold.

Author Geraint John

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