What We Think

Extreme weather events and your supplier risk.

In October 2017 we were warned that Hurricane Ophelia would wreak havoc on the British Isles. Eventually, it was downgraded as it approached the UK but it did bring very strong winds and created heavy seas.  It led to dangerous conditions for people and caused extensive damage to property.  Next time it could be much worse.

Earlier, in August, Hurricane Harvey brought massive destruction to Houston, Texas which is the centre of the oil and gas industry in the USA.  Just the physical damage caused by the hurricane was estimated to be between $150bn and $180bn. There was extensive flooding which impacted the entire area including the port which exports chemical products globally. The Wall Street Journal reported that Hurricane Harvey affected up to 10% of U.S. trucking capacity, and that international trade routes were affected as well. The occurrence of category four and five hurricanes has more than doubled since the 1970’s, partly caused by the 1°C average global increase in ocean temperatures.

What does this mean for supply chains? 

Businesses across many industries are often dependent on local suppliers which leave supply chains vulnerable to disruptions from extreme weather events like that in Texas.  Most supply chains use fuels, lubricants and chemicals to run their businesses and this type of disruption has far-reaching effects.

Supply chains need to be properly evaluated and alternative supply sources should be identified.  In a recent interview with The Wall Street Journal, Nick Wildgoose, Global Supply Chain Product Leader at Zurich, the insurers, said that “budget cuts and not taking advantage of available technologies are short-term, cost-saving solutions for potentially devastating long-term problems.” According to him, knowing where your critical suppliers are, mapping out probabilities for extreme weather events and creating contingency plans is vital. The aim is to avoid having too much value at risk in one location and being able to recover more quickly if an event does occur.

Power outages

Strong winds, rainstorms and hurricanes cause flooding and damage to the power supply.  No power means systems are down and connectivity is cut.  People cannot get to work, systems must revert to manual so everything takes longer. Supply chains are increasingly reliant on digital services and technology; no power means no real-time accurate data and therefore poor decision making.  Cloud computing and regular backups can ensure that at least the existing data is protected.

Demand Planning 

The experience of Hurricane Katrina in the Gulf of Mexico in 2005 highlights the challenges of forecasting the demand for goods and services.  That storm displaced nearly 800,000 people who were driven from their homes in Louisiana and neighbouring states. Ten years later, over 100,000 of these residents never returned to their original city or county from which they were displaced. Understanding the changes in demand patterns due to relocation is critical to recognize the future impact on business. Failure to adjust to the changed levels of demand means too much inventory and wasted investment in assets.

Procurement 

Procurement plays a key role in disaster recovery. According to Nick Heinzmann of Spend Matters, a procurement consultancy, Hurricane Harvey provided a learning experience for the future.

  • Industries that are most affected by disruptions to logistics include retail consumer goods, food, construction materials, machinery,  plastics, and petrochemicals and energy.
  • Fuel prices go up causing trucking rates to rise, at least in the short-medium term, impacting selling prices.
  • Supplier contracts should contain force majeure clauses.  Litigation may arise if this issue is not addressed.

Managing the risks

Having a supply chain risk plan in place won’t prevent disasters but it will limit exposure and minimize the impact. An in-house risk team should include major stakeholders, both internal and external, to develop the continuity plan.  Consider how one break in the supply chain affects the rest of the operations, i.e. what is the domino effect?  A supply chain map of first tier and second tier suppliers is necessary to evaluate the potential impact.

Like any other team, one person should be given the responsibility for monitoring conditions and handling communications with suppliers and customers.  Key suppliers should create and share their own response plan which will help you to avoid disruptions. Companies that can continue with business-as-usual (or almost) will have an advantage over competitors who do not have any plan.

According to UPS, the global 3PL distribution company, there are some important steps to take in developing a risk plan for logistics.

  1. Identify the risk.   Brainstorm it, list it, and decide what could possibly impact you in your global supply chain.  Understand what is entering the supply chain of your suppliers and subcontractors.
  2. Plan your risk response. Think about the most likely issues your business will encounter, and ensure you have a plan in place for it. Include a way of determining the threat level and response, as well as a unified way of processing and sharing that information with all partners.
  3. Mitigate the risk. When putting together your contingency plan, design strategies that lessen costly disruptions, e.g. alternative delivery routes. Companies that have improved visibility can detect potential disruptions in the supply chain before they happen and find ways to avoid potentially devastating incidents.
  4. Expand your risk response team. Businesses that don’t have the expertise in-house to deal with critical risks may want to collaborate with a third party who can set up contingency plans to keep your supply chain running smoothly. When a major supply disruption of mere hours can potentially take years to recover from economically, it’s worth the time spent to make sure you have the right plans in place to handle those risks and keep the business running smoothly.

Hurricane Harvey serves as a wakeup call.  Companies can minimize the impact of weather disruption on their business operations if they refer to detailed weather forecasts even if the event is not as dramatic.  There may be a spike in demand for staple goods and specific products for a short time; put together a plan for alternative sources of supply in advance. What happens if a key supplier of raw material or packaging is out of action for a week or a month due to flooding?  Always have another option.

Go Supply Chain Consulting can help you to optimise your supply chain operations. We provide capacity and productivity solutions in fast-changing business environments.

Our directors are experienced logistics consultants who have worked closely with clients in a range of sectors and countries to improve or expand their warehouse and distribution centre operations. 

Published by: Go Supply Chain Ltd