What Harvey and Irma Teach Us about Supply Chain Risk Management

Stephen DeAngelis

September 15, 2017

The double punch of hurricanes Harvey and Irma on the U.S. economy will be felt for years. Supply chain risk management professionals will learn some valuable lessons from these storms about to prepare for and recover from historical climate-related events. Those lessons will be important because severe natural disasters seem to be on the rise. The Economist reports, “According to the UN’s disaster-monitoring system, America sits alongside China and India in suffering the greatest number of natural disasters globally between 1995 and 2015. These include earthquakes, storms, floods and heatwaves that either cause at least ten deaths, affect more than 100 people or prompt the declaration of a national emergency. Since 1970, the number of disasters worldwide has more than quadrupled to around 400 a year.”[1] Preparations for and responses to Harvey and Irma were notable for the close coordination between the public and commercial sectors. That kind of collaboration will be critical in the years ahead.

 

Supply Chain Risk Management in the Years Ahead

 

Hurricane Harvey affected a significant percentage of the U.S. oil and gas sector and gas shortages became a critical issue in Florida ahead of hurricane Irma. Other basic supplies were also in short supply as regional warehouses had difficulty meeting demands. Walmart sent supplies to Florida from warehouses as far away as Utah. Supply chain risk management professionals must be prepared for unexpected developments like those resulting from the punches delivered by Harvey and Irma. Preparation involves developing and exercising emergency response and continuity of business plans. Taras Berezowsky (@TBerezowskyMM), Managing editor of Spend Matters, interviewed ‘ Bill DeMartino, general manager of riskmethods’ North American operations, and Heiko Schwarz, the firm’s founder and managing director, looking for suggestions about making supply chains more resilient. In any disaster response situation, they told Berezowsky, “Information is king.”[2] Karen Lynch, Vice President of the Global Wholesale Distribution Industry Business Unit at SAP, agrees. “There’s no getting around it,” she writes, “the absence of communication is chaos’s best friend. It is difficult (if not impossible) to accurately assess and respond to natural disasters or supply chain shifts without a holistic view of operations. Supply chain participants — both small and large — often experience reporting disparities that can severely hinder their ability to adjust production and logistics if necessary.”[3] The problem, of course, is that communications channels can be damaged during natural disasters making information gathering difficult if not impossible. How to continue operations with limited information is but one important consideration needing to be addressed in emergency response and continuity of business plans.

 

Analysts from Source One warn that trying to develop response plans in isolation from other supply chain stakeholders could be a fool’s errand. “When a single business decides to unilaterally prepare a risk resilience plan without contacting others,” they write, “it may not end up with a complete strategy.”[4] The best response takes place ahead of a disaster. In situations like Harvey and Irma, advance preparation is possible. In situations like the earthquake that struck Mexico as Irma devastated the Caribbean advance preparation beyond building stronger structures is often not possible. The lesson to be learned here is that plans need to be drafted for both pre- and post-disaster response. Source One analysts write, “[Companies] aren’t really planning for specific events. Instead of chronicling the various issues that could shut down procurement partners, they should be thinking about the potential results of those disruptions. Then, it’s time to come up with strategies that keep production active even when conditions are at their worst. Each firm’s tolerance for risk will differ, and this variable is built into disaster resilience planning.”

 

Pre-response Planning when Possible

 

Florida has responded to more than its fair share of hurricanes. Anyone watching pre-Irma preparations by the Florida government had to be impressed with its efforts. They had plans in place for fostering rapid evacuation of affected areas and for clearing the path for inbound deliveries of needed supplies (a real challenge when everybody else is trying to get out of town). Many commercial enterprises also demonstrated impressive pre-response activities. Pre-staging and selling of essential supplies is critical because required infrastructure might not be in place to receive and deliver supplies in the aftermath of a disaster. Lynch writes, “With shifting landscapes and an increasingly demand-driven economy, supply chain success not only requires flexibility and agility but foresight in preparing for worst-case scenarios.” Many retailers, like Walmart and Home Depot, use data gathered during past disasters to pre-stage goods ahead of predicted climate events. All companies could benefit from that kind of analysis. Lynch notes, “Recent developments in enterprise resource planning, IoT technology, and analytics have pushed the needle in terms of the insights that can be derived from the data organizations produce. This is terrific for executives and stakeholders since it helps them form better, real-time decisions — a valuable asset that can make a world of difference when disaster hits. However, it is crucial that your analytics are contextualized to reflect the nature of your business, partnerships, and environment in order to provide true value.” Cognitive computing platforms are great tools for helping determine effective pre-response activities. Because cognitive computing platforms can deal with many more variables than traditional analytics platforms, they can take into account inventories, weather patterns, geographical factors, traffic patterns, port closures, shelter locations, unique local requirements, and so forth.

 

Post-response Planning

 

Post-response planning is much more difficult than pre-response planning because when and where a disaster will strike is unknown. Barry Hochfelder (@barryhoch21) observes, “We can’t avoid natural disasters. But there are things we can do after it strikes to ensure that the supply chain stays intact and business keeps running. Unfortunately, too many organizations don’t know how to respond. … Even with a strong risk management plan in place, Mother Nature will do what she does.”[5] Responding effectively to a disaster is essential for any business. Hochfelder explains, “A major natural disaster can affect any industry. A key metric following a natural disaster (or any other supply chain disruption) is Time-to-Recover (T-t-R). The more time with no production, the lower the odds that the business will survive. According to the Federal Emergency Management Agency (FEMA), more than 40% of businesses never reopen after a disaster, and for those that do, only 29% were still operating after two years. And, FEMA says, if IT is down for nine days or more after a disaster, bankruptcy will follow within a year. Even those who survive suffer great loss.” Those figures alone should demonstrate the value of having a supply chain risk management process in place. Hochfelder continues:

“In the immediate aftermath of a disaster, it’s not easy to keep a clear head, so here are some tips for making a full recovery:

  • Renew business as quickly as possible: conduct inventory assessments, identify alternate suppliers and maintain sufficient insurance.
  • Have a plan in place to ensure equipment is safe and operational (or know where to find replacements or sub-contractors).
  • Determine recovery time objectives and how to meet them.
  • Determine what must be accomplished before the premises are safe for return.

“It’s also vital to reach all your key stakeholders as soon as possible following the disaster, including employees, customers, suppliers and distributors. Let your customers know when you plan to reopen, when you can take orders and begin deliveries. Talk to your suppliers to find out if they suffered damage and if they still can provide your products and services. (Again, it’s important to have mapped your supply chain, run scenarios and discovered alternate suppliers). A good mantra to keep in mind is, ‘It’s not what’s going to happen, it’s when.’ That Black Swan can swim in at any time.”

Post-response planning is not easy but it is essential.

 

Summary

 

DeMartino and Schwarz note, “It’s unfortunate, but as with the major disruptive events before Harvey, many organizations will finally have their wake-up call for the importance of a comprehensive supply risk management program. Enterprises must be risk aware, making risk an integral part of all decision making. A strong Supply Chain Risk Management foundation and generating sub-tier visibility cannot prevent disasters, but it can help to limit exposure and minimize impact.” Hochfelder adds, “Rebounding from a disaster requires planning and preparation. When the storm comes, it’s too late to start.” Having a good supply chain risk management plan in place is more important than ever. Don’t wait for the next one-two punch to hit before getting started.

 

Footnotes
[1] Staff, “Weather-related disasters are increasing,” The Economist, 29 August 2017.
[2] Taras Berezowsky, “Hurricane Harvey Q&A: What Procurement Practitioners Should Be Doing Right Now,” Spend Matters, 31 August 2017.
[3] Karen Lynch, “Weathering Disruptive Storms In Supply Chain,” D!gitalist, 30 May 2017.
[4] Staff, “Supply Chain Risk Management In A Post-Harvey World,” Strategic Sourcerer, 6 September 2017.
[5] Barry Hochfelder, “How to rebound from natural disasters,” Supply Chain Dive, 7 August 2017.