Mitigating Supply-Chain Risk When Natural Disasters Strike
Hurricanes Harvey, Irma, Maria, Florence and Michael all battered the United States in the last year, impacting Texas and Louisiana, Florida (namely the panhandle and south Florida), Puerto Rico, and the Carolinas.
According to FiveThirtyEight, Hurricane Harvey last year dumped approximately 27 trillion gallons of water on Texas and Louisiana last year, leading to a whopping $125 billion in damages.
When it comes to natural disasters, like hurricanes, the question is not “if” but “when.”
For manufacturers, natural disasters — whether it’s hurricanes, earthquakes, wildfires, or something else — pose a number of significant hurdles to supply-chain stability. For example, transportation of supplies can become impossible for weeks at a time as a result of flooded roadways and production on needed materials, like metals, can come to a halt in affected areas.
We spoke with Resilinc founder and CEO Bindiya Vakil earlier this year about risk mitigation, broadly with respect to the Trump administration’s Section 301 probe and the resulting tariffs on Chinese products. Vakil emphasized the importance of data in decision-making, namely in the form of proactive measures, as opposed to reactive, spot decision-making.
While it’s true that natural disasters, like the aforementioned hurricanes, don’t happen particularly frequently, they can have a deep and long-lasting impact on supply chain stability.
According to Resilinc’s Supply Chain Disruption Annual Report, disruptions roughly doubled in 2017, potentially impacting 32% of S&P 500 companies’ supply chains.
“This should be a wake-up call for business leaders around the globe,” Vakil said. “2017 was a turbulent year for US companies and their supply chains, causing a hidden drag that must be addressed. With 32% of S&P 500 companies potentially impacted, the economic damage is enormous.”
According to the report, three of the top five events in 2017 with respect to business impacts were hurricanes (Harvey, Irma and Maria), with North America coming in as the region most disrupted by natural disasters. Drilling down further, the automotive industry was the most disrupted by natural disasters in 2017.
Last year, on the heels of Hurricane Harvey, Vakil discussed the role water plays in the disruption of supply chains (and used Resilinc data to map out site concentration in affected Houston areas).
“We can expect that if factories have [any sort of] water dependency, there’s going to be extended disruption,” Vakil said during last year’s webinar. “Even if your suppliers are telling you they’re experiencing minimal impact, their essential infrastructure may not be available. Equipment, for example, may not only need to be replaced, but depending on the complexity and specific qualifications of the products, manufacturers may need to consider test runs for QC purposes, among other steps.”
In addition to roadway flooding, damage to some of the country’s busiest ports also impacts supply chains. Many breathed a sigh of relief when the Port of Houston, the country’s second-busiest port (by tonnage), largely escaped serious damage (the Port of South Louisiana is the busiest by tonnage).
The Port of Houston, for example, is also home to a massive petrochemical complex; as motorists around the nation noticed at the time, gas prices spiked after Harvey hit.
So how do manufacturers keep their operations running smoothly and mitigate supply-chain risk when natural disasters strike?
Just like man-made risks — for example, the imposition of tariffs on metals or the various goods and parts under the Section 301 investigation — the same mantra of proactive thinking applies to natural disasters. (That holds especially true for hurricanes, which, while devastating upon impact, have a long enough lead time that allow for formation of a risk mitigation plan — unlike, say, tornadoes, which have an average warning lead time of 13 minutes.)
According to Resilinc’s EventWatch 2017 Annual report, hurricanes/typhoons came in fifth place by category for bulletins issued in 2017 with 116 (up from 82 in 2016).
Needless to say, these types of events aren’t going anywhere; in fact, some of the most powerful and damaging storms since record-keeping began have occurred in the last several years.
In a white paper released in February, Resilinc details how one company, Biogen, proactively moved to mitigate impacts in the wake of Hurricane Maria, which devastated Puerto Rico and, among other impacts, led to the idling of pharmaceutical plants and concerns about drug and IV bag shortages.
While the specifics of Biogen’s strategies don’t necessarily apply to every business and every supply chain, the basics hold universally true: monitor and coordinate closely, formulate a backup plan and act decisively.
For example, per the white paper, Biogen determined Hurricane Harvey would not impact its supply chains, and continued business as usual. Irma, on the other hand, showed signs of potentially impacting its business operations.
“Biogen identified several Florida suppliers that were likely to be hit by the storm,” the study states. “At one site, there was a significant inventory of work in progress (WIP) materials awaiting final assembly and shipment to another facility in Kentucky for distribution. A painless solution was quickly developed: ship the goods immediately to the Kentucky site before Irma disrupted the previously scheduled shipment.”
Biogen also acted proactively when a 7.1 magnitude earthquake devastated Mexico City in September 2017, moving products that would be shipped to clinical sites elsewhere, outside of the earthquake’s zone of impact.
“We knew about the incident literally within 25 minutes,” said Daniel Biran, vice president of global security for Biogen. “We were quickly able to identify our resident and traveling employees in the zone of impact, communicate with all of them and let senior management know that everyone was safe.”
For a manufacturer, it’s one thing to be aware of a disaster — what comes after that?
The Resilinc-Biogen white paper describes the latter’s formation of a so-called “war room” to manage its response. Needless to say, every company, whether a consumer of metals or not, should have a dedicated team ready to respond to a natural disaster event and facilitate the steps to mitigate impacts.
Having a dedicated team streamlines the response and prevents the dissemination of information that might be incorrect or incomplete.
“Instead of everybody involved communicating bits and pieces of information by email and creating a confused picture, we had one source of the truth that managed the flow of information carefully and efficiently,” said Lee Spach, Biogen’s director of global product supply chain security, regarding its Hurricane Maria response. “We literally took over a conference room. We started with four or five people, and by the second day there were 10 to 15 people engaged, including certain commodity managers who had not been directly engaged with our Resilinc system before, and the relationship managers for the suppliers. We had manufacturing science, internal and external production, and regulatory staff there.”
Another tool to mitigate disruption is forward purchasing. In Biogen’s case, it executed a $1.3 million purchase for items that were at risk of shortages due to Hurricane Maria.
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The through line is simple: buyers must be ready for the worst-case scenario and ready to jump into action.
As we have seen in the last year, hurricanes can leave an impact that lingers for weeks, months and, in some cases, even longer.
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