From Hurricane Sandy to Typhoon Haiyan, there is no denying that extreme weather is almost a yearly expectation. Weather- and climate-related disasters have caused $2.4 trillion in economic losses and nearly 2 million deaths globally since 1971 according to the World Meteorological Organization. For companies leveraging global supply chains that are susceptible to high-impact weather patterns or natural disasters, these numbers are important to pay attention to. They should send a signal to organizations that if their supply chains are not prepared now for the next extreme weather event or natural disaster, they should start planning to be to ensure they can continue business as usual to the best of their abilities after it passes.
And they are. The second annual BDO USA, LLP analysis of risk factors listed in the most recent 10-K filings of the largest 100 publicly traded U.S. manufacturers included natural disasters as one of the top ten challenges. In fact, 88 percent of manufacturers noted risks related to natural disasters in the analysis. When natural disasters strike, employees’ safety is at risk, assets are vulnerable, transportation could break down, significant delays could occur and companies could be displaced or even shut down entirely. This is why advanced preparation could prove essential to minimizing the damage these disasters or extreme weather events can cause.
Think of it this way: supply chains are like professional football teams. If a key wide receiver or quarterback is benched due to serious injury, the team’s ability to perform diminishes, impacting overall game performance and possibly eventually ticket sales. Similarly, if one step in the supply chain is crashes, the whole company can face irreparable damages, from millions lost in sales to possible plant closures. However, just as with a football team, if there is a second stringer trained to takeover, such as a supplier in an unaffected area, the business impact could ultimately be avoided.
A few examples highlighting how extreme weather or natural disasters could significantly weaken companies’ supply chains include:
- 2013-2014 U.S. Winter Season: Last year’s winter weather season slammed U.S. manufacturers, disrupting supply chains across the country due to slow outbound and inbound deliveries. In fact the Journal of Commerce reported, “Ten industries reported slower supplier deliveries in January (2014), from the makers of plastics, rubber and paper products, to appliance and electronics manufacturers.”
- 2010 Thailand Flooding: For three weeks the country experienced massive flooding that left thousands of factories throughout central Thailand, including many of the most notable hard-drive manufacturers, under water and unable to operate. Some of the world’s largest computer makers were without a reliable forecast about when crucial parts would be available once again according to The New York Times, and the Business Forward Foundation noted that as a result “Production by consumer electronics manufacturers in the U.S. dropped by one-third.”
- The 2011 Great Tohuko Earthquake and Tsunami: As one of the strongest earthquakes ever recorded, Tohuko caused significant casualties and infrastructure damage, which was only amplified by the destruction of several nuclear reactors responsible for providing the region with electricity. It also greatly impacted the automobile industry. According to Automotive News, “The March 11 disasters temporarily closed the plants that make 17 of the top 20 models of Japanese vehicles sold in the United States and prompted General Motors to close a plant in Louisiana and Peugeot a plant in Europe.”
With so much potentially at stake, from customer satisfaction to stock price, in the event of extreme weather or natural disaster, how can companies prepare for what really is the unpredictable? A few considerations for strengthening supply chains include:
- Use diverse suppliers and production locations to more adequately protect the supply chain;
- Work collaboratively with suppliers to develop a resilient supply chain that can withstand the event of extreme weather;
- Create or update disaster recovery plans. Consider changes in secondary or back-up locations and operations, mitigation strategies, logistic alternatives, tested employee safety and evacuation plans, critical contracts and other significant impacts to the business’s risk profile;
- Assess whether accounting systems can adequately capture information to quantify and document losses, including lost orders, cancellations, decline in demand, extra expenses, property remediation and property repair;
- Assess whether employees have been adequately trained to capture relevant loss data and documentation;
- Review insurance policies for appropriate values and coverage, including: deductibles and self-retentions, coverages such as flood, contingent business interruption, extended period of indemnity, civil authority, ingress/egress, ordinary payroll, power outages and claim preparation fees; and
- Back-up records and other critical information.
Preparing for the unpredictable is never easy. By implementing these baseline measures, a company can minimize its supply chain’s exposure to any weather event or natural disaster, which will help it keep calm before, during and after the storm.
About the Authors Howard Sosoff is the Manufacturing & Distribution Practice Leader at BDO USA LLP, and Clark Schweers is the Principal at BDO Consulting and Head of the Forensic Insurance & Recovery (FI&R) Practice.