Natural Disasters Highlight Need for Supply Chain Risk Management

This has been a challenging month. Hurricane Harvey caused huge damage in southeast Texas and Hurricane Irma is expected to cause major damage to Florida and the east coast of the United States (as it did to several islands in the Caribbean). We should not forget the recent forest fires in British Columbia and California. Tornadoes, earthquakes, and ice storms seem to be occurring with much greater regularity and ferocity. These natural disasters have been very disruptive to the smooth flow of people, goods and services for many companies. They have also made life difficult for supply chain professionals.

Of course, disruptions to supply chains can come from factors other than weather or natural disasters. Quality control problems, piracy, export restrictions, and computer system hacking are just some of the factors that can come into play. To make matters worse, most of these disruptions are unpredictable in timing and scope. Each shipper has to make an assessment of the potential risks to their supply chains and make recovery plans.

According to Patthira Siriwan, senior project manager for supply chain development in North America for Damco, the combined logistics brand for A.P. Moller-Maersk, supply chain risks can be categorized into five groups: operational, social, natural, economy and political/legal. Damco defines supply chain risk management as “attempts to identify risks and quantify their commercial financial exposures as well as mitigate potential disruptions at each node and lane in the supply chain.” Supply chain risk models can vary from the rudimentary to the sophisticated. In the case of the latter, complex “what if” analyses can be performed. This allows the shipper and/or receiver to identify potential trouble spots and map out alternative supply chain strategies.

In an article in the Journal of Commerce, Siriwan indicated that shippers tend to focus on “factors with the biggest impact on their supply chain, such as on-time performance, supplier lead time variability and carriers by origin or trade lane.” Shippers need to perform some sort of probability analysis on the impacts of each potential disruption, with a particular focus on alternative vendors, carriers, origin points and ports and destination ports. Looking ahead to the balance of 2017, there are some major predictable (tropical storm Jose) and unpredictable risks that could drive up supply chain and transportation costs. The latter could include the impact on fuel costs as a result of unrest in Venezuela or war in the Middle East or war with North Korea.

Each company needs to assess the potential risks to their company for each of the five elements outlined above. As a minimum, shippers and receivers should be evaluating:

• alternate modes and carriers to make sure they have a range of quality options in place;

• alternate communication options (i.e. working from home);

• alternate power such as the use of generators;

• alternate facilities if a warehouse or freight terminal is damaged or destroyed;

• protection for homes, buildings, and other assets (i.e. trucks, trailers etc.);

• evacuation processes;

• back-up sources of food, water, lodging, transportation; and

• alternate sources of raw materials and other supplies.

In addition, each of the supply chain options should be tested under “real world” circumstances with actual freight to see if they are viable and dependable in a time of need. The sheer magnitude of the natural disasters we are seeing in 2017 should serve as a wake-up call to companies in all industries. Customers have choices. A failure to create a viable back-up plan in a time of crisis could severely damage your business.

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