CSCMP's Supply Chain Quarterly
March 21, 2019
Forward Thinking

How to better prepare your supply chain for the next extreme event

The destruction wrought by recent natural disasters in North America serves as a reminder of the value of having a supply chain disaster-recovery plan.

Hurricanes, fires, and earthquakes. The past few months have seen North America shaken by a series of natural disasters that have not only devastated local communities but also had a profound impact on some industries' supply chains. For example, drug manufacturers in North America are still scrambling to prevent shortages of key drugs for the treatment of cancer, diabetes, and heart disease after Hurricane Maria devastated factories in Puerto Rico.

These extreme events have once again emphasized the strategic importance of both disaster recovery and supply chain resiliency, or a company's ability to respond to a disruption. Supply chain resiliency demands a combination of tactical actions at the site level and broader, strategic changes at the network level. Collected here are a just a few suggestions from industry experts on how you can improve the resiliency of your supply chain facilities and network.

How safe are your facilities?
When it comes to improving the resiliency of your supply chain, a good place to start is by looking at your own facilities. One of the factors to consider when selecting the location of a new distribution center, factory, or other supply chain facility is how vulnerable it is to natural disasters, such as flooding, high winds, earthquakes, fires, or tornadoes, recommends Carl Solly, vice president and chief engineer of the insurance company FM Global.

"It's not so much that these factors get overlooked, as [it is that] companies try to cut it too close," warned Solly in an interview. "For example, sometimes companies see that they are 6 inches in elevation outside of the 100-year flood zone and declare victory. But flood zones are an approximation, and flooding can get much more severe."

Because flooding has gotten even more severe recently, FM Global has increased in recommendations for its clients and now suggests that any new facility should be located at least 1 foot outside of the 500-year flood zone.

Sometimes, however, it's not possible to locate in an area with little or no risk, or you may already have a facility in a high-risk area. In these cases, the best option is to make alterations to the site or building to minimize the risk. In areas with a high risk of flooding, for example, companies could bring in fill to raise the building by 2 or 3 feet, use flood barriers or gates, or simply make sure that product is not stored on the floor, Solly suggested. In earthquake-prone areas, consider the use of more resilient bracing for equipment and piping. Facilities in areas prone to windstorms should take advantage of additional fastenings to minimize damage from flying debris.

Additionally, it's important to know how a natural disaster might affect the area surrounding your site. This involves knowing who your neighbors are, Solly said. For example, are you located near a chemical plant that could release hazardous materials if its systems or facility were damaged during a natural disaster? Does the distribution center next door store combustible material (such as stacks of pallets) in its yard that could catch fire and spread to your location? "There is likely no way to clearly understand the neighbors' risk or risk management plan, but it makes good sense to consider the potential based on publicly available information," he said.

It is also good to know how well the local infrastructure and government services could respond to an extreme event, Solly said. Companies should address questions such as: Are the primary roads into and out of your site at risk from flood or earthquake? How well could the local fire department respond to a "high challenge" fire? If the site is not in the flood zone, is it protected by a levee, and is that levee adequately maintained?

What are your SOPs?
In addition to secure facilities and assets, your sites should have well-established standard operating procedures for responding to a crisis. Third-party logistics provider Geodis, for example, has created very specific business-continuity plans for for each of its sites, according to Mike Honious, chief operating officer, Americas. Each Geodis location has an information packet that contains a disaster checklist, a property-damage claim form, employee roster and contact list, a plan for communicating with employees and customers, a list of safe zones within the facility, an hour-by-hour tactical plan for what to do in a particular type of emergency, and other pertinent information. The company makes sure to review and update this information quarterly.

Companies should have processes in place not just for taking care of their facilities but also for taking care of their employees, said Honious. Your employees will not be able to come in and help get your operation back online if they are busy taking care of themselves, their families, and/or their own property. A smart company that cares about its employees will develop an assistance program that can help them get through these difficult times. For example, six Geodis employees' homes in Houston were heavily damaged by Hurricane Harvey and the associated flooding. The Geodis Employee Assistance Program helped those employees identify and get the resources that they needed, raised funds for them, and flew in employees from other areas to handle their jobs while they took care of their own affairs.

What will the effect be on your partners?
The best disaster-response plans, however, don't end at the company's own gates. According to Aaron Parrott, a specialist leader in Deloitte Consulting LLP's Supply Chain and Manufacturing Operations Practice, for many large manufacturers, 70 to 80 percent of the total value of their product comes from their supply base. If that much value is tied up in your supply base, it makes sense to consider your external partners in any disaster-recovery plans.

To do this, companies need to first map out how their material moves around the world and where their suppliers are located, Parrott said. In many cases, this type of supply chain mapping should include not just their suppliers but also their suppliers' suppliers. That way they can anticipate possible disruptions that they may not experience until weeks or months after the disaster has struck when supplies, components, or even capacity suddenly become tight.

While this may seem like common sense, Parrott said that most companies do not have visibility beyond the first or second tier of their supply chain. They might not even know who their tier 3 or 4 suppliers are. As an example, he points to the 2011 earthquake and tsunami that hit Japan, which is home to manufacturing operations for many of the parts and equipment that are essential to the computer, electronics, and automobile industries. Parrott says that many original equipment manufacturers spent the first three to four weeks after the tsunami just trying to figure out whether they had suppliers located in the affected areas, what parts those suppliers were providing to them, and what their own inventory levels for those parts were.

"What you don't want to happen is that a disruption occurs five tiers deep in your supply network, but because of how your network is structured and how you get information, it takes you five months to figure out that it happened," said Parrott. "You just lost five months of time that you could have taken to respond."

Mapping out all the tiers of your supply chain may seem nearly impossible, especially for companies with complex products. For this reason, Parrott recommends focusing on the 15 to 20 percent of components and parts that are the most critical. "Those are the ones that you really need to understand and have a multitier visibility to what those supply networks look like," he says.

Having this sort of visibility can help companies not only foresee any potential supply problems but also take advantage of their partners' assets and supplies to better respond to the event. In the days before hurricanes Harvey and Irma, for example, Geodis helped some of its customers move inventory from distribution facilities in Houston and Miami to other Geodis facilities in Dallas and Atlanta that were out of harm's way. It was also able to route incoming supplies away from the affected areas and into those other facilities.

An accurate up-to-date map of their supply chain can also help companies take proactive steps to mitigate risk before a natural disaster or extreme weather event occurs, Parrott said. For example, after conducting such a mapping exercise, a company might see that a single hurricane could wipe out its entire supply of a key commodity simply because of where its supply base is located. After identifying that risk, the company may consider changing its sourcing strategy so that suppliers are better distributed across the globe. Or the company may consider holding a greater amount of buffer inventory that would help it get through a period with a supply disruption.

Companies can structure these supply chain mapping and monitoring activities to occur in a variety of ways. One that has proven successful for some Deloitte customers is to create a center of excellence or "control tower" that uses supply chain visibility technology and analytics to gain a networkwide view of inventory levels and possible disruptions, said Parrott. "You have a center-based control tower that's monitoring all the aspects of the supply network, but the execution of activities and what you need to do once a disruption happens is distributed back to the businesses," he explained.

While the actual number of natural disasters and supply chain disruptions may have dropped in the past few weeks, that does not mean companies' supply chains have suddenly become risk-free. Instead, supply chain managers should use the "breathing room" that they have now to develop the facilities, processes, and networkwide visibility they will need to help them recover from the next unforeseen disaster.

Susan Lacefield is Executive Editor of CSCMP’s Supply Chain Quarterly.

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