I spotted this article from the Wall Street Journal a few weeks ago and a couple of points caught my eye. First, 2010 was a record breaking year for natural and man-made disasters. We had a virtual smorgasbord of catastrophes from flooding, to fire, to snowstorms. We had Volcanoes grounding air travel and earthquakes devastating an entire country. And of course, a major oil spill, the impact of which we will be feeling for years to come. According to the article, the economic losses from the disasters reached $222 billion US (three times that of 2009), which is only outdone by the human cost; 260,000 lives.
The other interesting point is that today’s interconnected world makes us far more aware and susceptible to the impact of these natural disasters. Instantaneous news through Twitter, Facebook, YouTube and blogs puts a human face on these events that simply couldn’t be done in a 15 minute segment on the evening news. The economic impact of a catastrophe on today’s global business is also far greater. Almost every large company has a distributed manufacturing base. Further, the suppliers which feed that manufacturing system also are spread around the world. This means that a disaster in some faraway place could have a devastating impact to a company’s ability to ship their product.
The article outlines a few suggestions on how to protect yourself from disasters at home and around the world;
1) Create a business continuity plan – A business continuity identifies the activities/people that are critical to running the business, and ensures that these are protected. As Wikipedia puts it; a business continuity plan works out how to stay in business in the face of a disaster.
2) Supply Chain Risk Management – Specific to the supply chain (and typically part of the Business Continuity Plan) you need to assess your supply chain to determine which suppliers are critical and for those suppliers, identify workarounds should this supplier not be available. Of course, this applies to both external and internal suppliers. A plan, while critical, is not enough. My position has always been that responding to unplanned events is a key component of supply chain risk management. You can assess all aspects of your supply chain, create mitigation strategies for any possible events and still be surprised by some unexpected and unplanned situation. Your ability to respond will mean the difference between a financial catastrophe and a minor blip (for more reading on this, download my whitepaper here.)
3) Insurance / Catastrophe Bonds – The Wall Street Journal article identified that companies can take out disaster insurance or catastrophe bonds. Of course, Insurance should never be your only disaster recovery plan. This white paper aptly describes disaster insurance as “the disaster recovery plan of last resort.” Like home insurance, you would take many steps to ensure that a disaster doesn’t impact your home (removal of dangerous trees, installing smoke / fire detectors, buying fire extinguishers), but if something DOES happen, you are glad to have the insurance to fall back on.
While I hope 2011 will be less “exciting” from a disaster perspective, I wouldn’t count on it. Already we’ve had a few winter storms across the US that people have classed as “snowmaggeden” events that basically stopped all movement across the central and eastern US for several days. Further, the trend towards globalization will continue and as such our sensitivity to regional disasters will continue to increase. So with that in mind, do you have a disaster recovery plan? Does it include supply chain risk? Comment back and keep the discussion going!
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Tags: Business continuity planning, Disaster recovery, Response Management, Scenario management, Supply chain management
Posted in Best practices, Response Management, Supply chain risk management
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Good reminders in this article. The tricky part with disaster planning is when conducting a hazard vulnerabilty analysis, you weigh risks against their likelihood of occuring and the damage if the risk actually happens. From that perspective, things like the Gulf oil spill would probably not rank high because their likelihood would be low. That’s why the worst disasters are so hard to plan for. Supply chain managers might be better off planning for somewhat generic disasters that would result in X,Y, or Z damages — then you can adjust to the ebb and flow of a particular event and how it affects suppliers.
Also, I’m not sure if I agree that 2010 was a record-breaker for natural disasters last year. Rather, such events get far more publicity now due to social media and 24/7 news coverage. I don’t think planet Earth is on an upswing in disaster quotas. Manmade disasters in 2010 might be a different story, however, as we did see some incredible human/corporate gaffes that led to big problems.
Thanks Scott…you’ve made some great points. I think the record breaking in the article I was referencing was around the financial impact of the disasters rather than the number or severity of events.
I completely agree with your point that low probability events like the gulf oil spill are not likely to end up on your company’s risk assessment; which just goes to show how important it is that a company has an intrinsic ability to respond to the unexpected.
[...] This post was mentioned on Twitter by Kinaxis, Scott Wallask. Scott Wallask said: Interesting post for supply chain planners RT @kinaxis: Coping with Catastrophe. Can your supply chain recover? #SCM http://bit.ly/eUXBgZ [...]
Hi John,
Nice article with many useful points.
About the frequency of those rare events, I am not sure the trend is going up in last year or decade; although some studies show that the disaster happenings have increased nowadays. For example, Stecke & Kumar (“Sources of supply chain disruptions, factors that breed vulnerability, and mitigating strategies”, Journal of Marketing Channels, 16(3), 2009) discuss that with an escalating threat of terrorist attacks and changing geographical climatic conditions, catastrophes are expected to occur more often in the future.
To me, the catastrophes were always there, around the globe, but with the (cost-efficiency centered) trends in our business started in 90’s (like lean production, globalization, single sourcing, etc.), we feel their painful impact much easier and quicker.
So, it seems that modern supply chains have become more prone to disruptions. At least as one possible output: no local event in one part of world is local anymore and its effects would spread quickly through our global supply chains and affect all of us. This generally means that more companies will experience the impact in their daily business.
Thanks for this informative arcticle.
I’m very interested in topic of SCRM, especially the sphere of managing unexpected events, contingency planning.
I would be very much obliged to you if you will share any information or case studies (if you have such) about the experience of managing this unexpected events in the supply chains or just show the direction for my research.
Hi George,
I tried emailing you directly but it did not work….
Thanks for reaching out – John sent me your email since my department manages content pieces.
SCRM is a hot topic so we have lots of resources. Apologies if some of the pieces are repetitive, I wanted to provide you with everything we have.
Here are some blog categories and tags on SCRM
http://blog.kinaxis.com/category/supply-chain-risk-management/
http://blog.kinaxis.com/tag/supply-chain-risk-management/
Here’s a whitepaper on the supply chain risk management: http://www.kinaxis.com/campaign/essential-characteristics-of-supply-chain-risk (you’ll need to register to view it).
Check out these pages on our website on Response Management and supply chain risk management.
http://www.kinaxis.com/operations-performance-solutions/supply-chain-response-management.cfm
http://www.kinaxis.com/operations-performance-solutions/supply-chain-risk-management.cfm
Here are some of our customer case studies that mention SCRM:
http://www.kinaxis.com/downloads/customer_spotlight/spotlight-teradyne.html
http://www.kinaxis.com/downloads/customer_spotlight/spotlight-varian.html
http://www.kinaxis.com/downloads/customer_spotlight/spotlight-adeptron.html
Also, you may want to check out the rest of the case studies here: http://www.kinaxis.com/supply-chain-solutions-company/resources/case-studies.cfm
Finally, our resident Thought Leader, Trevor Miles, is quite opinionated on SCRM – check out this PPT deck, webcast, and blog post.
http://www.kinaxis.com/downloads/slides/Is-Forecasting-Fatally-Flawed-2011-04-14.pdf
http://www.kinaxis.com/campaign/on-demand-ResponsivenessDemandForecasting/
http://blog.kinaxis.com/2011/03/is-forecasting-fatally-flawed/
If you have any questions, let me know. You can email me at ltaylor@kinaxis.com