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What would you do? Risk management: weather-related supply chain disruptions
In August 2017, Hurricane Harvey struck a significant blow to the Houston, Texas metro area, home to the sixth largest import terminal in the world as well as all of the shipping lanes in the Gulf Coast area. Given the strong economic linkages between the Gulf Coast and the country as a whole, Harvey impacted the U.S. economy far beyond the local region.
Supply management professionals were on the front lines of the economic side of this environmental disaster. Imagine yourself as one of them: your facility and/or your suppliers’ facilities are in the hurricane’s path. Damage is done during the storm, and you will have to deal with the after-effects, including ongoing impacts on transportation and labor. How do you prepare for the unexpected? How will you cope with the aftermath? What do you do?
This is a classic risk management effort. ISM defines risk as the “exposure to business loss or interruption of access to raw materials, manufactured goods, capacity, or other key materials, products, or services required by the buying organization to execute its business plans.”1 Risk management is therefore the “identification, analysis, and mitigation for what could go wrong within a given process or entity. Options for risk management include acceptance, mitigation, transfer, and control among others.”2
Risk management includes the processes of identifying risk, quantifying risk, assigning responsibility for management of risk, and mitigating risk. Mitigation actions can take many forms, including site protection, emergency response plans, and insurance. The development and implementation of a risk management program includes various types of risk such as geopolitical, environmental, public relations, financial, operational, brand/reputation, legal, technical, and data security risks.
In this article, we’re focusing on environmental risks such as hurricanes, epidemics, tornadoes, and earthquakes – all of which result in losses to the organization.
Back to the Hurricane Harvey scenario – how can you, as a supply management professional, help your company navigate these rough waters? First and foremost, by anticipating that this level of disruption via environmental disaster could happen. Have a framework for contingency planning in case of supply disruption. Prepare to cover both your locations and your critical supplier locations. Ultimately, successful navigation of environmental disasters lays in understanding where you have the greatest risk and having alternate sources of service and supply to meet demand if at all possible.
In today’s world, a lot of companies sign long term contracts with suppliers to develop strong relationships. As a supply management professional, you’ve likely worked hard to develop each source and you may not have multiple options for supply in each category. In light of the potential for environmental disaster – as well as other unexpected disruptions – it is important to know all of your company’s options. The potential for using another supplier should be written into your contracts. That way if your primary supplier shuts down, you’re not penalized for using an alternate supplier on an emergency basis.
If your location is shut down by weather, you should have an up-to-date understanding of what your current situation is: how long can you continue operating with what you have on hand? Do you have an emergency response plan for when you start back up?
In case of a shut-down, keep an eye on where all your shipments are and know the capabilities of your contingent labor partners (I.e. maintenance and tech services). While your business is shut down, track inventory levels so that when the business is up and running again, you know exactly what you need to do – rather than just sitting and waiting for the lights to come on. For example, if you are in the food industry, you know that there will be spoilage. You will need to devise a plan to replace inventory by working collaboratively with suppliers and internal stakeholders. Preparation and early action will ensure that your operation rebounds quickly.
Risk management should be on the mind of every supply management professional. Pre-planning to ensure supply chain agility and preparedness will reduce the overall risk to the organization. However, risk management requires active participation from the entire organization. Supply management professionals can bring their unique perspectives and external resources to the table so that they can collaborate with their peers to achieve better results for the organization.
Portions of this article were sourced from the soon-to-be released Study Guide, 3rd Edition and ISM Professional Series (3rd Edition), which are part of the ISM® Professional Series, used in ISM’s Certified Professional in Supply Management® (CPSM®) program.
1-2 ISM Glossary of Key Supply Management Terms 6th edition, Institute for Supply Management®, Tempe, AZ, 2015.