On Watching Hurricanes and Typhoons
When we look at extreme weather, such as the recent Hurricane Mathew, it's easy to think that if we are not directly in its path, it won't affect us. While this may be true in terms of physical damage, our supply chain may be affected:
- Damage to a supplier's buildings and production facilities. The 2011 Thailand floods showed how vulnerable some supply chains are, with approximately 25% of the world's production of hard disk drives affected.
- Water damage and loss of crops. If we are in the food industry, or an industry supplying goods and services to farms, then severe damage to crops will affect us too. It may be good (replacement equipment required; increased demand for our products which are unaffected by the weather) or bad (costs of ingredients go up, ingredients cease to be available, or farms ceasing to buy non-essential good and services).
- Disruption to shipping. During severe weather, goods shipped by sea may be delayed. This may affect us if we rely on either exports or imports.
- Disruption to land transport. Goods produced in the affected areas, or normally shipped through the affected areas, may be delayed until the weather has subsided and the infrastructure repaired.
- Closure of production. For safety reasons, most production facilities will close down before a hurricane and may need some days or weeks to restart, particularly if a damage assessment is required. One of the most obvious effects for many consumers are changes to the price of gasoline, as oil rigs and oil refineries are shut down, leading to a disruption in supply.
These are some of the problems caused by extreme weather. But what can you do about them?
- Understand your supply chain. If you're goods or services depend upon critical goods and services produced by other companies, make sure you know where they are produced and whether alternatives are readily available. If these goods or services in turn depend upon other major suppliers, then make sure you also understand something about the risks that those suppliers face.
- Monitor weather as it may affect your supply chain. Your local weather forecast may not cover expected extreme weather in Bangkok, so you may need to put a better mechanism in place if you need to identify global disruptions in advance.
- If possible, have an alternative supplier. In an ideal world if your regular supplier is unavailable, there would be somebody else who can also supply the same thing. This is one reason to prefer standardized components over customized components. But keep in mind that if your primary supplier has a significant market share, then all their customers will be looking for alternative suppliers at the same time as you. Standardization and the existence of alternative suppliers did not mitigate the shortage of hard drives in late 2011.
- Increase inventory levels during hurricane season. While lean and mean is the fashion, increased inventories can offer a useful buffer against supply chain disruption. While interest rates are low, the financial costs of holding additional inventory may be acceptable.