Governance, Risk and Compliance

Natural disasters and their impact on supply chains

December 2, 2014

Mother Nature can be companies’ worst nightmare, particularly when they are caught ill-prepared and outsource many of their supply chain functions. The past few years have been especially noteworthy in terms of supply chain risks. Natural disasters seem to be almost an everyday occurrence, between the 2011 Japanese earthquake, the flood in Thailand and the wildfires in Colorado. Each one of these events affected both local companies and major businesses in big ways. Ford, Intel and a number of other corporations are still reeling from natural disasters that rocked suppliers last year.

Hurricane Isaac

Hurricane Isaac is the most recent example of a natural disaster with the potential to have a significant impact on businesses both in the United States and across the globe. The Insurance Information Institute (III) recently noted that approximately 30 percent of American oil production is based in the Gulf, as is 20 percent of the country’s natural gas production. The Gulf Coast is also home to many highly trafficked supply routes – highways, rail lines, ports and the Mississippi River all converge throughout the region. A major storm has the potential to significantly affect activity in the Gulf and delay the transportation and delivery of goods. Moreover, many companies saw firsthand the effects that major natural disasters can have in the area. Just seven years ago, Hurricane Katrina struck the Gulf Coast and had a significant impact on both regional businesses and U.S. companies as a whole. This makes it particularly peculiar that many businesses were caught unprepared yet again, with few having adequate risk management and supply chain coverage in place. “Even for companies far from the eye of the storm, the impact of Isaac could have been significant, namely lost profits resulting from broken supply chains and absent business customers, as well as from the lengthy disruption of one of the country’s largest commercial ports,” the III adds.

Chinese disasters

Many American cities have safety regulations that require businesses to be at least somewhat fortified against natural disasters or face large fines for noncompliance. In developing nations, this is less the case. China in particular is a hotbed for natural disasters, ranging from earthquakes and windstorms to annual floods, but many suppliers and businesses don’t take adequate precautions to deal with these risks. For businesses looking for cheap labor, China has become a popular source, but by putting all of their eggs in the Chinese basket, they are opening themselves up to significant supply chain risks. A separate study conducted by FM Global suggests 95 percent of companies reliant on China for their supply chains are concerned about the impact of a procurement network disruption, with nearly two-thirds (65 percent) considering different means of increasing collaboration with suppliers to mitigate risk. “A natural disaster-related supply chain disruption in China would have far-reaching and long-lasting negative economic impact,” explains Vend Signal, Brady Family professor of operations management at the Georgia Institute of Technology’s College of Management. “It would slow down the global economy because China is not only a major exporter of goods, but also a major importer of goods. It would cause shortages in many consumer and industrial products that could lead to inflation and devastate the share price of companies.” As the past few years have proven, natural disasters can have a huge impact on global supply chains. Businesses need to make use of all the tools at their disposal – such as GRC software and other risk management solutions – to help mitigate any threats presented by these catastrophes.

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