With the strike of one of the most intense hurricane that swept the Northern Gulf Coast in a century, hurricane Michael raised significant alarm in many parts of the United States especially Florida. However, the panic has extended to disrupt the supply chains in many parts of the world similar to any other natural catastrophe. This is inevitable in the scenario of global supply chains when a disruption in any part of the world can have an impact on you.
The following examples can provide you with a preliminary understanding of how much losses companies had to incur following a natural or manmade disaster.
In March 2000, the Philips Semiconductor plant in Albuquerque was shut down following a fire caused by lightning. It led to a shortage of products for both Ericsson and Nokia. In the process, Ericsson lost at least $400 million in potential revenue.
Similarly, hurricane Mitch caused severe damage to banana plantations of Central America in1998. The growers took over a year to recover and there was a prolonged loss of supply to Dole and Chiquita.
During February 1997 fire that broke at a parts factory owned by Japanese manufacturer Aisin Seiki Co. Ltd., a key supplier for Toyota, forced the auto giant to temporarily shut down production at most of its Japanese plants.
The 1994 Kobe earthquake in Japan, left California-based sound card maker Kelly Micro Systems and many other small companies without any supply of parts. Immediately after the attacks of September 11, 2001, U.S. auto manufacturers ran short of parts because transport trucks had been delayed at the Canadian border.
So, do you feel that globalization has made us more vulnerable? It is still a debatable topic, but let us understand in specific how hurricane Michael has disrupted the global supply chain:
- Effect on Energy Supply Chain
Around 13 oil platforms representing one-fifth of the total production in the United States, along the Gulf of Mexico were evacuated by the oil companies. This led to a volatility in the global oil prices.
- Impact on Logistics
The progress of the hurricane impacted the logistics when several truck terminals were closed down. There were several days of supply chain disruptions and shippers had to charge a premium to get the load delivered via alternate routes. Restoration of power and infrastructure snarled the supply chains further giving a severe blow to perishable goods like vegetables, meat, and dairy. The trucks that manage to ship through alternate routes cannot be used to their full capacity as some space is to be allocated for relief materials.
- Impact on Cash Flow
In the short term, the credit challenges will be due to the cash outflow for recovering property losses and disruptions in business. However, out of the several issues in the securitization market in the aftermath of hurricanes, one of the major impacts will be on cash flows into securitization trusts especially for auto dealer floorplans and loans.
How do we tackle the supply chain risks? The table below gives some real-world strategies used by companies in similar instances:
|Financial Mitigation||Business Interruption Insurance||1. In the fourth quarter of 2003, Palm Inc. received a $6.4 million insurance settlement insurance from an earlier fire at a supplier’s factory.
|Operational Mitigation||Sourcing and Inventory
|1. Playmates Toys mitigated the impact of the 2002 west-coast dock disruption by investing in inventory earlier in the year.
2. The U.S. Strategic Petroleum Reserve protects the U.S. against interruptions in crude-oil supplies.
3. Nokia’s multiple-supplier sourcing strategy mitigated the impact of the Philips Semiconductor disruption in 2000.
4. Chiquita’s multiple-location sourcing strategy mitigated the impact of the 1998 Hurricane Mitch disruption.
|Operational Contingency||Rerouting and Demand Management||1. Nokia responded to the Philips Semiconductor disruption by temporarily increasing production at alternative suppliers.
2. Chiquita responded to the Hurricane Mitch disruption by temporarily increasing production at alternative locations.
3. New Balance responded to the west-coast dock disruption by rerouting ships to the east coast and by air freighting supplies.
4. Chrysler responded to the air-traffic disruption in the immediate aftermath of September 11th by temporarily switching to ground transportation to move components from a U.S. supplier to the Dodge Ram assembly plant in Mexico.
5. Dell responded to the disruption in memory supply caused by the 1999 Taiwanese earthquake by shifting customer demand to lower-memory personal computers.
Chopra, S., & Sodhi, M. S. (2004). Supply-chain breakdown. MIT Sloan management review, 46(1), 53-61.
Tang, C., & Tomlin, B. (2008). The power of flexibility for mitigating supply chain risks. International journal of production economics, 116(1), 12-27.