Hurricane Sandy Will Reveal the Cost of Poor Supply Chain Management

Satellite photo of Hurricane Sandy on October 29, 2012. CREDIT: NOAA/ NRL Monterey Marine Meteorology Division

Hurricane Sandy could cost insurers between $5 billion and $10 billion, according to a report in the Wall Street Journal. And Bloomberg recently reported that the bill for economic damage is poised to top $20 billion.

“Hurricane Sandy caused massive disruptions to US businesses and threatened billions of dollars in damage to a region packed with corporate headquarters, retail stores and transportation hubs,” said the WSJ story.

Having just come back from presenting at the European Supply Chain Risk Management conference in Barcelona, these numbers, unfortunately, are not surprising.

I listened to some major global companies, covering sectors such as life sciences, food & beverage and consumer electronics, and came to the realisation that apart from a couple of sectors, many have failed to take on board the lessons learnt from last year’s catastrophes.

There is still not enough alignment between the procurement function and group risk. The silo mentality – driven by localised profit and loss (P&L) accounts – has created opposing objectives, such as procurement trying to significantly reduce inventory and group risk and operations trying to reduce the level of business interruption should disasters occur.

Critical Dependencies

Cost reduction measures continued to be implemented with a focus on: reducing working capital and streamlining supply chains with single sourcing strategies.

These approaches increase the dependency of companies on a greater number of critical suppliers, leading to a large loss in terms of business interruption and additional cost of working following the loss of one of these suppliers. Moreover, many companies have failed to drive effective business continuity planning across their supply chains.

President Barack Obama receives an update on the ongoing response to Hurricane Sandy during a conference call with FEMA Administrator Craig Fugate, Dr. Rick Knabb, Director of the National Hurricane Center, and John Brennan, Assistant to the President for Homeland Security and Counterterrorism, in the Oval Office, Oct. 26, 2012. Alyssa Mastromonaco, Deputy Chief of Staff for Operations, and Richard Reed, Deputy Assistant to the President for Homeland Security, are seated at right. (Official White House Photo by Pete Souza)

All this said, once the full extent of the damage from Sandy is analysed, I have no doubt we will see large business interruption (BI) losses, not just as a result of property damage at supplier sites, but as a result of power failure to suppliers leading to the stoppage or partial stoppage of production.

I expect to see many cases where companies have inadequate and ineffective BI insurance – either because their supplier extension policies don’t provide enough cover from physical damage at their supplier’s site or because, whilst there has not been any physical damage at the supplier site, supplies have not be produced and delivered due to the reported power outages.

For the majority of these non-damage business interruption cases companies won’t have purchased stand alone non-damage related supply chain interruption policies due to the burden of disclosure or the cost.  They will not be covered!

About Tom Teixeira

Tom is the London-based Practice Leader, Integrated Risk Management, where he focuses on aerospace, oil and gas, mi…
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One Response to Hurricane Sandy Will Reveal the Cost of Poor Supply Chain Management

  1. Vijeesh Papulli says:

    You have brought out a valid point. It’s post calamaties like Hurricane Sandy when organizations realize the results of bad decisions in the past and that’s human psychology! Many would have learned from past natural disasters and taken some steps to mitigate these risks but there will be many who haven’t done much and left to rue their mistakes!

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