Numerous natural disasters have shown we routinely underestimate -- or simply ignore -- the degree to which calamities disrupt businesses and the supply chains. Many are unaware or don't understand their risks and thus ignore taking steps to avert the potential devastating business impact until it's too late. Lack of preparation cost businesses worldwide more than $50 billion in the first half of 2008 alone. Disasters can damage a company's production, cash flow, market share, reputation and even stock price. In a tenuous economy, CEOs should ensure their companies are taking steps necessary to protect the interest of their many stakeholders.

Already, in China, the mainland has suffered some of the most devastating natural catastrophes it has seen in decades. A fierce winter has produced sleet and ice across the region knocking out power, bursting pipes and freezing nearly every activity in industry requiring transport during China's busiest traveling season. Several rounds of heavy spring rains submerged thriving farmlands, triggered landslides, and flooded streetsforcing millions of evacuations A massive earthquake shook Sichuan province's entire infrastructure, causing billions in monetary losses. Now, a typhoon season well underway has already battered the country with several violent storms.

Companies can help themselves by taking a more proactive stance to protect their supply chain -- seeing beyond the notion that insurance alone is enough to cover losses. Businesses must incorporate approaches to safeguard each link in the chain with effective measures to reduce the attendant risks. It begins with taking time to identify key products, revenue drivers, core business processes and locations in the supply chain -- from procurement of raw materials to delivery of finished goods -- as well as the types of naturally occurring events that could disrupt them. The next step is to prevent these "pinch points" from manifesting into a disruption.

Prepare for the Worst

Flood -- Staying Above Water

In FM Global's 175-year history as a worldwide business property insurer, studies show that flooding costs companies between an estimated $2 billion and $3 billion in losses annually -- making it the most costly natural hazard globally. Ongoing analysis shows that a site within a published flood zone is five to seven times more likely to suffer a flood loss of $100,000 than to suffer an equivalent loss due to a fire or explosion. In addition, the average flood loss is about one and a half times as great as the average fire loss.

The key to preventing flood loss is to understand a site's exposure. It is critical to be aware of how much warning time you may have, how deep the floodwater is likely to get, the impact of fast-moving water might be, and how long it might take for floodwater to recede. Waves of little more than 3 ft. in height can cause structural damage, and can demolish lightweight buildings, too.

Looking solely at flood maps leads people to think locations outside flood zones are impervious to flooding due to urbanization, where changes in the landscape have altered the flood path. A site's design and layout itself can create a localized flood hazard if the storm-water management system is overtaxed. Once you know what to expect -- including an estimate of the damage and disruption a flood will cause your business -- you can take action to reduce your risk.

Preparation Tips

To reduce the impact of flood on your business, there are practical steps you can take immediately.

For example:

  • In greenfield projects, set your foundation levels with a safety factor well-above the 500-year flood level
  • Move critical items (i.e., stock, supplies, ,etc.) out of basements and away from low-lying areas
  • Make permanent physical changes to keep floodwater out of key areas -- for example, permanently elevating important items (i.e., key electrical, computer, etc.) above predicted flood levels
  • Develop a flood emergency response plan, or FERP

Organize your FERP

FM Global studies show that facilities with a well-organized FERP experience up to 70% less damage, and resume operations sooner, than locations with an inadequate FERP or none at all. An effective FERP includes a reliable method of warning, the authority to act and a well trained team with adequate equipment and emergency actions tailored to the amount of expected warning time.

Windstorm -- Battling the Breeze

Buildings fail when they are not designed to withstand the varying wind speeds. However, the potential for significant property loss and costly business interruption can be mitigated, even in the most extreme cases. Simple, low-cost steps can help to ensure the continuity of your business operations and to keep the supply chain intact.

The costliest impact of these storms is the damage that results when the building's envelope is torn open and lets wind and rain into the facility. Below are the most frequent and damaging ways that the building envelope can be opened:

  • Roofing covering and insulation tear up and off from support members
  • Lightweight wall covers, such as exterior insulating finishing systems (EIFS) or aluminum panels, tear away from the structure
  • Windows broken by windblown debris, such as surrounding trees
  • Windows are blown in by the pressures exerted on the building

During a windstorm, damage to the building's structural frame seldom occurs. By comparison, a small breach in the building envelope can destroy a large area of the interior. Keeping the building envelope sealed is one of the most effective ways to prevent windstorm damage.

Preparation Tips

Solutions to mitigate property damage and business interruption can be inexpensive. For example:

  • An FM Global loss prevention engineer noticed a roof at a client's facility in Japan was missing some standing-seam roof clamps -- a similar roof design for buildings in typhoon-prone countries such as China, Korea, or the Philippines. One week later, the client had a roofer add an additional 100 clamps. When Hurricane Isabel struck the facility three weeks after the roofing enhancements, the roof remained intact.

Other low-cost solutions include:

  • Moving stored products off the floor or from basement levels
  • Having ample waterproof tarpaulins to cover vulnerable equipment, material in process and finished goods
  • Removing outdoor furniture, rubbish containers and similar lightweight objects that are likely to become windblown missiles
  • Shielding windows with hurricane shutters or plywood

Surviving the Squall

All loss prevention recommendations and solutions for preventing and mitigating property risks -- are secondary to the most important action a client can take to prevent damage from a windstorm -- knowing where you're vulnerable. This requires you to identify the specific weaknesses within your and your suppliers' facilities, as well as the potential operational impact your business could face following the damage incurred from a windstorm. If the business can divert production to another site, then downtime will not affect the business nearly as much as if the site were the sole supplier of time-sensitive products to the worldwide market.

Earthquake -- Holding Steady During the Shake

Improving the earthquake resistance of buildings and other structures has received attention recently. However, less effort has been directed at improving the earthquake resistance of a building's contents, because fully mitigating shake damage to every piece of in-place equipment may require time-consuming and expensive modifications. A substantial reduction in the risk of shake damage to a facility's contents, however, can be cost-effectively achieved by restraining items that are not only vulnerable to earthquake-induced damage, but are either valuable or important to production.

A starting point for the mitigation of shake damage to a facility's contents is to anchor tall, objects, such as storage racks; or free-standing electrical. Experience shows these items, if unanchored, can overturn during strong ground shaking and sustain heavy damage; however, they typically perform well if restrained.

All Shook Up

During a recent 10-year period, FM Global clients experienced approximately $315 million in earthquake damage to their facilities. Roughly 75% of this amount can be attributed to shake damage. The extent of shake damage depends on both the intensity of the shaking and the physical characteristics of a facility, and usually involves either minor to moderate damage to many items, or major damage to just a few items. The most severe ground shaking occurs in the region nearest to the earthquake epicenter, but also at sites thathave unfavorable local geologic conditions, such as soft soil.

Preparation Tips

Here are some suggestions to keep your items -- and your profits -- from falling in the event of an earthquake:

Now:

  • Restrain important tall, slender objects by installing expansion anchors through holes at the base of each object.
  • Install automatic earthquake-actuated shutoff valves where flammable gas or liquid is piped into buildings.
  • Incorporate earthquake response into emergency response team (ERT) activities.
  • Involve a business continuity expert in new construction projects, fire-protection-system installations, and modifications and alterations to existing protection.

Soon:

  • Implement corrective measures as soon as possible to resolve any seismic upgrade recommendations for fire following earthquake and fire-protection systems.
  • Develop minimum seismic design standards and specifications for all construction, and for new equipment installations.
  • Develop an earthquake recovery plan.
  • Survey your facility contents to determine if the sliding or swinging of objects during an earthquake would result in significant loss.
  • Engage a qualified engineer to design earthquake modifications for tall, slender objects that cannot be anchored through existing holes in their bases, and for other facility contents that can be damaged from sliding or swinging.

The Supply Chain Connection

Supply chain decisions tend to be procurement-oriented and are driven by keeping manufacturing costs down. Inevitably, this means sourcing solutions in geographies remote from the corporate domicile, which can multiply the number of risks taken on by the enterprise. While manufacturing can be outsourced, you cannot outsource the various risks across the business. Multiple sourcing can help, but if located in one geographic area prone to one or more of the natural catastrophes described above, several locations (or perhaps one super-critical one, which becomes a bottleneck) can be exposed to unavoidable physical damage, and subsequent business and logistics disruption. The impact of such events, however, can be prevented, or at least mitigated.

Inclusion of the evaluation of these risks attached to the selection of supply chain sites at the due diligence stage can be a practical extension to the process. Buildings, machinery and equipment that are risk-prone to potential damage from natural hazards can avoid potential damage from loss with proactive organizational continuity planning. Supplier cooperation is critical and a close-working risk management relationship (between customer and supplier) helps. With greenfield projects, new opportunities to negotiate and invest in robust supply chain facilities at the outset can be presented, and therefore can eliminate the need for more expensive retrofits later.

By implementing an enterprise-wide supply chain risk management program -- armed with measures to prevent and mitigate property losses and costly business interruption -- savvy companies can be prepared to handle the wind, the water and the wobble.

Dennis Bessant is Vice President, Asia Operations at FM Global which helps companies develop robust property insurance and engineering solutions to protect their business operations from fire, natural disasters and other types of property risk. www.fmglobal.com


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