The Next Big One

May 4, 2011
Natural disasters are a certainty. Is your company prepared to cope with one?

Could it happen here? The shocking tragedy in Japan is a stark reminder that major earthquakes, not to mention hurricanes and other natural hazards, are a constant threat to communities worldwide and the interconnected global economy. While it is impossible to predict exactly when and where a natural disaster may strike, it is certain one will.

The earthquake that struck Japan on March 11, 2011, and the tsunami and nuclear catastrophe that followed in its wake, caused incalculable human misery, with nearly 30,000 people either dead or missing. The after-effects of the disaster will continue to be felt long after the actual event -- and not just in Japan. From automakers to the technology sector, thousands of businesses across the world that rely on Japanese companies as a vital link in their global supply chains also suffered. Japan accounts for a reported 20% of global semiconductor manufacturing, 60% of silicon wafers, and 90% of BT resin, an essential circuit board component. Due to the still-uncertain outcome of such issues as the failed Fukushima Daiichi nuclear plant, suppliers are struggling to recover from property damage and unplanned rolling power outages. The broken links in global supply chains may take many months, possibly years, to repair, causing substantial production slowdowns and consequent financial losses.

The question now circulating many boardrooms and the C-suite is this -- are we prepared, from a business standpoint, for the next big one? The reality of such a scenario is not if, but when. Multinational companies, and even middle market enterprises, have outsourced so much of their manufacturing to leverage labor cost differential that the risks of a broken supply chain must be considered relative to the gains. Fortunately, these risks can be managed and, to a great extent, mitigated at low cost.

The earthquake in Japan was preceded by a disastrous earthquake in New Zealand, and before that a devastating earthquake in Chile. These three countries are situated at the edges of a giant piece of Earth called the Pacific Plate, which geologists have dubbed the "Ring of Fire." Nine of the 10 largest earthquakes in history have occurred along this active tectonic plate, which covers almost the entire floor of the Pacific Ocean.

Among the larger cities in North America at risk along the "Ring of Fire" are Seattle and Vancouver, British Colombia. Those regions will someday experience a massive earthquake. The problem is that no one knows exactly when. Some geologists believe the recent disasters in Japan, New Zealand and Chile may be part of a sequence that has yet to subside -- a sobering thought, indeed. The threat of a natural disaster does not just reside in the Pacific. Many other regions of the world are similarly threatened, each of them a vital part of the world's economy. China's Pearl Delta is a region at great risk of earthquakes, floods and typhoons. Australia constantly confronts the threat of wildfires, Continental Europe braces for windstorms, and the United Kingdom confronts severe flooding.

The time has come for all companies to evaluate their preparedness for the next time Mother Nature strikes -- to balance the rewards of global procurement and manufacturing against the risk. Such due diligence must involve penetrating questions, such as the impact of a disruption to a critical sole source supplier. Companies should ask: Are my suppliers exposed to the risk of a natural disaster? Are their transportation corridors vulnerable? Are my suppliers' plants built to withstand earthquakes, windstorms or flooding? Are their facilities protected by automatic fire sprinkler systems, and are those systems earthquake-braced to prevent water damage? Do their plants have equipment bolted to the floor or otherwise reinforced to prevent movement if the earth shakes? Will their roofs withstand the force of a typhoon? If natural gas is piped into their production facilities, is there a gas shutoff valve in case of seismic activity? And so on.

If the response to these questions is negative, there are measures that can be taken to reduce the property and supply chain-related exposures. In fact, it may be economically advantageous for a manufacturer to invest in the physical upgrades required if the supplier lacks the financial means to make these improvements. Many of these enhancements cost little, given the vastly disproportionate return on investment they provide.

Implementation of this preparedness can be a challenge. While managers of corporate risk are cognizant of supply chain risks, they often are not in a position to do much about them. Companies need to tear down the silos separating supply chain managers and risk managers. Discussions about global procurement and manufacturing need to be undertaken, assessing the risks with the rewards. Pockets of vulnerability must be identified and mitigated.

No organization should depend exclusively on insurance, which cannot absorb the impact to a company's reputation with customers, partners and Wall Street, much less address a loss of market share.

Protecting the supply chain is the keystone to any successful business; the lack of it, its Achilles heel.

Bret Ahnell is senior vice president and manager of FM Global's Western U.S. Division. Prior to that, he was vice president and operations manager of FM Global's Dallas office.

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