Supply Chains Get Resiliency Test from Harvey and Irma

Many companies and procurement organizations take pride in the resiliency of their supply chains, which have rarely been tested more than in the last three weeks, from back-to-back hurricanes of historic proportions.

Last week, as Institute for Supply Management^® (ISM^®) released a supplemental Report On Business^® assessing the economic and supply chain impact of Hurricane Harvey hitting Texas and Louisiana, Hurricane Irma was wreaking havoc on the Caribbean and about to do the same on Florida. While the impact on lives and property is the most important cost, the supply chain implications will be felt far beyond the storms’ paths.

In its supplemental Hurricane Harvey report, ISM asked its Manufacturing and Non-Manufacturing Business Survey Committee members to assess how six KPIs could be affected by supply shortages. The indicator respondents feel will most likely “at least somewhat negatively impacted” over the next three months is prices (67 percent), followed by supplier deliveries (56 percent), inventories (32 percent), production/business activity (32 percent), new orders (23 percent) and employment (12 percent).

“We expect some short-term disruptions, and we'll see some price increases,” ISM CEO Thomas W. Derry told Phoenix radio station KFNN on Monday. “We've already seen it at the gas pump, for instance. And that's not surprising — about 20 percent of capacity for refining crude oil the United States is in Texas. So, the critical priority, I think, is to get the refining capacity back online, and you'll see some shortages of products that are related to crude oil or refined from crude oil, (like) certain petrochemicals and feedstocks. But otherwise, I think the impact is going to be fairly minimal.”

Given Texas’ importance to the (1) oil and gas and (2) petrochemicals industries, respondents expect fuel and petrochemical feedstocks and derivatives could be in short supply in three months. Plastic resins, chemicals, electronic components, electrical components and building materials are among the commodities that could be in short supply. Already, Rubbermaid’s parent company saw its stock take a hit in part to continued shutdowns of its resin suppliers in Texas and Louisiana, which has driven up costs.

Derry told KFNN that some supplier-delivery issues will be alleviated when refineries and facilities in Texas have power restored.

“There was the explosion a chemical plant near Houston, (for example),” Derry said. “When you lose power, you lose the ability sometimes to manage your operations properly. In that case, it was refrigeration. So, losing power is a big deal. Many of the refineries were shut down out of abundance of caution (and) as a safety precaution to bring them back on line. But when you get power restored and people get access to the facilities, it's not going to be difficult. Within a week or two, we should be back at operating capacity and working down any backlog in terms of supplier deliveries and getting back to normal.”

In other Harvey- and Irma-related supply chain news:

●With deliveries halted and power outages forcing station closures, around 40 percent of gas stations in Florida had no fuel on Tuesday.

●Shippers in the Bahamas are breathing a sigh of relief, as ports suffered less-than-expected damages and should be able to reopen sooner.

●An executive at a supply chain risk analytics firm told Freightwaves, “We’ve heard that truck capacity is running about 30 percent of what would normally be expected today in the Southeast (U.S.).”

●Even McDonald’s could have earnings negatively impacted by the storms.

Such factors as fuel and capacity shortages are easily visible, but procurement practitioners must keep in mind that natural-disaster implications are among the “below the waterline” factors in the total cost of ownership iceberg. Those factors are sometimes difficult to anticipate or are not evident in the immediate aftermath of an event. Bindiya Vakil, CEO and founder of Resilinc, a Milpitas, California-based provider of supply chain risk management research and analytics, told Material Handling & Logistics, “The closer you are to the suppliers in the region, the sooner the disruption will hit your supply chain. If these suppliers are in your (lower-tier) supply chain, and if you have not mapped your supply chain dependencies, the capacity and material constraints will be realized in the weeks to come.”

The rebuilding and recovery after Harvey and Irma will take months, and supply management professionals will likely be in constant respond-and-adjust mode. However, Derry told KFNN that supply chain resiliency means that, in the wake of a natural disaster, links that have not been impacted pick up the procurement slack.

“We've got 80 percent of U.S. capacity functioning just fine,” Derry said. “And that's certainly enough to keep the economy chugging along. I would expect — and I've seen some data analysis that says this — at the national level for the next quarter, we might lose two-tenths of a percent of GDP as a result of the two storms. The economy can easily absorb that and get back on course, with possibly even an expansionary effect as demand increases for rebuilding and reconstruction in, say, six months.”