SCRLC Newsletter, Q3

Hurricane Season Risk Management

The bad news is that 2010 is likely to experience more numerous and intense hurricanes than normal. The good news is that experts saw this coming early and have spread the warning.

Meteorologists uniformly expect this year’s season (June 1 through November 30) to be significantly severe with projections for 14-23 named storms. Satellite data is showing surface temperatures on the Atlantic from the coast of West Africa to the Caribbean, the breeding ground of hurricanes, to be abnormally high (two and a half degrees F above a recent 30 year average). Added heat provides more fuel for storm systems.

A second factor encouraging big hurricanes beginning in late summer will be the projected change from the El Nino cycle to the cooler La Nina over the equatorial Pacific. The warmer El Nino waters produce wind shears in the Atlantic atmosphere that effectively disrupt powerful storms. In the absence of such shears, hurricanes can develop on a near-vertical axis and grow extremely powerful.

“The atmosphere is a fickle beast — it can point itself in one direction and then change,” cautions atmospheric scientist Gregg Holland of the National Center for Atmospheric Research. “But everything we’re seeing is more extreme than in 2005, which generated some of the most powerful systems on record.”

The magnitude of disruption from a Category Five storms was dramatically underscored by Katrina in 2005. Prior to Katrina, standard risk management practices for supply chains dependent on access to the Mississippi largely entailed maintaining relationships with multiple shippers. Afterwards, in the wake of New Orleans being closed to all traffic for some time, the inadequacy of this approach became painfully apparent.

Supply chains with exposure on the Gulf of Mexico or southeastern Atlantic coast are particularly at risk.

With Puerto Rico-based manufacturing plants responsible for supplying to the U.S. and many other International markets, Merck has long had risk management planning in place to respond to hurricane disruption. “The biggest risk is power outage,” explains Julio Feliciano, Global Supply Chain Planning Executive Director. “In addition to robust contingency and recovery plans, we maintain inventory levels that assume a potential shut-down of two weeks.”

Foxconn, the Fortune 500 high tech contract manufacturer, is attuned to the importance of hurricane contingency plans because of the potentially exposed location of its Houston headquarters and production facilities. “After Ike (Category 4) in 2008,“ recalls Glenda Mcknight, Americas Region SER Program Management, CMMSG. “We were without power for several days.”

However, by having generators in place and networking with customers and off-site postings, disruptions were minimized.

“Our business continuity plan and emergency response plan had us very well prepared,” she recalls. “We knew what utilities companies to contact, we knew what outside resources we would need. We were able to be up and functional within a short while, a matter of days.”

Business Contingency Plans for this year’s hurricane season were reviewed earlier in the year. “We currently have generators in place at this moment ,” reports Ms. Mcknight. “We’re educating our people (they’re our number one concern) what to do here in the workplace as well as in their homes. We’re also concerned about our product, we’ll add additional security personnel in the event of a disaster. On-site temporary employment agencies will be able to provide replacement personnel if required. We’re in contact with our other world-wide facilities to make sure they can accommodate us and take our overload in the event that we have down-time.”

The worst case event would be a destroyed building. There are contingency plans in place for such an event at the highest level, says Ms. Mcknight. “Senior management would have decisions to make in that event. They’d have to determine the value-add of things like re-locating personnel, acquiring an alternative building and bringing in equipment.”