Business Monday

August 10, 2014

As natural disaster threats around the world increase, so do risks to businesses’ customers, supplies

Companies well-prepared for a hometown hurricane aren’t necessarily disaster-proof: As natural-disaster threats worldwide increase, so do the risks for companies’ customers and suppliers.

The tsunami that devastated eastern Japan in March 2011 was a wake-up call for Ryder System.

The tsunami shut down Japanese factories that had been supplying automotive parts to Japanese automakers, including a large customer of Ryder that was forced to cut its vehicle production due to the parts shortage. That dented revenue of the Doral-based provider of commercial transportation services that year: Revenue from Ryder’s supply-chain support business increased just 2 percent in 2011 from the 2010 level.

Since then, Ryder and its auto manufacturing customers have developed comprehensive plans for disasters that put automotive parts suppliers out of business, at least temporarily.

“What we’ve seen over the last couple of years is [that] the extremity of weather really heightens awareness,” said Dick Jennings, Ryder’s senior vice president of supply chain operations.

The 22nd anniversary of Hurricane Andrew arrives on Saturday, and South Florida companies are well underway in their hurricane planning. Window shutters are on hand. Generators have been purchased. Contingency plans have been made.

But companies that are well prepared for a hometown hurricane aren’t necessarily disaster-proof.

These days, cautious companies, like Ryder, are planning how to manage the impact of any type of natural disaster on their suppliers and customers. That’s especially true as businesses depend on supplies from sources in other parts of the nation, or even the world. Earthquakes, tsunamis, wildfires, floods and other natural disasters — even those that occur thousands of miles away — can affect business in South Florida.

While many South Florida companies have contingency plans for the impact of a hurricane on their local facilities, not every company is braced for the impact of a natural disaster on its suppliers or customers, said Gary Reshefsky, a principal of Century Risk Advisors, an insurance broker with offices in Boca Raton and Coral Gables.

“Because we’re in a disaster-prone area in South Florida, we tend to think of it [disaster risk] from our standpoint and not what happens if our customers are gone, or if our distributors or suppliers are gone,” Reshefsky said. “That’s an area that a lot of businesses don’t focus on.”

That type of derivative disaster risk also encompasses the impact of natural disasters on air and sea cargo carriers. Disaster damage to seaports and airports cause costly delays in cargo shipments. Due to port damage during the severe Haiti earthquake of 2010, sea cargo bound for Haiti had nowhere to go.

Because of Haiti’s damaged port, “we had shipments stuck in the Bahamas for six months to a year because they couldn’t get shipped out” to Haiti, said Bradford Boyd, principal of Anova Marine Insurance Services, an insurance broker in Doral. In addition, “the ports are right there at the front line when a hurricane comes through.”

Risks are rising

Richard S. Olson, director of the Extreme Events Institute at Florida International University, said companies have a growing incentive to reduce the risk of disaster damage to suppliers and customers because the insurance and reinsurance industries increasingly account for such risk in pricing their coverage.

Natural disaster risk is starting to command more attention because it is increasing worldwide.

“The private sector’s awareness has spiked because of the vulnerabilities they’ve seen in their supply and production chains, and because the insurance and reinsurance industries are paying more attention to track recurrences of hurricanes, cyclones and typhoons,” Olson said. “There’s much more attention being paid by risk modelers to natural disasters.”

A 2013 report on natural disaster risk by the United Nations found that while the total population of the world increased 87 percent from 1970 through 2010, population grew 114 percent in flood plains and 192 percent in coastal areas with cyclone exposure. The U.N. said the data suggest that globalization and integration of the world economy has encouraged population growth at a faster pace in hazard-prone areas than in others.

The U.N. also reported that extremely destructive natural disasters in recent years have increased business awareness of the risk of maintaining far-flung global supply chains. These highly publicized disasters include the catastrophic earthquake that ravaged Port-au-Prince, Haiti, in 2010, the East Japan earthquake and tsunami in 2011, and Hurricane Sandy in 2012.

The U.N. report, entitled “Global Assessment Report on Disaster Risk Reduction,” also found that exposure to disaster risk is increasing in Miami and other port cities “owing to economic and urban growth … sea-level rise and climate change … Estimated exposure to economic assets is expected to increase from $416 billion in Miami in 2005 to $3.5 trillion in 2070.”

“We’ve put a lot of people and a lot of economic assets in harm’s way,” Olson said. “It’s a global pattern … Look at what we’ve put in South Florida.”

Olson described sea-level rise as “a slow-onset disaster” in densely populated South Florida that is stressing the area’s transportation systems, water supplies and other types of infrastructure, making them increasingly fragile.

The Extreme Events Institute at FIU “focuses on disaster risk reduction — and, being realistic, disaster risk management because we have so much exposure now, compared to 1980 or 1990,” Olson said.

Olson first saw the havoc a severe natural disaster can create in 1972, during an earthquake that devastated Managua, Nicaragua.

“I was a young Ph.D., and I was recruited to be a translator and interpreter for a social scientist, and I basically ended up in anarchy,” Olson recalls. “The army had broken up. The soldiers, the National Guard, were basically operating as independent entrepreneurs ... We basically lost the capital and about 20,000 people.”

Since then, he has helped foreign countries recover from about 30 major natural disasters, often by working through the U.S. Office of Foreign Disaster Assistance.

“I’ve seen just about everything that can go wrong,” he said. “Nature will provide the events. We [humans] provide all the raw materials for emergencies, disasters and catastrophes.”

Heico’s risks

Among the South Florida companies that do take into account the risks posed by natural disasters elsewhere is aircraft parts manufacturer Heico, based in Hollywood.

Heico has been fortunate, despite its dual exposure to natural disaster risk on both the east and west coasts.

Victor Mendelson, who shares the co-presidency of Heico with his brother Eric, said the company has experienced few losses from natural disasters even though half of its U.S. production facilities are clustered in hurricane-prone Florida and earthquake-prone California.

“Our largest state is Florida, with eight facilities; the second-largest is California, with seven,” Mendelson said.

Heico has a large portable generator that it can shuttle between its South Florida production facilities if a storm causes an extended power outage. But planning for recovery from a California earthquake requires a different approach.

While hurricanes usually come with plenty of warning and allow ample time for evacuation, “earthquakes can happen while people are at work,” Mendelson said. “And they don’t just throw debris on roads. They make roads disappear.” Precautions at the company’s California production sites include wrapping security straps around inventory and bolting shelves to the floor.

Mendelson said Heico management considers the disaster risk of areas where it chooses to do production work but never has rejected a location based on its exposure to natural disaster.

“Fortunately, for most of what we make we have alternative sources of subcomponents and raw materials,” Mendelson said. “Of course, the difficulty is delays, because a [backup] factory can't generally turn out a [Heico] product the next day.”

My ceviche

For many companies, of course, alternative suppliers are backups for a reason: They’re not the best, but they may be better than nothing when a supply chain breaks.

Consider the supplier options of Sam Gorenstein, co-owner of My Ceviche, a company that operates quick-service seafood restaurants in Miami-Dade.

Gorenstein is a picky wholesale buyer who buys only wild-caught fish, prefers fish caught near South Florida for their freshness, and buys most of My Ceviche’s finned inventory from a “super local” purveyor. If the primary purveyor went out of business due to a natural disaster, “we have identified different sources that are not local,” including importers of fish from Ecuador and Costa Rica, Gorenstein said.

“There’s plenty of seafood abroad. Obviously, it’s not the same as using local product … It’s tough, but we have to secure our supply chain.”

Ryder’s plans

Just about every company in Miami-Dade and Broward County has some kind of plan to recover from a power outage and hurricane damage to their premises.

Ryder, for example, has a detailed emergency management plan to maintain operational continuity by protecting employees and such assets as trucks, buildings and computer data in the event of a disaster. The plan is tailored to hurricanes.

Standard procedures in the face of an approaching hurricane include topping off the fuel tanks of Ryder trucks to mitigate the possible impact of fuel-supply disruptions. Ryder uses a centralized asset management system to track its truck and move them to different locations in the company's North American network to sidestep weather damage.

However, Ryder often sends additional trucks to cities in the path of a storm in anticipation of increased post-disaster demand for rental trucks in those cities, and to fulfill its obligation under a national contract with the Red Cross to provide trucks to the medical relief organization at disaster sites.

Ryder also has heavy-duty generators to keep large office buildings, maintenance facilities and rental stores open for business. The company has staged the generators at locations across the country and periodically relocates them to areas under a severe weather threat.

But Ryder executives long accustomed to the multiday warnings of approaching hurricanes have learned the hard way, through their experience with the Japanese tsunami, to take a broader view of the business risks of natural disasters that happen with little or no warning.

“In order to plan [for natural disasters], there are different categories,” said Gregory Greene, executive vice president and chief administrative officer of Ryder. “You have to know what’s coming … and then there’s stuff like the tsunami that nobody saw coming. So we kind of changed our mindset about it, knowing events can be big and we might not even see them on the radar screen.”

The company’s comprehensive plans for disasters that affect customers in the automotive manufacturing industry includes the predetermined location of a “joint crisis center” at either a Ryder facility or a Ryder customer facility.

The elements of these contingency plans also encompass the maintenance of buffer stocks of automotive parts that could become scarce after a natural disaster, the identification of backup-parts suppliers, and estimates of how much time the backup suppliers would need to start delivering vehicle components to Ryder's automotive manufacturing customers.

“There is literally a plan for every part,” said Jennings, Ryder’s senior VP of supply chain operations.

But the company has found that in some cases, alternative suppliers just don’t exist and so has learned to take that into account in its planning.

Jennings said one post-tsunami obstacle to automotive manufacturing in 2011 was the absence of alternative suppliers of a palette of vehicle paint pigments that a Japanese company had been producing. “They were the only ones in the world that were doing that,” he said. “Unfortunately, they were dismantled [by the tsunami] and just unable to produce.”

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