One basic precaution, Subramaniam says, is ensuring that goods are stored on a second floor in a fortified structure, safe from the elements during a hurricane or a flood. “If multinationals can’t change where they are making products or where they are warehousing them, they can at least bring to bear loss-prevention techniques so that when the wind does blow, they know the building will remain intact,” he says.
The companies that face the most difficult issues are those with less control over the placement and robustness of their critical facilities. For example, electronics manufacturers like Hewlett-Packard, Dell, and Cisco Systems typically depend on an outsourced manufacturer — Flextronics is a well-known one — to make and assemble large components in their products. These contract manufacturers have another tier of suppliers beneath them and then at least one more tier below that. “You can have a high-tech product from Dell or HP, but actual manufacturing gets done by Flextronics, which turns to other people who are not on their payroll,” says FedEx’s Schmitt. “The further you get down that chain, the further away it is from the United States.”
Adding to the complexity is the fact that the large electronics companies are taking the products manufactured by a distant supply chain and distributing them all over the world. Some experts recommend that companies relying on contract manufacturers can, if nothing else, stipulate in their agreements that losses will be shared in the event of a natural disaster that disrupts the flow of supplies.
Information technology systems that support global supply chains must also be considered when planning for natural disruptions, says Subramaniam. It’s one thing to safeguard physical production, warehousing, and transportation, but if IT systems are knocked out, companies lose the ability to manage their supply chain and engage with customers. Customer-specific data is particularly important to safeguard. “Every major organization is looking at how it can back up the data centers, which represent the ability to service clients,” Subramaniam says.
A potentially salutary by-product of the growing fear of natural disruptions is a new willingness among companies and their suppliers to exchange detailed information about what is happening throughout the supply chain, using software tools that enable collaborative decision making and that in many cases can lead to increased efficiency between trading partners, says Leroy B. Schwarz, professor of management at Purdue University. By making commodities, logistics, procurement, and pricing information more transparent, affiliated companies can come to the aid of a supplier or sub-supplier that suddenly loses access to raw materials or has its distribution network curtailed by an unexpected event before a bottleneck is created.
Whether or not one subscribes to the theory of global climate change, the expansion of supply chains into new geographies means that companies must continue to educate themselves about natural disruptions — and spend a bit more money to build redundant factories, weatherproof their facilities, and pre-position inventory. Despite the heightened risks, however, Schwarz says companies see such large cost gains from extending their supply chains into lower-cost countries that “nothing is stopping the trend.”