Disasters prompt supply chain risk reconsiderations

Factory workers joined sandbagging operations in mid-October to keep their companies operating in Thailand's Nawa Nakhon industrial estate despite ongoing flooding./ AP

BANGKOK—As flooding in Thailand disrupts supply chains in many industries, the event—along with Japan's March earthquake and tsunami—is prompting many to consider aspects of supply chain risk that might have been previously overlooked.

While many expect global sourcing to become an even larger factor for businesses going forward, recent events are prompting companies to consider the geographic concentrations of suppliers, the need for backup suppliers and re-engineering processes to accommodate backup components should supply chains be disrupted.

With an estimated 45% of the world's hard drive production located in Thailand and flooded plants affecting production by major manufacturers such as Seagate Technology Inc. and Western Digital Inc., some analysts say the hard drive disruption could affect personal computer production through the first half of 2012.

The flooding also has had a major impact on the auto industry, where disruptions at Thai auto manufacturing plants and parts producers reportedly is expected to result in lost production of 250,000 vehicles worldwide.

Many Japanese companies relocated production to facilities in Thailand after the March earthquake and tsunami, a report suggested last week. London-based law firm Reynolds Porter Chamberlain L.L.P. said the move to Thai facilities helped many Japanese companies mitigate their losses after the Japan disaster. But many now face further losses as a result of the floods in Thailand.

“The problem for insurers who provide business interruption cover to Japanese manufacturers is that they have to cover the losses stemming from the Thai flooding because so many businesses moved some or all of their supply chain there,” Daniel Saville, legal director in the reinsurance and corporate insurance department of Reynolds Porter, said in a statement. “Moving production from Japan to Thailand was "Plan B.' The question now is whether those businesses have a "Plan C,'” he said.

Gerry Alonso, senior vp of claims at Factory Mutual Insurance Co., which does business as FM Global, in Johnston, R.I., noted that the “slow developing” nature of the Thai catastrophe makes it difficult to get a handle on the extent of losses. And, the duration of the flooding could exacerbate the losses.

“It's been a month and the water hasn't receded,” Mr. Alonso said. “That amount of time with water in a building, the damage could be far greater.”

“We've had some clients that have been able to procure boats and divers and go in there, but that gives you an idea of what you have.” he said. “The frustrating part from a claims perspective, you can't really start to assess losses until the water's gone.”

William J. Montanez, director of risk management at Oak Brook, Ill.-based Ace Hardware Corp. and a member of the board of the Risk & Insurance Management Society Inc., said his company hasn't been affected by either catastrophe, though it relies on overseas suppliers. “We look very carefully at our supply chain and we do a fair amount of sourcing from China and that part of the world,” he said.

“I think we're going to continue to go down that road,” Mr. Montanez said. “At the back end, we have to look at safeguarding and how we can make it less risky to do it.”

With the Thai floods raising awareness of the risk of geographical concentrations of suppliers, Linda Conrad, director of strategic business risk management at Zurich Financial Services Ltd. in New York, said her company has been working with clients to identify where suppliers and industries are concentrated.

Going forward, she said, “I think this illustrates the need for better continuity plans,” including backup supplier arrangements, diversifying the locations of suppliers and using different backup suppliers than competitors.

Ms. Conrad also said companies are starting to ask existing suppliers about their own continuity plans. “I think that's a positive development that's come out of this,” she said. “People are also starting to do a lot more scenario analysis,” including calculating the potential impact of having to re-engineer processes if alternative components or parts don't match the specifications.

In general, the recent supply chain disruptions are leading many companies to embrace “that resiliency mindset of: Let's try to think through some hypotheticals and plan for this when it costs us less than when we are in a crisis,” Ms. Conrad said.

Ace Hardware's Mr. Montanez sees a similar response. “A lot of people are starting to go down this road, predictive modeling and what are the business continuity issues and how are we going to incorporate that into our strategic plan and the enterprise risk management process,” he said.

He noted that recent events have raised stakeholder expectations about companies' awareness and management of supply chain risks.

“At the end of the day I think the onus that's going to be on risk management and management in general is how can we get a preview of what the future might look like and how will we respond to it,” Mr. Montanez said. “That's what ERM is all about.”

Sarah Veysey contributed to this report.