Natural Disasters Interrupt Flow of Global Supply Chains

In a recent article on Penn State Live, Rebekka Coakley interviewed Smeal’s Christopher Craighead about his thoughts on supply chain disruptions due to natural and manmade disasters. According to previous research conducted by Craighead, managers in charge of supplier selection need to consider the risks involved at the beginning of the process instead of waiting until all other supply decisions have been made.

The global marketplace tends to expand each year. Does this mean more companies face devastating disruptions of operations due to natural and manmade disasters?

Craighead: Absolutely! Think of it as stepping into a boxing ring -- it’s not a matter of if you will be hit by disruption, but how often and how hard. Some companies may face disruption on a weekly or daily basis, but most don’t get the press coverage that hurricanes and worker strikes garner. There are all types of disruptions that can occur at any point: smaller ones may be caused by traffic congestion or even a small fire; a short-duration fire can result in millions of lost dollars.

What are examples of natural, manmade and pandemic disasters most people have witnessed within a lifetime?

Craighead: The terrorist attacks of Sept. 11 were major not just due to the loss of life but also in business disruption. The West Coast port strike in 2002 basically cost various industries billions of dollars. SARS, Hurricane Katrina, volcanic eruptions, anything newsworthy doesn’t just affect life but supply chains. Even the threat of a disease like H1N1, which didn’t pan out the way they thought it might (thankfully), still altered the way businesses were run.

How severe will the BP oil spill be to various industries?

Craighead: The impact of disruptions is hard to determine until the event completely unfolds -- it’s much easier to look back on them. We do know how this oil spill will affect significant portions of supply chains; certainly any company in the area has been affected. Tourism and fisheries are certainly affected in that region, but again, anyone may feel the impact. Companies coming into nearby ports that were shut down or slowed down will have a harder time bringing their products into the U.S.

It feels like we’ve had a lot of disruptions, but major interruptions occur every year. More may be reported this year, but because concern for such disruptions is increasing, some companies are rethinking strategies and might find some sources of supplies closer to the United States.

What are some of the biggest supply chain interruptions you’ve seen within the past five years, and which disasters were at fault or had the biggest impact?

Craighead: I think if you looked at them historically, there are probably two to three major widespread disruptions each year. Weather and natural disasters are often the culprit -- there’s always a hurricane, earthquake, volcano or tornado going on each year. With two major earthquakes and the volcano eruption, this year may end up being one of the worst. Also, weather experts are predicting one of the worst hurricane seasons ever for the United States.

What kind of efforts are businesses making to prevent too much disruption?

Craighead: It’s been my observation that companies are very concerned about the potential impact of disruptions and their potential short- or long-term effects. Disruptions are one of the biggest threats to the revenue stream of almost any company. However, company planning and preparedness sophistication varies dramatically. There are a lot of tools and planning that a company can do in advance before a problem occurs. Some companies are doing a lot, some very little. Companies that continue to outsource and have global supply chains are going to have to get better at dealing with disruptions.

Further, some may be rethinking their supply chain design decisions: perhaps they will no longer have an offshore supplier, but find one near shore in Mexico or somewhere in South America. Global supply chains are so complex, and as a result, the chance of a severe disruption increases. Due to this complexity, even a small disruption can propagate thousands of miles away, making it more global and more widespread.

In general, larger companies are extending greater efforts to manage the risks because they have more at stake. Automobile manufacturers, big retailers and pharmaceutical providers with extensive global supply chains have a lot at stake and therefore are embracing techniques to deal with interruptions and the various risks they have in being a global business.

Is there a single event that took place in the last 10 years in the United States that has disrupted operations for a number of businesses, and if so, did it have an impact on the rest of the globe? Have we fully recovered?

Craighead: In the last 10 years the event that had the biggest disruptions and biggest impact was probably Sept. 11. The loss of so many lives is hard enough to deal with as a society but this was an intentional act of terrorism that affected everything. Hurricanes aren’t malicious; Sept. 11 was really hard to deal with and probably had the biggest impact on global supply chains in the last decade. Have we fully recovered ... no, I don’t think we ever will.

Is there one specific industry that is affected the most by certain disasters?

Craighead: If you have widespread disruptions, they affect most businesses. Businesses that feel it the most or have more at stake are often those dealing with time-sensitive or critical products. The more companies “put in the boxing ring” the more severe the impact.

Christopher Craighead is an assistant professor of supply chain management at The Penn State Smeal College of Business. His primary research interests lie in the area of strategic sourcing and supply management, with a focus on global supply chain disruptions/risk. In addition to his research, Craighead teaches classes in strategic procurement to undergraduates.