As the first quarter of the year passes, the early morning gym population is dropping to pre-holiday levels and high-calorie comfort foods are returning to pantry shelves, just as they do every year. Sticking to personal New Year’s resolutions is as tough as it has always been. But somewhat surprisingly, sticking to 2014 resolutions for our businesses often turns out to be no easier.
Many times, the best-intentioned plans to make investments to promote the long-term resilience of our companies, by upgrading our facilities and strengthening our capabilities, tend to wither in the harsh reality of the need to “beat the street” at the end of the quarter. In the case of supply chain continuity investments, for example, this can be a costly and short-sighted mistake, especially as it relates to weather-related risk management.
While opinions about the exact causes of the new climate volatility may differ, there is no question the losses associated with extreme weather events so far this year have already cost more than $1.5 billion in insured losses, according to estimates.
Atlanta’s choice not to fund a more robust public transportation system, for instance, came home to roost at the end of January when ice and snow paralyzed the metro area and stranded motorists for as long as 48 hours. Similarly, prior decisions by various U.K. authorities to unfund river and estuary dredging programs left the south of England earlier this year at the mercy of the worst flooding since the rains of 1776.
This extreme weather volatility is not likely to abate soon, and the costs associated with it will only increase. Reinsurer Swiss Re has estimated severe weather in New York City alone causes an estimated $1.7 billion in annual economic losses and that number could rise to $4.4 billion yearly within the next 40 years.
These eye-watering statistics indicate it has become critical for corporate leaders to re-evaluate the potential impact of natural disasters on their businesses -- not as an occasional risk management exercise, but as an integral part of normal business operations and investment.
As global supply chains continue to expand and become more complex, and as companies continue to invest trillions of dollars in hazard-exposed regions, it is critical to commit to a small number of “process” investments, even when the threats seem remote. If financial executives can stick with just three risk-related resolutions, we believe they should be the following:
- Identify and measure potential supply chain exposure from natural disasters
- Implement and test an emergency response plan
- Involve the board of directors in enterprise risk management
Supply Chain Exposure
Increasingly complex supply chains and sometimes opaque networks of sub-contractors pose substantial threats of logistical breakdowns for many global businesses. While identifying where the major risks lie and measuring their potential impact can be a tiresome and time-consuming, doing so is a crucial business investment that must be approached in a systematic and integrated way.
Supply chains often develop in a piecemeal fashion to satisfy short-term needs dictated by specific economic conditions. Without close examination, hidden risks can get built into the system and compounded at each step of the way.
Only by looking at the system at a macro level can these hidden risks be brought into view. These may be infrastructure weaknesses in a specific country or the concentration of too many critical suppliers in regions exposed to a high degree of natural hazard, such as earthquakes, floods or typhoons.
This risk analysis needs to be a living dynamic process, not a one-time exercise. Making these audits part of an annual cycle ensures the temptation to skip this important examination can be managed appropriately.
Emergency Response Plan
No one likes drills. They can be time-consuming, expensive and take thinly stretched human resources away from the intense focus on operational effectiveness that contributes to financial success. Decades of business experience, however, demonstrate there is no substitute for well-organized, in-depth simulations to uncover the challenges organizations face in real emergencies.
These include the protection of facilities against extreme levels of wind and water; the resilience of the infrastructure in a given geography; the availability of emergency response resources such as back-up power, emergency equipment and sufficient vehicles. It also includes training in emergency leadership and the soundness of decision-making structures for a given type of emergency, whether that is fire, flood, storms or terrorist kidnapping.
Testing an emergency response plan on a regular basis provides important insights into the efficacy of the core components of an organization’s readiness. Informed actions can make the difference between getting a business back on its feet quickly, or suffering losses with a significant impact on the bottom line.
Risk Management and the Board of Directors
Except in some specific industries, or in the aftermath of an extreme weather event, supply chain risk management is rarely a subject for regular discussion at the board level. This is a mistake.
Getting the board’s agreement to a long-term orientation toward supply chain risk as a significant management issue is something that requires perseverance. Board members should agree to take oversight in this critical area. Board oversight means the issue becomes a staple subject of board level conversation, as it should be.
With such oversight comes thoughtful discussion of risk and, when needed, agreement to investments that reduce the company’s exposure to the business interruptions that can come from supply chain exposure. Board-level issues get attention and are managed.
It is equally true that if a business process is on the board’s agenda, resources to make enhancements in that area are much easier to pry loose.
As with all resolutions, commitment takes time and perseverance. We often fail a few times before we succeed. In the long term, however, these resolutions are essential to an organization’s resilience.
Jeffrey A. Burchill is senior vice president and chief financial officer at business property insurer FM Global.