Disaster-Proofing Your Supply Chain: A 5-Question Checklist for Execs

In 2014, there is renewed optimism among many business leaders about the resurgence of U.S. manufacturing and the potential for significant new facilities to be built In the United States for the first time in decades. Rising labor costs around the world and starkly lower energy costs in the U.S., combined with some highly publicized supply chain issues in recent years, are causing executives to look more closely at manufacturing opportunities stateside.

In a recent media interview, Bayard Winthrop, CEO of American Giant, one of the world’s most popular hooded sweatshirts, discussed publicly how expanding manufacturing in the U.S. has provided greater flexibility and customer responsiveness: “After solvents caused blotting on t-shirts at the Los Angeles factory recently, [Winthrop] was able to get his production chief in California on the phone with his fabric supplier in North Carolina. The issue was fixed within a few hours and only about ten yards of fabric went to waste.” As Winthrop told the reporter: “This wasn’t a myopic quest to make everything in America. You just can’t get that kind of quality control with overseas suppliers.”

However, as it relates to supply chain risk, the U.S. is by no means an unalloyed positive. The variety of natural disasters is more commonplace in the U.S. than in almost any other country in the world. Such threats raise significant questions for companies considering new site locations here. Recent extreme weather events have led executives, in addition to civil authorities, to evaluate how they can “harden” facilities and infrastructure to make physical assets more resilient.

We believe, by contrast, that truly resilient businesses are weighing such risks and rewards a little differently. Rather than just assessing how well-protected an individual facility is in a vulnerable location, they are considering whether that business operation needs to be situated in an exposed location to begin with, whether that is a flood plain, tornado alley, or hurricane pathway. However, corporate decision-makers with this mindset are too few.

Consider the challenges experienced by technology companies with operations in Thailand during and after the severe floods of 2011. Hardening facilities in advance to respond to negative weather patterns allowed many factories to remain operational; however, the infrastructure collapse caused by heavy rain rendered many of these types of precautions meaningless because workers and managers were unable to travel to work afterward. To truly be organizationally resilient, a company needs to evaluate the impact of a system-wide, worst-case scenario. Those companies that took a systemic view in Thailand before 2011 had a significant competitive advantage as a result of their planned resilience.

In the immediate aftermath of a significant supply chain disruption, business leaders tend to increase their focus on this type of system-level planning. Unfortunately, however, the critical awareness raised immediately following a natural disaster can fade from memory far too quickly. This is not surprising. We know from neuroscience research that it is human nature to hope for the best rather than plan for the worst, and once the stark reality of a natural disaster dims in the memory, we naturally tend to revert to this behavioral mean. Only exceptional leaders exhibit the self-knowledge to correct for this natural human tendency.

It is true that not all damage or business interruption from extreme weather or natural disasters can be avoided, and to some commentators, this is something to be celebrated. As Nassim Taleb wrote in his book Antifragile, frequent non-catastrophic exposure to negative events actually makes us more resilient. Events such as the floods in Thailand, when successfully managed, are not only an opportunity to gather critical information about how to manage through disasters—they also provide priceless information that can be useful under normal circumstances.

For instance, when systems temporarily seize up, alternative processes are spontaneously created that can serve as models for doing things more cheaply and more effectively under ordinary conditions. Sometimes, ad-hoc solutions invented during extreme events and under duress lead to industry-transforming ideas that please customers, put competitors at bay and make an organization that much more resilient.

For example, Superstorm Sandy prompted some organizations to take a closer look at “just-in-case” management, a recent reaction to gaps in just-in-time business practices, that can ultimately accomplish more than just minimizing property damage during an extreme event.

In the case of manufacturing, some businesses have learned that having auxiliary distribution centers in multiple regions are the best way to ensure business continuity in the event of a disaster at primary facilities. Those firms have seen how an expanded distribution center network can minimize supply chain disruptions and lead to quicker delivery times to customers as well as reduced transportation costs compared to normal business conditions.

Effective planning in a resilient business not only requires us to set aside our bias for wishful thinking, but also asks us to find the confidence to confront worst-case scenarios and address risk in a more strategically thoughtful way, by posing these types of questions:

1. How will we do business if our critical systems—manufacturing, storage, electronics and distribution—are rendered inoperable?

2. How can we resume operations quickly following a business disruption, and what will we need to do so?

3. Are there any particularly vulnerable aspects to our business that we can eliminate as opposed to harden?

4. What are the pieces of our business that are so critical that a major investment in hardening or redundancy would be justified?

5. Despite taking many proper precautions, are we still vulnerable to disruption due to outmoded infrastructure in the region?

This brief list is merely a sample of the kinds of questions a truly resilient business should ask itself. The answers are often surprising. They reveal unexamined opportunities to enhance business efficiency, develop innovative solutions and even uncover new markets.

Organizations that pursue resilience as passionately as other strategic activities will find that passion amply rewarded.

Business leaders intent on bringing manufacturing back to the United States have the hopes of many Americans behind them, but these hopes can only be satisfied if they plan for supply chain risk here as carefully as they should anywhere else in the world.

Jon Hall is executive vice president of FM Global. He is responsible for various divisions within the organization, including underwriting and reinsurance, claims and enterprise learning, marketing, engineering and research, information services and Affiliated FM, a member company of the FM Global Group. Hall is based in the FM Global corporate offices in Johnston, R.I.