From collapse to recovery

1 August 2007
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02 August 2007

Recent floods and earthquakes have disrupted thousands of businesses worldwide. How can purchasers help minimise the damage? Helen Gilbert reports

Natural disasters hit the headlines last month on both sides of the world. Flooding in the UK and an earthquake in Japan have disrupted hundreds of thousands of lives and businesses. But for our profession there was one positive outlook - the willingness of buyers to work with suppliers to minimise disruption.

For example, car giant Toyota was one of several manufacturers affected when an earthquake in Tokyo last month forced Riken Corp, a supplier of piston and sealing rings, to halt production.

As a result, Toyota's factory lines in Japan were suspended for three days. As part of the firm's philosophy of Genchi Genbutsu, or 'go and see for yourself', the firm provided 200 staff to do precisely that, and help Riken with its recovery.

Alan Day, managing director at State of Flux, a supply risk management consultancy, says it's essential to help "business critical suppliers" in such situations. "In that instance an organisation should make sure it looks after its suppliers. It's an opportunity to strengthen the relationship. On the flip side they are not going to do it to the detriment of getting the products and services needed, so they have to balance that. Speed is of the essence and it's important to have plans [alternative suppliers] in place."

Sheffield City Council is all too aware of how important back-up strategies are. Recent flooding forced them to stockpile sandbags and they purchased more than 35,000.

"We used our normal supplier - we call it the first supplier - and also our second and third supplier in an interim period when our first supplier had some difficulties providing them to us due to high demand," says a council spokesperson.

But while it might seem obvious to have contingency plans and risk management processes in place, the message is still failing to get through to some people. The Chartered Institute of Management (CIM) confirms what many suspect, that there has been a dramatic increase in the number of businesses hit by flooding in the UK. Nearly 30 per cent of businesses were affected in 2007 compared to 9 per cent in 2006. That figure is set to climb further. Even so, CIM claims only 57 per cent of businesses have plans in place to deal with water damage.

Insurance is also critical. Steve Foulsham, technical services officer at the British Insurance Brokers Association, says organisations can buy cover to protect their business if damage occurs at a supplier's premises. Known as supplier extension cover, the policy is an extension of Business Interruption Insurance, which firms can take out to cover their lost turnover.

Foulsham explains: "If one supplier suffers a loss at their premises, say as the result of a flood, the buyer can utilise the supplier extension policy as his business will be affected because of the incident at the supplier's."

Alongside insurance, Foulsham urges businesses to produce business continuity plans (BCP) and test them regularly. "It might be worth the buyer asking his major suppliers if they have a BCP," he adds. "If they have they are more likely to be able to work through a disaster and supply the buyer than if they didn't."

As natural disasters appear to increase in frequency it makes sense for buyers to be prepared.

Alex Hindson, associate director of enterprise risk management at Aon Global Risk Consulting, says: "If suppliers are truly critical and single sourced then some kind of tracking or early warning system might be appropriate to allow time to implement contingency plans. To be informed is to be forearmed."



SMaug2007

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