The Extended Effect of Hurricane on Supply Chains

The Extended Effect of Hurricanes on Supply Chains Kaushik Sengupta Zarb School of Business, Hofstra University

4/8/2020

Major Natural Disasters: Last 15 years Indian Ocean Earthquake and Tsunami, 2004 Hurricane Katrina, 2005 Fukushima Tsunami, 2011 Hurricane Sandy, 2012 Hurricane Harvey, 2017

Product Distribution Patterns • Hoarding leading to stockouts • Bread, Milk, Eggs • Canned Foods, Bottled Water • Shovels, Electric Generators, Sand, Wood • 0-14 days warning • Specific geographic areas • Damages to infrastructure • Short-Long Recovery times • Product placement • Advanced positioning of fleet • Air Shipments where possible • Last Mile Delivery

2017 FEMA Hurricane Season After-Action Report

Current Situation

Wuhan – January 2020

Honk Kong – Mid-February

Tokyo – Early March

U.S. – Mid March

Costco – Mid-March

Very Stable Demand in Normal Times

Basic Products Supply Chain

Frequent Supplies Planned Based on Accurate, Reliable Forecasts

Local and In-Country Sourcing

Low Inventories

• • • HURRICANES

Why is this one different?

COVID-19

Short, definite time period Focused geographic region Established strategies of • Secondary sources • Supplier Resilience • Risk mitigation strategies

• Uncertain time period • Across all regions • No history of a similar event • Widespread effect on: • Many different products • Company resources • Distribution strategies • Companies are scrambling

What is happening to toilet paper?

Consumer Retail

Virgin Wood Pulp

Paper Mills

Recycled Wood Pulp

Packaging

Warehouse/ Distribution

Wholesale

Business Retail • • •

Wide Paper Sheets No excess capacity Not easy to increase capacity

• • •

Dependent on upstream supply Dependent on chain upstream supply Disintermediation will chain shorten time of delivery

• •

Products are different Channels and demand patterns are different

Paper Towels Toilet Paper Paper Wipes

Widespread and uncertain disruption • • • • • •

Capacities are not that flexible = especially on volumes Capacity addition is a long term investment JIT system of operations have minimized inventory holding Bulky products like toilet paper much more difficult to distribute What happens if employees fall sick?

Established distribution channels have been affected • Redirecting shipments  transshipment quantities and modes • Bypassing intermediaries  disintermediation patterns

Supply chain risks: Bullwhip and Short Gaming • Bullwhip Effect • Stock piling now will lead to reduced demand in the future • How would suppliers plan for the demand variations?

• Customer irrationality leads to very inaccurate forecasts • Gets worse the further you go up the supply chain • Short-Gaming • Retailers perceive shortage in manufacturing capacity • Retailers place redundant orders with multiple suppliers • Cancels all orders once one of the orders is received • Manufacturers end up with excess inventory situation and nowhere to sell • If this doesn’t go away soon • Panic buying can extend to other products • Supply chains become less efficient  Higher prices for everyone

The Food Supply Chain 4 months Your Grocery Store

Retail DCs

Regional DCs

Factories

• U.S. food supply chain is strong  stocks of staples are stable • Can only hoard that much fresh fruits and vegetables • But there are issues………

Food Supply Chain Distribution and Logistics • Established Distribution Channels are based on optimization models • Uses data related to costs, lead times, capacities

• Shipping companies carry the majority of food items • Port entry restrictions • Changing country specific requirements • Worker shortages and shifts • Air freight has drastically reduced  spike in prices

Food Supply Chain Sourcing • Logistics issues may eventually create supply shortages in some products • U.S. imports about 15% of its food • Produce, chicken, beef, dairy locally produced • 200,000 temporary guest workers come here on H2A visas • Mostly from Mexico • Farms in California may be affected – 1/3rd of U.S. produce • Farm products have a very short window of operation • Worker unavailability • Farm owners have to decide whether to farm the crops

What is the situation with ventilators?

• This is an extremely complex product • Requires close to 150 parts from suppliers spread across multiple countries • Almost impossible to find alternate sources of supply to increase production • Product and process reengineering will be required for auto and other manufacturers • Direct correlation between product features/variety and volumes • Possible to produce in higher volume a basic ventilator with no frills • Agreement among multiple manufacturers and suppliers • Can the number of parts be reduced?

• Demand has already spiked – extra units needed yesterday • Existing units have a long cycle with a typical patient

Short term issues are going to be unavoidable

Summary

Some long term implications are possible

Increase in prices Stockouts in certain items

Overstocking would be a reality in the future for certain products

Pandemic needs to be over to return to stable supplies and prices