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