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The Real Impact of Natural Disasters

John Manners-Bell explores the real impact of recent natural disasters from around the world and their implications on the wider supply chain

Natural disasters are those that can either result from geo-physical events (such as earthquakes and tsunamis), hydrological (floods), meteorological (tornados, hurricanes, storms, blizzards etc.), or climatic (heat waves, droughts etc.). Potentially they could also include space-related events such as solar flares or meteor impact. Obviously in some cases disasters are a combination of multiple categories, in which case the severity of the disaster can be exacerbated. An example of this is Hurricane Katrina – a storm which not only resulted in enormous damage in its own right, but led to the breach of the levees protecting New Orleans from the Mississippi causing massive flooding.

In economic terms, the United States is most at risk from meteorological-related disasters due to the location of important economic centres in sub-regions prone to severe weather events. In 2012, nine of the costliest natural disasters occurred in the United States, according to insurance company Swiss Re, and all were weather-related. The worst of these was Hurricane Sandy which resulted in estimated losses of $70 billion.

Climatic disasters also had a major impact on the United States in 2012. A heat wave led to severe crop failures in the US Corn Belt resulting in agricultural losses of $11 billion. This was the worst ever drought, in financial terms.

Outside of the United States, Italy was the worst affected country in 2012. A series of relatively minor earthquake tremors resulted in an economic loss of $16 billion. Of course, measuring in humanitarian terms (numbers of casualties, for example), disasters in Asia can far outweigh those in the developed world. However, as they affect predominantly poor areas, the economic damage in dollar terms is low.

The catastrophic earthquake in Sichuan province, China, stands out not only for the vast cost of re-construction, but also for the fact that its impact was highly localized. For global supply chains, the most costly events were the Japanese tsunami of 2011 and the Thai floods. This was because the impact was largely on the upstream distribution – disrupting the flow of goods and production around the world.

The greatest impact of the hurricanes in North America was largely on downstream distribution. Retail and consumer supply chains were severely affected, thus leading to a humanitarian disaster.

The Thailand Floods: Impact On High Tech Supply Chains

In 2011 Thailand suffered one of the worst floods in five decades. The floods began in July, but steadily worsened throughout October, and were mainly limited to northern and eastern areas around Bangkok. However, these affected areas were home to hundreds of manufacturing facilities that were completely flooded.

Japanese car makers that had just started to recover from the earthquake and tsunami were faced with shortages of key parts made in Thailand. Toyota and Honda both had to halt production at facilities even in North America because their Thai suppliers were flooded.

The hard disk drive manufacturing sector was particularly affected; Thailand is the second largest market for production of hard disk drives after China. Toshiba, the fourth largest producer of hard disk drives, halted all of its production in Thailand. Seagate was less impacted and did not have to stop production because its factories were in the northeast where flooding was less severe. Shortages of supplies lasted into the first quarter of 2012 and prices at their height increased 20–40 percent.

As a result of the disruption semiconductor chip manufacturer, Intel, warned that its revenues and profits would be lower than expected because of shortages of hard disk drives in the industry. Due to the closures, Intel's customers were not able to source sufficient volumes of hard disk drives to meet demand, and cut down on their microprocessor inventories. Intel warned that the shortages would continue into the first quarter of 2012.

Intel was not the only manufacturer struggling. Dell also missed sales targets in its quarterly results, due, in part, to shortages of hard disk drives. However, management said that it had made strategic purchases of inventory elsewhere in an attempt to overcome this problem. This inevitably came at a cost.

Thailand supplies about 40 percent of the world's market of hard disk drives. The supply chain problems which high-tech manufacturers faced re-opened the debate over the wisdom of sourcing from suppliers clustered in such a vulnerable area.

The Eyjafjallajokull Volcano

The eruption on 14 April 2010 of Iceland's Eyjafjallajokull volcano (the second eruption in a month) caused havoc throughout Europe and beyond due to clouds of ash which were blown across Europe, resulting in the decision by air traffic control regulators to shut airspace on grounds of safety. The impact of this first eruption in 190 years continued even after airspace restrictions were lifted.

The regulators' decision to shut down airspace in Britain, Norway, the Netherlands, Germany, Austria, Belgium, Denmark, Finland, France, Germany, Latvia, Luxembourg, Poland, Slovakia, the Czech Republic, Bulgaria, Sweden and Switzerland cost airlines some $200 million per day from cancelled flights and caused the European economy to suffer significant losses in lost business.

The obvious reaction by logistics planners was to use other modes of transport for intra-European movements, such as roads and short sea shipping. The main problem was handling inter-continental traffic. As a contingency, freight forwarders and airlines set up hub activities in airports in southern Europe. For example, UPS flew some freight to Istanbul and moved it into Europe by road. Other providers used North African or even Middle Eastern airports. The issue with using facilities in the Mediterranean, however, was one of capacity. It was impossible to move the combined volumes of the Northern European airports through a handful of airports in southern Europe or North Africa.

The supply chain consequences were felt further afield than in Europe, and no more acutely than in east African markets. Here, perishable air cargo, such as fresh fruit and flowers, backed up at airports and, given the lack of appropriate temperature-controlled storage facilities, much of it was ruined. This caused considerable hardship to exporters and their employees.

All flights to and from Europe were affected on all routes and many were cancelled. Specifically for the trade ‘Far East Westbound’, this situation impacted on already tight capacity and led to additional bottlenecks. Some carriers in China stopped accepting cargo due to unavailable warehouse space at the airports, and grounded most flights.

This article is an excerpt from Supply Chain Risk by John Manners-Bell.