Severe weather can affect all areas of the country. Tornadoes, snowstorms, wind, thunderstorms, and hurricanes affect us all and can have a major impact on our businesses.
For instance, the 2021 hurricane season has already begun with five active storms, including Hurricane Elsa, which made landfall in the United States earlier this month. The National Oceanic and Atmospheric Administration (NOAA) expects between 13 and 20 named storms this year, with about 6 to 10 of those storms anticipated to become hurricanes.
The effects of these storms on manufacturers can be wide-reaching, regardless of where a manufacturer is located. If a manufacturer’s supplier is located in an area affected by a storm, the manufacturer may face supply chain disruptions, extended lead times, force majeure declarations, and increased costs. For instance, when Hurricane Harvey landed in southern Texas and the Gulf Coast in 2017, it caused severe disruption to many chemical and plastic factories located in that area. Manufacturers were unable to obtain goods from these companies, and many factories made force majeure declarations because of their limited abilities to produce. Later that year, Hurricane Irma struck southern Florida. The impact of the two storms led costs of raw materials including lumber, steel, and plastics to increase by double-digit percentages.
In addition, oil and gas costs often rise after a hurricane. Hurricane Katrina, a category 5 hurricane that hit the Gulf Coast in 2005, severely hurt refinery and production capacity in the United States. According to the U.S. Senate’s Joint Economic Committee Report on the impact of Hurricanes Katrina and Rita on oil prices and the economy, capacity concerns caused the federal government and some European countries to release oil from their emergency stockpiles. Despite these actions, the average weekly gas price increased 41.6% compared to the same period the previous year. As a result, manufacturers using material derived from oil experienced significant cost increases because of these storms. Further, freight costs increased substantially, impacting many manufacturers and businesses across the nation.
Because hurricanes and other major weather events are inevitable, manufacturers who may be impacted by severe weather should take time to consider their vulnerabilities. Manufacturers may take the following actions to help mitigate the effects of hurricanes and other severe storms:
- Create a disaster recovery plan.
A disaster recovery plan is a written document that includes actions to take in the case of a disaster, including a severe weather event. Typical plans may include reviews of resources, budgets, data, suppliers, and compliance requirements that may be impaired as the result of a disaster. Businesses without a plan should consider the risks and impacts of a disaster, and the steps to follow in the case a disaster occurs. Businesses with a current plan may consider reviewing it periodically as well as if business conditions change or a disaster occurs, to ensure the plan’s effectiveness.
- Revisit your insurance coverages.
Businesses should review their insurance coverages at least annually. This review should not just focus on the coverage and its financial limits. It should also include changes made by the insurance carrier to the plans, trends in manufacturing as well as in the insurance industry, and needs of the business that may not be addressed in the current plans. For instance, manufacturers located in a hurricane-prone geography should be aware that typical flood or property insurance may not cover devastation due to a hurricane unless proper riders are implemented. Similarly, goods damaged in transit due to severe weather may not be covered by general policies, without similar riders. It is important to understand the limitations of your insurance coverage.
- Evaluate your supply chain.
Do you have suppliers located in high-risk areas? If so, do you have plans in place to obtain critical goods in the case of a disruption? Know alternative ways to obtain critical materials. Also, stay abreast of major storms and their anticipated paths. Some suppliers may be able to supply extra goods on short notice or expedite future deliveries if a storm may be approaching.
- Consider your inventory metrics.
Many manufacturers work actively to maintain certain inventory metrics, such as inventory turnover ratios or days sales of inventory on hand. However, there may be good reasons to forgo the metric in the case of potential supplier disruption. During times of severe weather, consider changing your metrics – therefore allowing higher inventory levels – to ensure your ability to supply in the case of a storm.
- Think about your IT infrastructure.
If you are in an area that often experiences severe weather, thinking about your IT infrastructure and the preservation of data is especially critical. Physical storage can become damaged, heightening the importance of offsite storage or other cloud-based storage options. If you are not located in these geographic areas, you may not think about a storm’s potential impact on your IT infrastructure. The frequency of scams, phishing attempts, and other cybersecurity attacks often heightens during and after a natural disaster. Ensure you have proper training, protection, and other protocols in place to protect from an attack. .
To discuss the impacts of severe weather on your manufacturing business, contact a member of HBK Manufacturing Solutions or your HBK Advisor.