Thai Flood Waters October 2011
Revered playwrite George Bernard Shaw once said “Success does not consist in never making mistakes but in never making the same one a second time.”
Recently there was a highly-publicized construction project close to my neighborhood east of Toronto, Canada. The new office building was to be the centerpiece of a business improvement area revitalization initiative. After a long period of planning and obtaining the required permits, spades finally hit the ground. Excavation began, but soon it was found that the ground below street level was too sandy to support the building. The project was scrapped, the hole was back-filled, and the lot is now a lovely grassed parkette.
The planners made a big mistake. It cost someone a lot of money. Feelings were hurt.
As my old friend Randy would say, “Too bad, so sad, let’s move on.”
Would it be a smart move to encourage another builder to plan the construction of a similar edifice on that same spot? Would you insure the building if they managed to construct it?
This, it appears, is exactly what is happening in Southeast Asia, but on a much grander scale.
Recent natural disasters in the region, which have dramatically impacted the supply chains of major industries, are costing insurers big money. It has been estimated that floods in Thailand, which adversely effected over 1,000 factories, has cost insurers $20 billion.
Writing for Reuters News Agency today, David Fogarty and Clare Baldwin reveal some rather frightening trends with respect to risk management, or lack thereof:
Global insurance companies are struggling to get a grip on their flood exposure in Asia nearly a year after one of the world’s costliest disasters hit Thailand, with executives fearing an even worse event looms in the region.
Some firms learnt from the Thai floods, with new defences built to protect multi-billion dollar industrial estates in the country. Insurance premiums have also gone up, but factory construction in flood-prone areas remains rampant across Asia.
Insurance executives say the industry is vulnerable to another major flood, with scientists identifying the coastal plains of southern China as one area at greatest risk.
“When I go and look at these industrial parks and ports in some of the low-lying coastal areas, I just have to stand back and think: Who’s insuring these things? Who’s done the risk assessment?” said Adam Switzer, a coastal scientist at the Earth Observatory in Singapore.
“What I consistently see on the coasts throughout Asia is that we’re still making the same sorts of mistakes.”
The Thai floods hit nearly 1,000 factories feeding global supply chains – particularly in the auto sector – costing insurers an estimated $20 billion.
In the rush for development that has lifted millions out of poverty in Asia, many factories have been built along coasts, especially in river deltas. According to insurance industry executives, most construction was done without long-term historical data on floods and storms.
On top of that, rising sea levels, increasing rainfall and more intense storms – together with more people and infrastructure – mean the risks have multiplied.
“We should be identifying these pockets of exposure earlier,” said Scott Ryrie, Asia-Pacific vice chairman for Guy Carpenter, a global insurance industry services firm.
The goal, insurance executives say, is to break the cycle of paying for the same losses over and over again.
After the Thai floods, global reinsurer Swiss Re reassessed flood risk in emerging markets. The report’s No. 1 risk was China, whose vast industrial estates are at the heart of global manufacturing, making everything from iPads to brake pads.
Among other Asian countries listed, Malaysia was 5, Indonesia 7 and India 10. Thailand was ninth.
Munich Re and Guy Carpenter have also reviewed flood risk models, particularly for industrial parks in Asia.
“A new risk awareness has to set in along the entire value chain,” said Tobias Farny, Munich Re’s Asia-Pacific chief executive. “The exposures present need to be defined, described and ring-fenced in order to become insurable.”
Ryrie said insurers in many countries have contained risks by imposing tighter payout limits and pushing for better historical data to improve risk models.
WHERE NEXT?
At an industrial estate on the flat plains north of Bangkok, where Japan’s Toshiba makes lighting and home appliances, workers rush to finish a 9.5-km (6-mile) concrete and earth dike that is 1.5 meters (5 ft) higher than the old one.
Behind them, a brown stain runs along the factory buildings where floodwaters lingered for two months, knocking out major foreign-owned manufacturing operations and triggering a flurry of business interruption claims around the world.
Many in the insurance sector agree that an even bigger loss is likely in China, the motor of global manufacturing, where large areas of factory estates are vulnerable to flooding and storms.
Fierce competition among Chinese insurers, low premium prices and a lack of long-term disaster risk assessment mean insurance companies are potentially exposed to big losses.
In an article that I published earlier this year (Japan One Year Later: What Did Supply Chain Practitioners Learn from the Tsunami?), I asked the somewhat rhetorical question, ”are they [companies engaged in offshore manufacturing] willfully ignoring threats to their supply chain in favor of pursuing short-term profit?”
In that article I pointed to three pieces of advice offered by Carla Huang, writing for EBNonline:
A key strategy is to create flexibility within the supply chain. Below are some suggestions for companies looking to achieve more flexibility in their supply chains to address fast-changing business needs while simultaneously managing any risks involved.
Avoid sacrificing flexibility for efficiency: For years, and especially following the recent recession, companies have focused on lean manufacturing. By streamlining manufacturing, lowering inventory, and converting to a just-in-time model for the movement of goods, manufacturers stand to benefit from lower and often more predictable costs and increased profits due to higher efficiencies. While manufacturers benefit greatly from lean manufacturing processes, they must walk the fine line between efficiency and inflexibility.
For example, relying on a single source or route for materials and parts might be more cost effective, but in this scenario, operations can quickly break down if the supply chain is disrupted. Utilizing supply chain partners with large networks is one strategy manufacturers can follow in order to minimize potentially negative effects on lean operations. With access to more resources and experience, these supply chain partners can develop flexible supply chain solutions to normalize operations as much as possible.
Think business continuity vs. disaster recovery: An additional step manufacturers can take in an effort to minimize the impact of catastrophic events on their operations is to develop plans that focus on business continuity in the wake of major disruptions. Many manufacturers have basic disaster recovery plans in place to handle emergency scenarios, but true business continuity plans should identify the operations that are critical to maintain and focus on strategies for maintaining them. These areas usually include production, fulfillment, distribution, accounting, and customer service.
Use visibility technologies to your advantage: It’s critical that companies plan ahead to manage risks, especially in highly competitive industries such as high-tech, in which companies cannot afford disruptions in operations. Visibility tools and technologies enable manufacturers to track and monitor supply chain events and patterns as they happen (or even before they happen), putting companies at a significant advantage when it comes to risk management. Investing in the latest visibility technologies will help protect your supply chain and your company’s ability to stabilize operations quickly if a disaster or other unexpected event should occur in the future.
Disasters like the one in Japan are beyond our control. This is why manufacturers must focus on the things that are in their control and make supply chain adaptations wherever possible to prepare for the unexpected. A flexible supply chain should be a priority for every high-tech manufacturer and embraced across the company for supply chain and business impact.
Perhaps now is the time to open our eyes to the real risks.
Your comments and feedback are welcome.
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