How to Not Lose Your Shirt When Disaster Strikes Your Supply Chain

June 1 is the official kick-off of hurricane season ? a timely reminder for retailers to take stock of the contingency plans they have in place in the event their supply chains are washed out by a powerful storm or impacted by another significant weather event or natural disaster. 

Why do you need a contingency plan for Mother Nature? For starters, weather- and climate-related disasters have caused $2.4 trillion in economic losses and nearly 2 million deaths globally since 1971, according to the World Meteorological Organization. And more recently, you may recall the transportation and logistics shutdowns during the winter of 2014 that took a $15 billion bite out of U.S. businesses. These numbers alone should be reason enough to develop a contingency plan to help your business stay afloat during a significant business interruption, like a hurricane.

While retailers are aware of the risk natural disasters present, many are lacking the preventive measures to mitigate the impact of a supply chain disruption caused by a natural disaster. The 2015 BDO Retail RiskFactor Report, an analysis of the most recent 10-K filings of the largest 100 publicly traded U.S. retailers, included natural disasters as one of the industry's top 10 risks. Ninety-six percent of retailers noted risks related to natural disasters in the analysis, up from 70 percent in 2010.

The growing number of retailers who identified this as a risk could be attributed to the increasing frequency at which severe weather events are occurring. In 2012, Hurricane Sandy impacted retail distribution centers in the northeast due to severe flooding and power outages, forcing major retailers, ranging from Amazon to Diane von Furstenberg, to tell customers to expect delays on shipments. In 2014, an unusually harsh winter stalled shipments, forcing some manufacturers to shut down for days, delaying deliveries to some retailers.

Moreover, the 2016-2017 hurricane season is predicted to be the strongest in over four years with 12 named storms on the horizon. With so much at stake, from customer satisfaction to stock prices to employee safety, it is imperative that retailers have a contingency plan in place to help mitigate the impact of supply chain disruption. As you review or develop your disaster response plan, here are a few tips to keep in mind:
  • Identify a response team to take the lead on communicating with employees and external stakeholders. Following the activation of an emergency preparedness program, it is critical to communicate with employees and business partners about their well-being, as everyone will be dealing with potentially significant — or even devastating — personal and professional issues.
  • Collaborate with and diversify the locations of your suppliers. Use diverse suppliers and production locations to more adequately protect the supply chain and afford your business greater flexibility and choice. It is also advantageous to work collaboratively and closely with suppliers to develop a resilient supply chain that can withstand extreme weather. You should also feel free to ask your suppliers for their disaster plans and review them regularly.
  • Review your insurance policy. Even if a business does not suffer physical damage, it may still be eligible for business interruption claims. For example, if customers or suppliers have been flooded and cannot receive the business' goods or services, the insurance policy may include what is referred to as "Contingent Time Element coverage." Non-physical damage coverage for business interruption losses can also include lack of access to facilities (road closures), government declarations of emergency, cancellation of events or loss of utilities, among others.
  • Maintain contemporaneous documentation. To say that the hours and days after a disaster are hectic is an understatement. This is a trying time for businesses as they work to rebuild and recover. However, keeping careful records even during disruption is critical. Email records around current market conditions, cancellations of sales, or suppliers/customers being impacted are critical to preserve as they can be extremely valuable to a business interruption claim.
  • Get the right team on your side. A major property claim can take several months to resolve, and the complexity of the issues that may arise requires external advisors to look out for a business' interests while management focuses on what is important: rebuilding and recovering.
  • Establish milestones for claim recovery. Following a major catastrophe, resources are often stretched thin. It is important to create milestones and hold all members — from the adjusting team to internal stakeholders — accountable for achieving those goals.
Preparing for the unpredictable is never easy. By implementing these baseline measures, retailers can be well prepared to minimize their supply chains' exposure to any weather event or natural disaster.

Rick Schreiber, partner and leader of the Manufacturing & Distribution practice and partner of the Consumer Business practice at BDO USA, LLP, has more than 23 years of public accounting experience. He can be reached at [email protected]. Clark Schweers is the principal at BDO Consulting and head of the Forensic Insurance & Recovery (FI&R) Practice. He has significant experience advising consumer and retail products organizations on the quantification and compilation of complex insurance claims for insured businesses. He cn be reached at [email protected].