The Supply Chain
The petrochemical industry must learn painful but necessary lessons
from Hurricane Harvey’s impact on the supply chain.
By Yves Thill, Vijay Kasi, Vincenzo Sposato and Brandon Kennedy
When Hurricane Harvey made landfall on the Gulf Coast of Texas in August, the damage predictions were dire. But the relentless, unprecedented rainfall that caused such massive flooding and destruction caught even the pessimistic off guard.
The impact of Harvey on the region’s petrochemical industry has been substantial, causing ripple effects across the entire supply chain. The vast majority (90 percent) of Texas ethylene capacity and more than 60 percent of all U.S. capacity came to a halt, and around 20 percent (more than 3.5 million barrels a day) of U.S. refining capacity was shuttered for nearly two weeks.
The port of Houston, the second-busiest port in the United States, was closed for more than a week, and a rail embargo of the Gulf Coast was in effect for two weeks. To make matters worse, key supplier plants were flooded due to an unexpected levee failure outside Houston.
Harvey’s aftermath brings into sharp relief the importance of the Gulf Coast region to the entire petrochemical supply chain. Specifically, it makes up:
* 80 percent of North American ethylene capacity and 20 percent of global capacity;
* 67 percent of North American propylene capacity and 13 percent of global capacity; and
* 80 percent of North American styrene capacity and 15 percent of global capacity.
Virtually all petrochemical suppliers in the Gulf Coast were offline for at least a few weeks and some will be offline for months. When such a significant portion of North American capacity goes offline for this much time, the effects will be felt across numerous industries for months to come. Demand does not slow down because of any natural disaster and, in certain cases, it can even increase. This is the case for packaged food and water, cleaning supplies and temporary shelter.
Even for those able to restart relatively quickly, there was almost a month’s worth of pent-up demand they needed to contend with – on an infrastructure network that had sustained considerable damage, including washed-out bridges, damaged rail lines and limited truck access. This will continue to impact petrochemical suppliers, their customers and the economy at large for some time.
Petrochemical spot pricing immediately peaked, and this will continue to be felt as customers try to manage their demand against the volume allocations they have received from their suppliers. This puts petrochemical producers at risk, as many customers were forced to turn to their suppliers’ competitors to fill the gap.
Lessons from the Past
The world has seen its share of natural disasters in recent years, from a succession of powerful hurricanes, to earthquakes that give rise to massive destruction and deadly tsunamis, to volcanic eruptions that spew ash and disrupt global flight patterns. These natural catastrophes not only result in an enormous amount of damage locally, they also can cause today’s lean supply chains to come to a screeching halt, especially when back-up plans are limited.
About 1.2 million Americans currently live in areas at risk of “substantial damage” from hurricanes, according to the Congressional Budget Office – a number that is expected to increase nearly tenfold by 2075. This means that the disruptions caused by Harvey will not likely decrease moving forward, and it is crucial that we begin to fundamentally shift how we manage supply chains in this new reality. To do so, we need to look at the lessons learned from each natural disaster so we can be better positioned for the future.
Anticipate disruptions. If we could accurately forecast all disruptions, few of us would be in our current line of work. However, as supply chains get longer and increasingly global, the probability of facing some level of disruption becomes much higher. Where once contingency planning was a “nice to have,” today it is an ongoing necessity. Suppliers to and customers of the petrochemical industry need to work together to manage the impacts of significant natural disasters. That includes creating detailed disaster recovery plans, prequalifying alternate suppliers across the entire supply chain and conducting scenario planning to identify potential weaknesses in the supply chain.
Enable information flow within supply chains. When disaster strikes, companies need to be able to communicate rapidly both up and down the supply chain. No one can prevent a hurricane from striking, but ensuring suppliers and customers are well informed of the latest developments has proven to be a true competitive advantage. The information we take for granted might prove to be vital to a supply partner’s operations.
Build a risk management culture within the organization. An assessment of each supplier’s risk profile needs to be embedded in the vetting process. Companies also need to qualify alternative suppliers for crucial products and qualify alternative products when products are limited by geography. While this may come at a short-term premium, it effectively serves as a relatively low-cost insurance policy in a worst-case scenario.
Build the value stream map of the entire supply chain. Creating a detailed map of the entire supply chain will enable greater understanding of each individual link, including the supply sources and geographies. Who depends on what, and from whom? This seemingly banal exercise has proven to be essential for accurate scenario planning, which ultimately becomes mission-critical when dealing with a major disruption caused by a natural disaster.
Take advantage of software and tools to perform ongoing risk assessment. Simulation, alert, and disaster recovery software will enable teams to analyze and evaluate different scenarios. Harnessing big data inputs can help determine the likelihood of specific events.
Planning for the Future
Harvey may not have been the worst hurricane in terms of the Saffir-Simpson scale, but it has exposed the fragility of the petrochemical supply chain. Companies that treat the outcome as a unique opportunity to learn and offer competitive advantage will be in a strong position to mitigate the results of future disasters.
Yves Thill, partner; Vijay Kasi, vice president; Vincenzo Sposato, manager; and Brandon Kennedy, senior analyst, are with A.T. Kearney.