The Supply Chain
Advanced planning makes the difference when you have to compete for resources.
Second in a series of articles that explores preparing for and recovering from natural disasters.
By Yves Thill, Vijay Kasi, Vincenzo Sposato and Brandon Kennedy
For petrochemical buyers, keeping supply-chain information flowing during a natural disaster is the fastest route to recovery. When Hurricane Harvey struck the Gulf Coast in 2017, it became immediately clear that there would be substantial impact to operations, but it took weeks to assess longer-term implications. With nearly all ethylene capacity shut down in Texas, nearly a quarter of U.S. refining capacity halted and major logistical disruptions, it was critical for petrochemical users to react quickly.
There are several steps companies can take to mitigate a natural disaster’s impact on operations. It starts with establishing an emergency response center long before a disaster strikes and staging it for rapid activation when a crisis looms. As the event unfolds, systematic communication and detailed mitigation strategies address developing conditions. Follow-up reviews after restoration, with a focus on continuous improvement, provide valuable learning for the future.
Work on Your ERC
Natural disasters produce exceptional circumstances that disrupt the normal way of doing things. Consequently, it takes a sophisticated organizational structure and process to minimize short- and long-term damage. This is especially true for petrochemical users, whose suppliers are often concentrated in areas particularly prone to natural disasters, leaving entire supply chains vulnerable to system-wide delays and shutdowns. To compound matters, most North American petrochemical users face similar exposure, so when one business is scrambling to find alternate supplies, so are its rivals.
Establishing an emergency response center (ERC) – a war room of sorts – can mitigate disruption. The ERC is a temporary governance and execution structure that transcends divisional and business lines. It is structured to quickly identify potential risks to supply, develop mitigation strategies and fast-track their approval.
A core team staffs the ERC with typically six to eight members. They are dedicated exclusively to the ERC for the duration of the crisis and, thus, put their regular positions on hold. A single “owner” who can provide perspective across the industry leads the team. That person should have extensive organizational skills and relationships throughout the company to quickly cut through any internal bureaucracy to find the right people with the right information to make things happen. An executive sponsor keeps C-suite executives abreast of developments and solicits their input.
Other core team members represent relevant functions including demand planning, operations, manufacturing, supply chain, logistics, marketing and commercial. A procurement representative will be in close contact with suppliers throughout the process. In addition, depending on the disaster’s location, the team may also need members from safety and human resources. Enterprise-wide, an extended team backs the core group, providing in-the-field input and executing ERC directives.
While a virtual ERC can certainly work, the core team ideally works from the same physical location to operate efficiently and encourage cross-pollination of ideas among members.
The core team focuses on five tools of fast-track restoration.
1. Tracking of demand, supply and real-time inventory status
A detailed database captures exactly what material is needed, how much is being supplied and what is on hand. This involves:
- Refreshing monthly demand volumes regularly, allowing the team to identify minimum requirements and calculate a target state (typically 50 percent above demand);
- Validating daily on-hand inventory, which gives the team its effective starting point and allows it to identify supply gaps. Cross-check forecasted demand volumes with actual consumption to identify discrepancies;
- Layering in material in-transit and confirming feasibility of on-time delivery, which is important to validate assumptions in supply forecasts; and
- Using the above to identify supply gaps. This serves as the foundation for the next step.
2. Mitigation strategies for each material and plant at risk.
These critical strategies will differ but may be comprised of:
- Identifying qualified back-up suppliers;
- Tapping into distributors’ inventory;
- Importing material from overseas; and
- Slowing consumption of material, in a worst-case scenario.
3. Daily calls with current suppliers and potential alternates.
Frequent calls ascertain what is being produced where. They track allocation levels and anticipated dates for changes, including start-up or allocation removal.
4. A scoreboard for each material and plant at risk.
The team develops one-page summaries for each material using information collected in the first step and refreshes them daily or whenever updates are available. The ERC uses these scoreboards to communicate a complex matrix of moving parts during executive review calls. Each scorecard is a visual overview of:
- Demand – monthly and target state
- Supply – actual on-hand inventory and confirmed material in shipment
- Mitigation strategies – plans to fill in supply gaps, indicating which are confirmed or pending
5. Daily calls with executives and the extended team.
This is essential to ensure coordination, quick approval and input on pricing and other commercial matters. Another daily call with the extended team gathers input from the enterprise and broadly disseminates information.
Maximize the Benefits
At a minimum, petrochemical users will want to have the ERC and core team in place the day after a disaster occurs. Ideally, however, the core team will form and plan an ERC and recovery approach far in advance of any disaster or major potential supply disruption. Should the unthinkable occur, the team moves immediately to activate the plan.
Post-disaster, gradual dismantling of the ERC takes place as restorative activities resume and the business shifts from disaster recovery to normal operations. As the disaster subsides, it is important to take stock of enterprise-wide weaknesses that were identified, effectively leveraging the crisis as a system-wide pressure test.
Now is the time to review gaps in internal processes and sales and operations planning, and work with other teams to develop plans to fix them. Revisit the supply mix and qualify new materials or new suppliers, thinking critically about risks posed by limited supply, especially in a more serious disaster. Finally, create or update ERC templates and procedures while events and details are fresh in everyone’s mind.
Disasters of all kinds will continue to threaten the petrochemical supply chain and overall business continuity. Having a well-conceived recovery plan helps ensure resiliency and prosperity after the clouds have cleared.
Yves Thill, partner; Vijay Kasi, vice president; Vincenzo Sposato, manager; and Brandon Kennedy, senior analyst, are all with A.T. Kearney.