When Storms and Floods Menace Business

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They're going to focus on whether they have to give up some of their profit margin to reduce their risks. A lot of our clients are starting to recognize that. We had a severe snowfall occur in China (BusinessWeek.com, 2/1/08) that nobody expected, and a lot of facilities collapsed. Companies increasingly ask: "What is the improvement in our margins worth if our supply chain breaks down, and what could we have done about it?" Generally, their answer is: "We should have spent more money on the loss-prevention side and made that building in China able to withstand a much higher snowfall load."

That's where we come in. Several of our clients [in China] have told us that their facilities are still standing. They gave up on that profit margin initially and put up a stronger building based on our recommendation.

So is all this climate change or not?

Our scientists tell us that they're not 100% sure about the reason, but there definitely is an increase in the frequency and severity of windstorms and floods. We have a very large research group, probably the largest collection of PhDs as it relates to fires and disasters. We do a lot of basic research in those areas. We have a campus where we build things and burn things down, to figure out how materials behave and how facilities or a warehouse respond when a fire occurs.

What are other issues that CEOs ought to be thinking about but aren't?

They should understand that their businesses have become significantly more complicated and riskier. They don't fully recognize that. They're focusing on the productivity gains and the margin gains, but not on the risks.

More and more, our best clients are having their breakdowns outside North America. Plants are not as well built. The preventive maintenance processes are not as well established as they would be in North America.

What about where they have an extensive sourcing network of different suppliers that they don't actually own?

That's a big issue, and it's getting bigger. The people in the forefront of managing that are in the high-end electronics businesses because they have so many suppliers. They are far more sophisticated than typical industries.

But this is a high area of risk. Not all of them are focused on the fact that one tiny screw manufacturer is critical to their enterprise. We've shown that to our clients many times. They may have a very large operation but if something happens to that screw manufacturer, that's going to put their product at risk.

Seems like insuring the global supply chain would be inherently risky because so many companies don't really know how far their supply chain reaches. Right?

That's our job. When a client hires us, we work to identify the key elements of the chain. We reach through that network and reach conclusions on the quality of the properties that supply the components. We go backwards into their production chain. That's the heart of where business is changing dramatically. Small events now threaten an entire supply chain.

In addition to writing Armchair MBA for BusinessWeek.com, William J. Holstein writes for The New York Times, Fortune, Corporate Board Member, Dealmaker, and Strategy + Business.