The hurricanes that pounded the U.S. Gulf Coast last summer may rank as the nation's worst supply chain disaster to date. But the next catastrophe could be far worse.
It could kill as many as 360 million worldwide (16 million in the United States alone), sicken millions more, and lead to the collapse of the global economy. There's virtually nothing we can do to prevent it.
And it could strike at any time. In fact, it may already have struck. "Frankly, the crisis could, for all we know, have started last night in some village in Southeast Asia," epidemiologist Dr. Michael Osterholm has been quoted as saying in published reports.
That threat, of course, is a worldwide flu pandemic. For the past decade, health officials have been anxiously tracking the spread of a particularly lethal strain of avian flu, known as H5N1, from Hong Kong to other parts of Asia to Africa to Europe. So far, the pathogen has claimed fewer than 100 human victims. But viruses are notorious for their ability to mutate, and sometimes, those mutations enable them to jump from one species to another. Should the virulent H5N1 strain make the leap from birds to people (that is to say, mutate into a form readily transmitted from person to person), a pandemic could erupt.
If that happens, Alex Lee Inc. will be ready. For nearly a year now, the Hickory, N.C.-based food distributor has been working on a pandemic contingency plan (see accompanying sidebar). That plan includes steps for coping with a surge in absenteeism, policies for dealing with drivers who refuse routes in infected areas, minimizing contact between drivers and warehouse personnel, and providing emergency housing for critical workers. The company has even developed policies for handling the media.
But Alex Lee appears to be the exception, not the rule. A survey conducted by DC VELOCITY in mid February revealed that 43 percent of the respondents had no business continuity plans of any kind. Among those who did have crisis management plans, a staggering 84 percent had not made provisions for dealing with a flu pandemic. Nor did they intend to. Of those who hadn't drafted pandemic protocols, almost three-quarters said they had no plans to do so before the end of this year.
Those figures jibe with the experts' perceptions. "My guess is that nobody is talking about this," says Yossi Sheffi, director of the Massachusetts Institute of Technology's (MIT) Center for Transportation and Logistics and author of The Resilient Enterprise, a book on the importance of crisis control planning. "I don't see a real level of preparedness within companies. In many ways, I don't think they even know what to do."
Taking it slow
There are many reasons why business has been slow to act. Denial is one of them. "When you hear talk of a flu outbreak in China, you don't think about how quickly it could propagate across the United States," admits Scott McWilliams, CEO of third-party service provider Ozburn-Hessey Logistics. (Several weeks after making that statement, McWilliams reported that his company had launched a full-scale pandemic planning project.)
Another is reluctance to spend money—particularly among companies burned by the overblown Y2K scare. "It's hard to get businesses to spend money on something that is unlikely to happen," says Dr. Sherry Cooper, global economic strategist and executive vice president of Harris Bank in Chicago and BMO Financial Group of Toronto. Still, she warns, businesses ignore the threat at their peril. "[The risk of a pandemic] Anybody here? may be low probability," she says, "but it's very high impact." Business's tardy response may be understandable, but it'svery high impact."
Yet another reason may be that corporations simply don't realize how serious an economic threat a pandemic poses. Unlike, say, a hurricane or terrorist attack, a pandemic would be a catastrophe of extended duration. "An influenza pandemic will be like a 12- to 18-month global blizzard that will ultimately change the world as we know it today," says Dr. Osterholm, who is the director of the University of Minnesota's Center for Infectious Disease Research & Policy and an associate director for the Department of Homeland Security.
Estimates indicate that a pandemic's economic impact on the United States alone would exceed $100 billion. Airlines, entertainment businesses, and restaurants would be wiped out almost overnight. Mom and Pop businesses would be shuttered by the death or prolonged illness of a key family member. On top of that, thousands of employees would abandon their jobs.
Anybody here?
Business's tardy response may be understandable, but it's nonetheless misguided, warns Dr. Osterholm. "The business community can no longer afford to play a minor role in planning the response to a pandemic," he says. "Every company's senior managers need to be ready to respond rapidly to changes in the availability, production [and] distribution ... of their products."
Product availability problems would be among the first to surface. Should an epidemic erupt in China (which is widely considered the likely source of an outbreak), it could halt production and paralyze the country's logistics network. The United States, with its heavy dependence on Asian-made goods, would feel the effects almost immediately.Hardest hit would be businesses operating on a just-in-time delivery schedule.
Those who found ways to work around the product shortages would still run smack up against a severe labor shortage. According to estimates from the Center for Infectious Disease Research & Policy, labor shortages could reach as high as 50 percent at the height of the pandemic. (If that sounds overstated, keep in mind that even healthy workers could be sidelined by the need to nurse sick family members or care for children home because of school closures.) Absenteeism would be more than just a short-term problem. The center projects that the national workforce would dip by about 15 percent for the course of a 12- to 18-month pandemic.
A labor shortage would hit DCs harder than most. You can write a report or revise a spreadsheet from home (electrical power and Internet bandwidth permitting), but you can't ship cases, drive a truck or guard a DC from a remote location.Nor can you pick orders, fix a conveyor or re-ticket merchandise. "The bottom line is [a labor shortage] would be catastrophic," says McWilliams. "The work force is directly correlated to efficiency and capacity. If you lose one-third of your workforce, you lose one-third of your productivity."
A labor shortage would have repercussions beyond the DC as well. Carriers could also be hit hard—particularly truckers, which are already struggling with a shortage of qualified drivers. "Obviously, the labor force is ... critical to what you do inside a facility and likewise in the transportation arena," says Rick Blasgen, president of the Council of Supply Chain Management Professionals and a former ConAgra Foods logistics executive. "Because logistics operations are so labor intensive, you [risk running] into the situation where things will be delayed or stop moving altogether."
Who's in charge here?
As difficult as planning for the unthinkable may be, it will be far easier now than later. "[C]ompanies need to have contingency plans in place before the crisis hits," says Bob Silverman, president of consultant Gross & Associates. "There won't be time during the crisis to come up with a good plan; it needs to be developed and tested beforehand."
Take, for example, the potential for severe absenteeism. Crisis planners urge companies to find ways to back up essential work functions so that the absence of one or two key people doesn't shut down the entire operation.
Silverman suggests that companies begin cross training workers right away. That doesn't mean weeks of offsite classes, he says, but rather, "[c]oncise training in the basics of warehouse operations ... so that workers who've never worked in a DC can safely perform the tasks necessary to receive, process and ship products."
It also means finding backups for highly trained technicians, which can be a lot harder. Though it's feasible to train an IT specialist or engineer to drive a forklift or operate enough of the material handling equipment to keep goods flowing, it's tougher to do the reverse—to train a forklift driver, for example, to perform maintenance on complex material handling equipment.
It may be harder still to train people to fill in for the CEO or CFO, something few companies attempt. As McWilliams puts it, "the higher you go up the food chain, the less cross-training you have within a company."
But training might be a small price to pay if the alternative is a leadership vacuum. Crisis planners recommend that companies develop a clear emergency chain of command, so that no matter who falls ill, there will always be someone in charge. They also urge companies to identify key positions that currently are only two or three people deep in terms of experience, and train additional employees to handle those tasks.
Focus on the essentials
Another key challenge is to identify the company's essential functions and figure out how to keep them running with just a fraction of the workforce. For distribution centers, that might mean lining up backup services. Silverman urges companies to consider forming relationships with third-party logistics service providers (3PLs). That way, if one of a company's DCs were particularly hard hit, it could temporarily shift some work to a 3PL in another location.
Companies might also have to cut back on some of the "extras" they offer. In many DCs, workers devote much of their time to value-added services: re-labeling, ticketing, price-marking, special packaging and so on. Suspending these services might be necessary to free up labor for more urgent tasks like receiving and shipping.
Similarly, companies may find they're forced to make temporary changes to their order policies. Piece picking is far more labor intensive than case picking. By rounding orders for piece quantities up to full cases, and case quantities up to full pallets, suppliers would be able to boost throughput volumes.
Likewise, in an emergency, a company could ask suppliers to drop ship directly to customers. In all probability, that would also require rounding orders up to full cases and full pallets.
Other matters to consider include figuring out how the facility would deal with a spike in online orders or a shortage of supplies. Some companies may decide to stockpile inventories in case foreign or domestic suppliers shut down. Others may opt to line up backup suppliers.
The human factor
Operating during a pandemic may also require companies to suspend their existing human resources policies. Take sick leave, for example. Chances are, your sick leave policy was originally drafted to discourage absenteeism. In a pandemic, however, the last thing you want is employees showing up for work sick. You may need to revise your sick leave policy to make sure you're not penalizing workers for staying home when they're ill. You may also find it's necessary to be more flexible on bereavement or short-term disability policies.
There are other employee-related topics to think about as well. One is emergency health care: Where can you isolate sick workers? Who will care for them? Another is workplace hours: Can you stagger work hours to limit the number of people assembled in one place at a time?
One thing you don't want to do is depend on the government for even basic necessities. Dr. Cooper suggests that businesses stockpile emergency supplies like water, anti-bacterial soap, latex gloves and masks, though she admits that employers are often reluctant to spend the money. Management may be far more concerned about the next quarter's financial results than in preparations for something as uncertain as a pandemic, she says."But think of the advantages [the company] could gain if a pandemic did occur and it survived [and found itself] in a position to help its employees and the community when they needed it most."
That's still a big "if," however.No one can predict whether H5N1 will run its course, mutate into a relatively harmless bug, or trigger a raging global disaster. But if last year's hurricanes taught the nation anything, it's the peril of ignoring warnings. "The 'Big One' may or may not be on the horizon," says MIT's Sheffi, "but being prepared is a small price to pay."
