Climate Change, Supply Chains and Compliance

Regulatory requirements dictate that large companies carefully evaluate their supply chains’ exposure to risks from extreme weather. Done properly, however, the exercise can bring far wider benefits.

Climate continues to cost the earth – in all senses. According to insurance broker Aon, insured losses from natural catastrophes, like hurricanes and floods, reached $118 billion last year. The losses, across almost 400 events, were more than a fifth above the average for the century. There were also 37 events that saw losses of $1bn or more – a new, dismal record.

The costliest event of the year was still earthquakes, with those in Turkey and Syria seeing insurers pay out $5.7 billion. However, New Zealand, Italy, Greece, Slovenia and Croatia all saw the most expensive weather-related insurance events on record.

And that’s just insured losses.

Most damage is not insured, and the actual losses to individuals and businesses are many times higher. The economic loss of the Turkey and Syria earthquakes alone is estimated at $92bn. The death toll was 95,000 – the highest in more than a decade.

Again, that is driven not just by 64,000 fatalities from earthquakes but 16,500 deaths from heatwaves around the globe.

Last year was the hottest on record.

Just the Start: Climate Losses will Mount, Fear Insurers

Such losses are changing the very way insurers think about risk.

Traditionally, the insurance industry has distinguished between the big-ticket primary perils, such as tropical cyclones, earthquakes, and European windstorms, which are relatively infrequent but cause massive losses and secondary perils.

More frequent but traditionally considered more manageable because of the smaller losses, are natural catastrophes like thunderstorms, floods and wildfires.

Climate change is altering insurers’ perspective.

Aon’s report showed that these “secondary” perils have caused significantly more losses to insurers than primary perils over the last decade due to their increased frequency and severity. In 2023, primary losses were a distant second, accounting for only 14 percent of global losses.

As the chief climate scientist of Munich Re (the biggest “reinsurer” that provides cover for insurers against really large losses) recently told the Financial Times: “We no longer can call such events secondary. They have reached in the aggregate the order of magnitude of a major hurricane, or tropical cyclone, or winter storm.”

As the FT article makes clear, this is not just a problem for insurers but for businesses and individuals, too, as underwriters decide there are risks they just do not want to take. We face the prospect of certain locations becoming uninsurable.

Moreover, it is a problem that may only get worse. Last year, Lloyd’s of London warned insurers that the full impact of climate change had yet to be fully felt when it comes to claims. According to the FT, again, it is urging insurers to be proactive in addressing the risk.

“By the time we can definitely see the impact in claims, it will be too late,” Lloyd’s director of portfolio risk management told a private meeting.

Pharma Supply Chains: TCFD and Beyond

Since the pharma sector is no stranger to the risks of weather impacting its supply chains, all this provides one good reason for it to take climate change seriously.

Another is that it increasingly does not have a choice.

It’s not just insurers who have become increasingly aware of the financial risks posed by more frequent extreme weather events.

Governments and regulators, too, have recognised the growing danger and the possibility that it could pose systemic risks to financial stability. States have, therefore, been putting ever greater pressure on businesses to identify, quantify and address those risks.

As we’ve discussed before, that was led by the Task Force on Climate-Related Financial Disclosures in the UK. It introduced the requirement for big businesses (to apply to all businesses by 2025) to report the impact of climate change on their supply chains. It was disbanded last Summer – but only to be replaced by the IFRS Foundation, which was tasked with taking forward its work by the Financial Stability Board.

The IFRS has already clarified that the International Sustainability Standards Board (ISSB) standards launched in June 2023, fully incorporate the TCFD requirements.

You can read our earlier blog for a fuller explanation of the requirements and why tools like our supply chain risk assessment SCAIR® are so valuable in helping businesses comply.

However, here, I’ll concentrate on just two aspects, which we have highlighted in our recent video on TCFD, climate change and quantifying risk.

Bringing Value at Risk into the Real World

The first is that SCAIR® doesn’t just provide a tool and framework to accelerate the process, enabling organisations to comply more efficiently. It also helps avoid common pitfalls and ensures the exercise has real organisational value.

For example, SCAIR® helps identify risks to products and focuses on those with the highest revenues. This can quickly help companies reach a robust figure for the value at risk at each location. Crucially, though, it doesn’t just estimate the potential losses in terms of pure gross profits.

In the event of a catastrophic climate-related event, no business will simply watch as their primary sources for profitable products vanish.

They will use their existing stocks, inventories and reserves and quickly seek to source other suppliers and additional production capacity.

SCAIR® accounts for that and seeks to provide a real-world value at risk – not simply a box-ticking exercise for regulators but a genuinely helpful and crucial piece of business intelligence.

Climate Change Supply Chain Location Mapping

That grounding in the real world needs to be replicated when evaluating the risks of climate change.

Existing risk assessment methods suffer significant faults. In many cases, they are not location-specific, substituting an evaluation of the specific risk of a site with broad, regional risk evaluations.

Even worse, existing solutions are usually backward-looking. They assess the risk to a location by reference to the past without accounting for the impact of climate change in worsening extreme weather.

In a sense, this ignores the entire purpose of the exercise.

SCAIR® addresses this drawback by interfacing with Location Risk Intelligence, reinsurer Munich Re’s solution for assessing physical risks from natural hazards (previously called NATHAN) and climate change.

Munich Re’s Risk Management Partners division uses the world’s most comprehensive disaster database and sophisticated modelling to provide robust, location-specific climate change predictions.

Again, this ensures that it is not simply a compliance issue but an exercise with real value. The intelligence from SCAIR® and Location Risk Intelligence enables businesses to focus on locations at the highest risk from further natural catastrophes due to climate change.

A Boon for Business Continuity

Indeed, this is the real value of the exercise beyond compliance.

Identifying vulnerabilities in the supply chain and developing robust intelligence for both values at risk and the risk itself enables businesses to anticipate and address their business interruption exposure at critical nodes.

That might mean diversifying supplies to build increased resilience into the supply chain. It might mean putting in place extra measures, such as increased stocks or other ways to mitigate losses. Credible figures for the value that could be lost at a site can be used to justify investments to protect against them.

If interruptions to a site prove unavoidable, SCAIR® gives businesses the tools to lessen the impact.

It can enable businesses to assess the impact of catastrophic events more rapidly and respond more effectively than those without such planning, for example.

Read our case study on how it helped a large pharmaceutical manufacturer quickly implement continuity plans to lessen the impact of a Puerto Rican hurricane.

Finally, if all else fails, a better understanding of exposures and the value at risk in each location provides a basis for calculating the insurance required for the residual risks that cannot be addressed.

It provides businesses with the insights needed to purchase an appropriate level of business interruption cover and, perhaps, to make their case to secure affordable premiums in a tough market going forward.

More than Covid: Lessons for Supply Chain Resilience from 2020

Hard Truths from a Pandemic

Pharma and others in the life sciences shouldn’t let the lessons learned from the crisis go to waste. As we emerge on the other side, now is the time for a strategic review of supply chain vulnerabilities. Intersys Risk Director Catherine Geyman, takes stock of the situation.

It’s been an unprecedented year for life sciences. The pressure on both supply and demand as a result of the pandemic was unparalleled in modern times.

As Peter Ballard, Chair of the British Generic Manufacturers Association (BGMA) put it in the organisation’s review: “At the peak of the first wave in the UK, the pandemic derailed all sense of normality. It thrust healthcare and its supply chains into the forefront of public consciousness as the NHS staff struggled to keep pace with patient demand with the resultant knock-on effect to the medical supply chain.”

It was the perfect storm: huge increases in demand which could not have been planned for by the pre-covid supply base; and massive disruption to supply chains as a result of staff absences and government constraints.

In the UK, generic medicines make up more than three-quarters of all prescribed drugs. According to the BGMA, which represents UK-based generics manufacturers and suppliers, demand for some drugs was five to ten times higher than usual. At the same time, an export ban on active pharmaceutical ingredients (APIs) from India – accounting for about half of APIs used by British generic medicines – came in, in March. BGMA members reported a 24% reduction in supply from the country. Companies also saw a decline of over a fifth in finished products from India.

And it wasn’t just the UK, of course. We’ve looked at shortages in the US earlier in the year. There, our analysis showed that, with a few exceptions, shortages were mainly demand-driven, as the virus saw a clamour to get hold of certain anti-virals, anaesthetics and sedatives. Companies reporting new drug shortages in the US rose from 19 in January to 71 by April. Nor was it just a life sciences issues, even if the industry was hard hit. As the Harvard Business Review recently noted, “The supply shock that started in China in February and the demand shock that followed as the global economy shut down exposed vulnerabilities in the production strategies and supply chains of firms just about everywhere.”

With vaccines developed, this might be the beginning of the end for Covid. For those in pharma and the broader life sciences, though, it should just be the beginning of a strategic review of the impacts on their supply chains and what we can do differently in future to minimise disruption.

To quote the BGMA again: “COVID-19 has presented unprecedented challenges, but it would be unforgivable not to learn from those and apply that experience to the future.”

It’s in this spirit that I recently held a webinar on Understanding Risk in Pharmaceutical Supply Chains.

Learning the lessons?

As that webinar underlines, there are two reasons why we need to take this opportunity to look back before going forward. First, because it might be unwise even now to think the challenges the virus presents are at an end. The vaccine roll out will take time in the UK and elsewhere; the Pfizer supply chains themselves are already facing disruptions due to out of specification raw materials. Many still fear a third wave of the virus after Christmas. In other words, there are still plenty of opportunities to surprise and disrupt supply chains.

Even if we have managed to put this crisis behind us, the pandemic has shown what is possible. It could happen again. Businesses must prepare for the next crisis, not the last one.

It doesn’t take a worldwide catastrophe to cause supply chain disruptions, however. Well before this spring, drug shortages were again making themselves felt.

Unsurprisingly, there are several reasons for shortages. In some cases, it is other significant events; it’s worth remembering that before Covid the critical concern for the UK was Brexit, something of which we may shortly be reminded (particularly since buffer stocks put in place for Brexit have been used during the pandemic). US supply lines, meanwhile, have been repeatedly hit in recent years by hurricane activity in the likes of Puerto Rico.

But in addition to these significant disruptions to supply, there are a whole host of other, lower-impact, higher frequency events and risks that, if not managed, can escalate over time and eventually cause supply interruptions. They include failures to meet on-time, in-full (OTIF) targets as a result of delivery delays or batches not released; process variability, quality deviations or unreliable manufacturing or API plants; lower profile supply chain disruptions – the result of critical material shortages, facility damage or transit failures; and, finally, product shortages as a result of recalls or other regulatory intervention.

The majority of these events normally do not reach public scrutiny as they are usually handled and mitigated by having safety stock in place. If problems persist, however, that reserve can be eroded and eventually exhausted, resulting in drug shortages.

The critical point is that Covid did not always cause the weaknesses we’ve seen in supply chains. It often just revealed them.

Long-term fragility

To understand why, and how drug shortages have re-emerged to challenge the industry, it’s necessary to recognise the long-term trends that have increased companies’ exposure to supply chain disruptions. Three related themes are essential.

The first is the accountant’s drive to make supply chains more efficient that has seen businesses cut back on stock and redeploy backup facilities to productive use. Mergers and acquisitions resulting from the same push for efficiency, meanwhile, have reduced the number of suppliers for crucial APIs, eliminating redundancy in the supply chain. This a relatively simple point: By reducing both the range of alternative providers and internal production capability and stock levels, we’ve inevitably reduced the resilience of supply.

The second is again the result of the determination to cut costs: Outsourcing to countries with lower labour costs, which has focussed industry dependencies on fewer API or contract manufacturers. As noted above, this has resulted in businesses heavily dependent on India, and to a lesser extent China for APIs. Disruption in the event of an export ban or similar block on supplies will almost inevitably be felt downstream. Indeed, this issue rapidly came to the fore right from the start of the pandemic.

The industry’s decision to shift API production to Asia has also increased drug supplies’ reliance on jurisdictions with less mature regulatory systems and, hence, potentially lower standards. There is no escaping that the regulatory track record of China and India is demonstrably inferior to that of the UK, Europe or the US.

In the image below, the colour coding shows the frequency of OAIs (Official Action Indicated notices) issued to facilities by the FDA as a percentage of the number of inspections conducted. In the US and Europe, the likelihood of an OAI was usually below five or six per cent (green and light green). In China and India, the rate was more than eight per cent (red).

Source: research by Intersys Ltd as part of the ReMediES project.

That’s a particular issue because while manufacturing of APIs has moved to jurisdictions with arguably lower standards, regulatory requirements have, if anything, moved the other way.

In practice, this can result in disruptions to the supply chain in one of two ways. First, where a compliance failure occurs, the OAI often results in prolonged plant shutdowns for remediation. Second, remediations that result in major changes or new suppliers will take time to be approved by the regulators.

It’s an irony that the regulatory measures in place to protect patients, can count against the patient if something goes wrong in the supply chain and extensive regulatory re-approval is required for the solution to put it right. This is far from being a theoretical risk. An FDA report in 2019 showed that of 163 drugs that went into shortage from 2013 – 2017, 62% followed supply disruption associated with manufacturing or product quality problems. Moreover, there is an interplay between regulatory risks and the other vulnerabilities from long-term trends touched on above. As a result, certain types of drugs are particularly vulnerable to supply chain interruptions.

This is confirmed by both the FDA report and a study led by Intersys with the Institute for Manufacturing at the University of Cambridge, part of a cross-industry collaboration project called ReMediES, which revealed that 69% of product shortages in 2018 followed OAIs issued to the company reporting the shortage. Both studies showed that the drugs most likely to be in shortage were generic injectables, which require rigorous manufacturing processes but do not provide much profit margin as a result of competition. (A BMGA study of 40 originator products to come off patent since 2014, shows sale prices fell by an average of 89%.) Older drugs with a median time since first approval of almost 35 years are also more to be in shortage.

Price competition for older generics makes investment in robust quality management systems difficult. Moreover, in the event of an interruption that causes the drug to become scarce, low prices and regulatory hurdles discourage new market entrants from correcting the situation.

Seeing is believing

There’s one final factor that explains the rising disruption to supply chains, and it’s an important one: The increasingly global nature of life sciences businesses and the complexity of their supply chains has decreased visibility and oversight of them. The result is that both the underlying vulnerabilities and interruptions to supply chains are more difficult to detect and address.

As my presentation outlined, the life sciences supply chain takes in a broad range of other industries. These also vary considerably, depending on whether we consider biologics, traditional pharmaceuticals or medical devices. These bring a range of second-tier suppliers and contract manufacturers into consideration. As a result, life sciences businesses can find themselves exposed to a range of risks to livestock, chemicals or engineered components businesses.

Trying to predict the full range of possible events that could impact these suppliers is arguably impossible. What businesses can do, however, is to identify the most critical suppliers, and determine the value at risk for the critical dependencies of key products.

Understanding where these vulnerabilities lie enables the business to focus on these so that impacts on them are identified and responded to more quickly. Quantifying the value at risk, meanwhile, allows proper evaluation of risk mitigation options through a cost-benefit analysis.

Crucially, neither require you to anticipate what event might cause the disruption – only the vulnerabilities and value at risk. That’s important because it’s what the last year has really shown us: That we need to be ready for anything.

For more on these issues and particularly how SCAIR can help with identifying mapping, quantifying and addressing critical exposures, watch the webinar for free here.

Catherine Geyman, Director, Intersys Risk Ltd

Coronavirus Drug Shortages Highlight Pharma Supply Chain Dependency on China and India

Covid-19 threatens to cripple medicine supply lines bringing China, India dependency into sharp relief

Should pharma be panicking over the Coronavirus and Drug Shortages? Intersys Risk Director Catherine Geyman evaluates the tough choices facing pharma.

The epidemic has raised criticisms of the dependence on overseas supplies for our medicines, in particular active pharmaceutical ingredients (APIs) and generics in the pharma industry. The Economist’s recent piece, for instance, suggested that prior to Covid-19, there was widespread complacency.

“Until about the third week of January, only a few pharmaceutical executives, drug-safety inspectors and dogged China hawks cared that a large share of the world’s supply of antibiotics depends on a handful of Chinese factories,” its article opened, before continuing in similar vein.

Nor is it just industry outsiders. This week, the chairman of India’s Pharmaceuticals Export Promotion Council of India (Pharmexcil) said Europe was panicking following its government’s decision to restrict exports of 26 APIs (mainly to protect domestic supplies): “[W]e control almost 26% of the European formulations in the generic space. So they are panicking,” said Dinesh Dua.

This is unfair, however – at least as far as the pharma industry goes (and for quite a few others). It is not just a “few” executives who have been concerned about the reliance on China and India for APIs. Many European and US pharma supply chain managers have worried about it for years.

Governments, too, have noted the reliance on China with concern. Last year, a hearing of the U.S.-China Economic And Security Review Commission in Congress considered this very issue. Senator James M. Talent provided a concise summary: “According to the Food and Drug Administration, 13.4 percent of U.S. drugs and biologic imports are from China, as well as 39.3 percent of medical device imports, making China one of America's top sources for medical products. These numbers understate significantly the true sourcing of health products in China because China is also the primary supplier of precursors for pharmaceutical companies in other countries such as India which, in turn, are major suppliers of finished product to the United States.”

Strikingly, the hearing also heard that the US considers this a national security issue.

“The growing reliance of the U.S. on foreign sources for critical defence related material is an issue that must be addressed at the national level,” Christopher Priest, Chief of Staff for the Defence Health Agency Operations Directorate, which oversees the medical needs of the US Army, Navy, and Air Force, told the hearing.

Ultimately only time will reveal the true impact of Covid-19 on global pharmaceutical supply. Most well managed biopharma companies will hold significant stocks (months) of API to ensure their patients are protected from this type of unpredictable event. However, there is also a large number of low cost generic drugs that simply do not have the margin to support significant stock holdings, and many companies producing the same generic drug may be dependent on a single source of API in India or China. The global drugs market was already in a precarious position with drug shortages, so this is simply going to exacerbate that situation.

Quantifying the value of stock in terms of continuity of supply and identifying critical supply dependencies are key drivers of interest in tools like SCAIR®. Companies are increasingly urged by their stakeholders to understand and map their dependencies and exposures, precisely because they have been concerned about how vulnerable they are to a disruption.

Probabilities and pandemics

SCAIR®’s approach is to focus on impact rather than probability to ensure the company has taken measures to protect itself against major supply chain interruptions, regardless of their source. It is a more manageable challenge than quantifying likelihoods or assessing probabilities, which is a difficult task.

This is not just because it is hard to predict outcomes (after all, who really knows how far and fast Coronavirus will spread and the impact it will have?). It is also because we often don't understand probabilities and misinterpret risk terminology.

In a recent discussion of Covid-19 and risk perception on Radio 4’s World at One, Cambridge professor and chair of the Winton Centre for Risk and Evidence Communication, David Spiegelhalter made the point that most people don’t understand the term “reasonable worst case scenario”. That is despite it being a key phrase used in contingency planning activities for the Coronavirus and much else. It’s often taken as meaning a likely outcome, rather than as what it is: a catastrophic but credible scenario. A similar misunderstanding could often be detected in reporting around the Yellowhammer Brexit contingency planning.

As one critic of the resulting “hysteria” put it at the time: “It is not a prediction but a worst case scenario, helping the government in its planning to mitigate the risks.”

Even if we understand the terms, though, our brains are not well suited to evaluating probabilities, as another academic on the Radio 4 discussion pointed out. The “probability neglect bias” makes us less focussed on probabilities and more on outcomes, explained Dr Barbara Fasolo from the LSE: it’s the reason we panic over unlikely disasters and also why we bother playing the lottery.

In controlled experiments this bias leads to seemingly irrational behaviour. For example, people do not differentiate between a one percent probability of getting a non-lethal but painful electric shock, and a 99 per cent probability. In fact, they are willing to pay the same amount of money to avoid either set of odds. In real life, as with the Coronavirus, though, the probabilities themselves are massively unclear, which only makes rational judgements harder.

Consequently, impact quantification for scenarios rather than probability assessment is usually more helpful. You can spend an awful lot of time and money trying to work out the likelihood of each major interruption scenario, but that is usually wasted. It is much better to spend resource planning for and remediating the sources of risk that can do the most damage to your supply chains.

Hobson’s choice

However, once the assessment is done, there remains the challenge of the lack of attractive alternatives.

As stated, the dependence on China is not a new concern for pharma. Coronavirus has just brought it into relief. Recently, we’ve had concerns around the potential impact of the US China trade war, for example. More longstanding are concerns about quality – and that applies more so, if anything, to India. An analysis last summer showed that, of the 75 warning letters sent by the US FDA to pharma manufacturers for violating safety or quality standards in the 20 months to August 2019, half were to companies in China or India. For non-compliance notices from the European Medicines Agency, meanwhile, the proportion was almost two thirds (64%).

So why haven’t US and European pharma businesses addressed the risk?

For two related reasons: first, because change is difficult and expensive. Once a company has tuned its process to and validated its use of a certain type of API from a particular source, it is costly to replace and revalidate the source. There is therefore an in built bias to stay with current suppliers.

Second, while change is costly, APIs and generics are cheap. As we’ve noted before, there’s little incentive for new players to enter the market – and certainly not in Western countries where labour is relatively expensive and overheads are high. Moreover, as The Economist piece correctly states, the rest of the world will have lost a lot of its expertise in making APIs, and it’s difficult to start back up. We go back to what the FDA has called a “broken marketplace”, with prices not rising despite shortages and production typically not increasing enough to restore supply to pre-shortage levels.

Pharma has long noted the risks of reliance on Chinese sources, but a cost-risk-benefit analysis has so far always come down in favour of the status quo – because it’s cheap.

One exception to this is Sanofi who recently announced the creation of a France-based offshoot that will produce APIs. We’ll have to wait and see if other businesses will follow suit.

No upside in Covid-19

So, will Coronavirus force pharma to rearrange their supply chains? We shouldn’t bet on it – at least in the short term.

In the long term, the rise of the Chinese middle class and increase in wages means that the future of cheap production in the country is uncertain. And, when it finally looks like it is no longer economical, it may well be that pharma businesses learn from the past and don’t simply look for the next cheap production base.

In the meantime, though, businesses face significant costs and disruption of changing suppliers – and massive uncertainty over how the pandemic will develop and the potential disruption involved. It’s hard to justify the move.

Of course, in a sense this is a similar dilemma to that facing governments around the world as they determine what and how far to go in combatting the spread of the virus. Do too much, and if they succeed they will be said to have over-reacted; too little and they’ll be blamed for the consequences as the virus spreads. It’s a no-win situation. But governments have relatively unlimited resources, and risk only their popularity, which may recover by the next time their public heads to the polls. Pharma businesses don’t have that luxury – a rash move could cost them their competitiveness and ultimately profits.

For the time being then, most will choose to sit tight and wait to see if change is forced upon them. But that doesn’t mean they can’t be ready.

With tools like SCAIR® managers can map their supply chain dependencies and exposures. Soon with functionality we’re adding they’ll even be able to overlay custom events (such pandemic hotspots) to further quantify impacts and scenarios. With this they can see dependencies, loss estimates, vulnerabilities, and the ultimate financial impact of events, so they can be ready to act if the time comes.

If you want to be prepared for the worst, let alone avoid it, it pays to know what the worst might look like.

Catherine Geyman, Director, Intersys Risk Ltd

When the storm comes

Hurricane Irma once again shows us the importance of mapping supply chain risks for the pharmaceuticals industry.

The storm has passed, but the effects will be felt for months to come. In the Florida Keys up to a quarter of homes in the low-lying islands are reported to have been destroyed. Many in the Caribbean have had it worse.

There will, as always, be lessons for industries, including pharma. Puerto Rico, for example, is a huge centre for pharma manufacturers – the fifth biggest in the world with more than 80 plants. It accounts for about a quarter of the country’s GDP.

The island was actually spared the worst of the hurricane, but still three died, 50,000 were left without water and 600,000 without power. The storm served once again to expose the fragility of the island’s infrastructure. Nor are hurricanes the only recent disruption to hit the island. Only at the start of the summer did it declare its outbreak of the Zika virus over, after it infected more than 40,000.

Weather risk: an unavoidable reality

It’s not just Puerto Rico, of course; Irma brought potential for disruption across the Caribbean, to Florida and on inland. And it’s not just Irma; it followed hard on the heels of hurricane Harvey.

The industry has got better in recent years at dealing with these events, not least because of government encouragement to avoid disruption to medical supplies that can exacerbate the tragedy. One of the untold stories of both hurricanes Harvey and Irma is the shortage of urgently needed medicines; untold, because the problem was largely avoided with some improved planning.

But we’ll be tested again. Yes, hurricane Irma was unusually strong, but we’ve seen storms this powerful – and perhaps more so – before. We’ll see them again. The role of climate change in developing such storms will continue to be debated. What’s unarguable is that pharma – and a wide range of other industries with global supply chains – will always be at risk of exposure.

Preparing in advance for real resilience

Modern technology is a big part of the answer to managing this risk. The information businesses and the public have on a hurricane’s trajectories and strength is unparalleled; they can now track it online in real-time. Combine that with modern software solutions and we can quickly map risks for at-a-glance understanding of exposures.

That’s always useful in directing emergency responses when the storm comes. It’s more useful, though, used to map exposures and build resilience through continuity plans before. The power of Irma may have been a surprise, but storms in the hurricane season are not. Fortunately, we have the tools to weather them well; we just need to make sure we use them.

Could the Impending ‘Solar Max’ be the Next Disaster to Hit Global Supply Chains?

Compared to sudden economic downturns, terrorist attacks, floods, earthquakes, tsunamis and the like, the next potential disaster to hit global supply chains could be pretty left-field. It's all to do with the cyclic behaviour of the sun...

The sun's magnetic field experiences cyclic changes that peak every 11 years (known as the 'Solar Maximum' or 'Solar Max'). This is when the sun is at its most active and when severe space weather events can occur. The next Solar Max peak periods are due in 2011/12 and are predicted to be the most intense for 50 years.

The strongest solar activity was recorded in1957-8, when the world was on the verge of a technical revolution, having just catapulted Sputnik into space. Back then the US experienced a radio blackout that cut it off from the rest of the world, and voltages in electrical telegraph circuits exceeded 320 volts in Newfoundland. On that basis, the impact of the stronger activity that is predicted for 2012 is almost incomprehensible.

During a Solar Max, violent solar flares (atomic explosions) blast out from the sun at high velocity. Emissions from the flares (charged particles that form an ash cloud) produce intense bursts of radio noise that can disrupt GPS satellite navigation. Aircraft navigation systems can be particularly affected. And with the impending Solar Max having the potential to completely drown out GPS signals, the commercial aviation industry is understandably worried.

GPS is also used for emergency rescues and to synchronise power grids and mobile phone networks. Electrical disturbance and damage to power grids (caused by solar activity) can also result in closures of businesses, schools, hospitals, government buildings, etc. as well as disrupting countless domestic homes.

Returning to commercial aviation, although planes can fly without GPS, power outages can force air traffic controllers to increase the distance between aircraft, and to slow take-offs and landings, causing (massively expensive) flight delays.

Who would have thought that an ash cloud could create so much havoc!

The good news is that the potential threat of a Solar Max can be effectively risk managed. For any Risk Management/DR Specialist worth their salt, a Solar Max represents the ultimate challenge, in fact. A risk management expert will thrive on advising and guiding business infrastructure managers on the best 'solar flare-proof' steps to take, such as the implementation of:

A back-up generator supply - to ensure critical systems can be powered
Financial exposure/loss minimisation strategies - data system and software back-up plans to maintain uninterrupted customer-related operations (customer-facing operations, customer-service provision, etc.)
Uninterrupted communication systems - for communication between management and staff, staff and customers...

These (and other safeguards) could mean the difference between a company continuing to trade as normally as possible during a Solar Max, or even going out of business altogether.

For any company, having a tailored contingent business-interruption plan in place well before the Solar Max is prudent. But understanding how resilient your global supply chains are to potentially catastrophic scenarios is paramount. With the next Solar Max drawing closer by the day, it’s essential for infrastructure managers to ACT NOW!

Sources:
http://www.universetoday.com/14645/2012-no-killer-solar-flare/
http://www.newscientist.com/article/dn10189-solar-flares-will-disrupt-gps-in-2011.html
http://www.mekabay.com/infosecmgmt/solarmax.pdf
http://www.solarstorms.org/SRefStorms.html

Severe Weather Tests Supply Chain Contingency Planning

There certainly is a spectrum of views on the UK’s ability to plan for and react to extreme weather events. These range from the average man on the street complaining that the UK will always grind to a halt after only 1 cm of snow, to the opinion that we are learning from previous cold weather experience and beginning to become more resilient as a nation.

The recent performance of BAA and Northern Ireland Water suggest that the contingency plans of some infrastructure organisations have not accounted for extreme disruption scenarios. However, there may be some small glimmer of light at the end of the tunnel in the form of a review of the local authorities’ response to this year’s cold snap. This complementary report indicates that the local authorities have learnt lessons from the previous two winters.

Can any differences in performance between local authorities and infrastructure organisations be attributed to the difference in mandatory contingency planning requirements for first responders (governmental bodies, the NHS) and second responders (utility companies)?

Or is it more to do with the level of scrutiny following the disruption during the previous two winters (reported to cost the UK economy £1bn), which resulted in the Winter Resilience Review (final findings published Oct 2010)?

Either way, UK Plc appears to have applied some sound supply chain risk management principles in order to improve their local response efforts to the December snowfalls, namely:

- Alternative sourcing options. By exercising ‘contingency’ contracts, farmers and their tractors were quickly mobilised with their snow ploughs to clear the highways.

- Increased buffer stock. Following the well-publicised shortage of gritting salt last year, the government has taken decisive action to increase the national salt stock pile and then make local authorities pay through the nose if their own stocks are inadequate and they need more in a hurry.

As with most supply chain contingency planning, it’s all about justifying the investment in the solution by quantifying the potential impact of the threat.