Supply chain braces for swine flu pandemic but will it be too late?

Supply chain braces for swine flu pandemic but will it be too late?

While much of the world was showing growing alarm over a possible swine flu pandemic and business scrambled to contain the impact, Dan Sanker, CEO of logistics provider CaseStack, pulled out his plans for a severe ice storm in Arkansas. The storm a few years ago was one of the natural disasters that sent the company rushing to restore disrupted supply chains and convinced Case-Stack that disaster planning is best done before the lights go out or, in this case, before the virus spreads.

"We have a contingency plan in place for any event," Sanker said this month as his company and others with ties to trade with Mexico watched for symptoms in the supply chain from the outbreak of swine flu. "Today, you need a backup plan for anything, whether it's a port closing or terrorism, or the bankruptcy of a trucking company you work with."

Whether it╒s called risk management or supply chain resilience, such contingency preparations have become a significant part of logistics and transportation planning for distribution chains that now routinely stretch halfway around the world ╤ and that are sometimes stretched to the point where they are dangerously fragile.

Manufacturers and retailers with business in Mexico took that to heart as the swine flu outbreak that originated there sent workers home, forced factories to shut down and pushed the government to shut down all business May 1-5, which also happened to be a holiday weekend. Railroads and trucking companies said cross-border business was continuing, but they were girding for a larger outbreak and shippers were bracing for shortages in parts and materials that normally come from Mexican sources.

"This is a critical supply chain issue because of the risk of shortages of product in a plant from Mexico," said Harry Rhulen, chief executive of Firestorm Solutions, which provides risk mitigation and crisis management services.

Management consultant Ariba said companies should respond at the first signs of disruption. "Swine flu will have a significant impact on the global supply chain, as outsourcing to Mexico has become a major component of the sourcing programs at many companies, particularly those in the high-tech and heavy manufacturing sectors," said Kris Colby, retail sector director at Ariba.

The swine flu outbreak could hardly have come at a worse time for business: Just when many global companies were reporting that demand for their products had probably hit bottom, the H1N1 flu strain rocketed in from Mexico. Within a week, World Health Organization laboratories identified 985 H1N1 flu infections in 20 countries, including El Salvador and Colombia, and confirmed 25 deaths in Mexico. There were cases reported in Asia and Europe, as well as the Americas.

Mexico was returning to normal after the business shutdown last week, and schools were to reopen this week. But doctors warned further mutations in the virus could lead to a wider, more virulent epidemic, and the WHO triggered its own global logistics response, shipping out 2.4 million anti-flu treatments to countries that had not stockpiled their own drugs.

Adrian Gonzalez, director of the logistics executive council at ARC Advisory Group, warned that many governments would likely overreact to the threat, comparing it to the SARS outbreak in Asia in 2003. There, he said, Motorola shut down its Singapore plant when one employee was infected. "If an employee at one of your suppliers or customers in Mexico becomes infected, what do you think will happen?" Gonzalez said.

Experts such as Gonzalez said the SARS outbreak was likely a good model for the economic impact of the swine flu outbreak. Asian economies were hit hard and fast by SARS in 2003, but economies recovered almost as rapidly once the virus waned.

Nevertheless, logistics planners warned companies to set at least some early-stage contingency plans in motion.

Colby advised companies sourcing from Mexico to ╥begin planning now for supply chain disruptions so that they can mitigate any negative impact on their business.╙ If there is a serious pandemic, he said, the biggest risk would be in the travel and tourism industry, where many flights may be canceled, significantly limiting access to air cargo service.

"Large shippers may want to begin to spread their freight between commercial and cargo carriers now, as shipments that are completely at the mercy of commercial airlines could be vulnerable," Colby said.

He said companies should monitor where they are sourcing from and adjust their safety stock "to be less reliant on hot-spot countries like Mexico. In Europe or the U.S., there are good systems in place to contain an outbreak if one occurs. Such systems are not in place in Mexico, China and India, which makes it difficult to determine the impact on production."

Colby said his customers are not yet displaying concern about the impact on their supply chains, but "we are monitoring the situation closely so that we can be ready to help them avoid any disruptions if and when the outbreak becomes more severe."

Others said it is not enough to look at the impact on the supply chain alone. The swine flu outbreak demonstrates the close attention companies must place on their employees that execute shipment planning.

Rhulen said his clients are grappling with the psychological impact of a possible pandemic. "Employees are concerned about, 'How do I protect myself, my business and my clients?' Companies that don't have a communicable illness plan are really scrambling."

There is nothing esoteric about the proper hygienic protocol for reducing the risks of exposure for employees, Rhulen said. The problem is many companies don't develop a formal plan for dealing with any communicable diseases in advance of such an outbreak. They react in an ad hoc way, making it far more likely that the plans they whip together will be incomplete or faulty.

Trucking and logistics company Con-way, which has trucking services across the U.S.-Mexico border, said it created its "pandemic response plan" in 2007 based on threat levels designated by the Centers for Disease Control and the WHO and started the plan in motion as the swine flu scare spread in Mexico.

Con-way installed hand sanitizer dispensers in all of its facilities, and made a formal effort to instruct employees about proper hygiene practices for preventing the spread of flu viruses. Con-way has also issued guidelines to all employees regarding proper hygiene practices.

These sorts of tactical measures only address health issues, however, and not the impact of such a pandemic on supply chains. If the pandemic becomes serious enough, many companies may wind up asking their office workers to stay at home and, if possible, work there over the Internet.
That's one measure CaseStack takes after making its computer programs Web-based and accessible remotely.

"We need to be able to be sure (in advance) that people can work at home," Sanker said. CaseStack also has a plan to keep all of its employees and customers up-to-date over the Internet about service disruptions, including warehouse closures. The company automatically flags employees and customers when a particular carrier it works with is no longer receiving any loads.

More strategically, the swine flu outbreak also highlights the importance of using advanced tools that provide visibility into the entire supply chain. Sanker said, "You have to know where all the stuff (shipments) is at every minute."

However, "visibility alone is not enough," said Jeff Karrenbauer, president of INSIGHT, which provides supply chain software and services. "I need to know where my stuff is stuck, but I also need to identify the various ripples all across the supply chain when something is stuck. I also need to know, how do I allot other resources to make up for it?"

He said most companies still react tactically to epidemics and others risks, rather than plan strategically for various possibilities.

"You need to build a model of your supply chain in advance," he said. Your model should set out in detail how your company will react in case, for example, you lose access to a particular port, manufacturing plant or critical raw material anywhere in the world. It must explain in detail what you will do if a supplier that provides 40 percent of a key raw material goes bankrupt or gets shut down by local authorities because of a health-related event. "Which facility would impact us the most if we lose it? And if we lose that, what is our secondary plan? And how are we going to reconfigure our supply chain?"

But most companies prefer to pretend that no serious supply chain disruptions will ever occur. "We are placing the longest bet in the history of Las Vegas that nothing is going to happen," Karrenbauer said.

Contact Alan Field at afield@joc.com.