Assessing the Near- and Long-Term Supply Chain Effects from Hurricane Harvey

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Procurement professionals have their work cut out for them as rains from Hurricane Harvey finally recede.

While the personal and human costs of the disaster are only beginning to be tallied, supply chain and logistics pictures appear even murkier. Here are the top supply chain areas Harvey has disrupted, as well as the near- and long-term consequences procurement organizations will face responding to the storm.

Transportation

The most immediate disruption felt by procurement teams has been the ensuing logistics nightmare.

Throughout the first half of the week, all major logistics hubs were shut down until further notice. The Port of Houston was closed through Thursday, and is expected to fully reopen at the earliest in five or six more days, Spend Matters Managing Editor Taras Berezowsky learned in his Q&A with Riskmethods.

Harvey also shut down the Ports of Galveston and Corpus Christi, Houston’s William P. Hobby and Bush airports, and brought freight and road transportation to a complete standstill. Suffice to say, little is leaving or entering the greater Houston area any time soon.

Major industries affected by the logistics disruptions include retail consumer goods, food, construction materials, machinery and, of course, plastics, petrochemicals and energy.

Oil and Gas

America’s growing role in the global oil industry is firmly centered in Houston, which means Harvey has sent significant shockwaves through energy markets.

Harvey’s second landfall Wednesday choked the country’s fuel-making capacity to a quarter of the usual total. The impact on oil-related prices, however, has been mixed.

Fuel prices have jumped considerably, rising above $2 per gallon for the first time since July 2015, according to Bloomberg. Trucking rates will likely rise both nationwide and especially in the Houston area in the near term.

Crude prices, on the other hand, have dropped, with West Texas Intermediate falling 1.7% last week. Oil traders appear to be focusing more on how damage to refineries will decrease demand rather than how the affects total oil supply.

But this is the near-term picture. As OPEC continues its policy of production cuts, Harvey’s impact could appear later in the form of reduced U.S. exports, creating bullish conditions for crude in the long term, Reuters reports.

Legal Risks

Beyond supply disruptions and price aftershocks, procurement groups should also begin preparing for any legal actions that could become necessary when affected suppliers fail to meet contractual obligations.

Between transportation issues and the inability of many Houston residents to even return to their homes, many suppliers, particularly in the region’s considerable plastics and petrochemicals industries, have completely shut down their operations.

In the near term, communication and information gathering should top procurement’s priority list. Knowing the operational state of suppliers will help planning for when conditions eventually normalize.

Looking forward, procurement should check supplier contracts to see if they contain force majeure clauses, which permit a supplier to justify failure to meet deadlines, reach production goals, make deliveries or uphold its end of a contract with another company as a result of a natural disaster, "act of man" or "act of God," according to Supply Chain Dive.

While communication and collaboration with suppliers should take precedence during this difficult time, the lack of a force majeure clause — a not uncommon possibility with many companies affected — could potentially lead to the use of litigation as a remedy to production halts or delays.

Preparing for the Next One

In addition to investigating current supplier contracts to inform next-step strategies, procurement must consider its performance during this event and the possibility of further disruptions to come.

For many organizations, Harvey should serve as a wakeup call. As riskmethods' Bill DeMartino, general manager of North American operations, and Heiko Schwarz, the firm's founder and managing director, told Spend Matters Thursday, “enterprises must be risk aware, making risk an integral part of all decision making. A strong supply chain risk management foundation and generating sub-tier visibility cannot prevent disasters, but it can help to limit exposure and minimize impact.”

This is an essential point, because Harvey will certainly not be the last major storm to affect major supply hubs in the Gulf of Mexico.

Case in point: There are already two tropical threats procurement should be monitoring.

One is a potential storm forming in the western Gulf of Mexico that could bring yet more rainfall to Texas early this week.

The other is Hurricane Irma, which recently formed in the Atlantic. Current conditions in the Caribbean are causing that storm to intensify already, and it is expected to reach Category 3 or stronger.

The first storm is concerning because Houston is still flooded, and any additional rainfall will only exacerbate currently overloaded wastewater systems.

Hurricane Irma is a more complex beast. It is too soon to tell whether the system will pose a threat to the U.S., according to the Weather Channel. But based on its rapidly increasing strength, keeping tabs on Irma’s path will be critical.

Need help preparing for this or other potential risks threatening your supply chain? Check out this quick compilation of risk-related research and advice from Editor-at-Large Sydney Lazarus to get started.

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