Are you ready for the next Katrina?

By James Aaron Cooke, Executive Editor -- Logistics Management, 10/1/2005

By now, we've all seen the horrific images of destruction caused by Hurricane Katrina. And we've heard the reports that government officials failed to heed warnings and take actions that might have mitigated the loss and damage that resulted from the storm.

Government officials were not alone in being ill prepared. Many manufacturers and shippers underestimated Katrina's impact and experienced supply chain interruptions. Those experiences should serve as a wake-up call for American businesses to re-examine the structure of their supply chains and prepare crisis plans for dealing with future inventory disruptions.

Throughout the '90s, the paragon of the perfect supply chain was one that held almost no inventory. Companies viewed inventory sitting in warehouses as a huge negative on their balance sheets; it was expensive to pay high interest charges on goods that had yet to be sold and converted into cash. During those years, companies practicing sound supply chain management held as little stock as possible and relied on carriers to make swift deliveries from centrally located distribution centers.

But that was a different time. The lean-inventory, just-in-time-delivery supply chain model does not make sense today. For one thing, there's a current capacity shortage in transportation. Shippers have a tough time finding truck, rail, ocean, or air carriers to make regularly scheduled deliveries under normal circumstances, when the Department of Homeland Security considers the threat level to be low, or Code Green. In a Code Red situation, companies will be sorely pressed to find willing, able, and available carriers. Still, businesses must be prepared to handle any supply chain disruption caused by another natural disaster or, God forbid, one fomented by terrorists.

In this age of uncertainty, shippers would be wise to re-examine the inventory-transportation trade-off equation they use to calculate the amount of buffer stock needed to serve customers.

Our own research here at Logistics Management indicates that companies are beginning to do just that. Indeed, 61 percent of readers who responded to a special survey said that their companies were holding more inventory than in the past. (For more details, see the feature story on Page 59.)

But stockpiling inventory is only the first step. Logistics managers must also develop a plan for how they will supply their customers in time of crisis. For example, they need to determine which of the carriers they now employ have the flexibility to handle additional shipments out of other distribution centers. They need to ask themselves: Does the distribution network need another distribution center? Can other suppliers step in and provide needed products in a pinch? As companies source more materials overseas and supply chains extend around the globe, contingency planning becomes a more difficult exercise—one that requires sophisticated software to analyze all of the variables.

But it's an exercise that must be undertaken. As our nation's experience with Hurricane Katrina demonstrates, we must have disaster-preparedness plans ready for a range of circumstances. And logistics managers must have in place their own plans for maintaining distribution operations before the next supply chain disruption becomes a reality.