This piece was originally published on Freightwaves.
Extreme weather is on the rise, forcing businesses to make the necessary adjustments
The summer of 2021 will be remembered for shattered records. Not to be outdone by pole vaulters in Tokyo or new variants of an unending pandemic, our climate is going above and beyond in asserting its dominance over human life — and the global economy.
Hurricane Ida’s devastation from New Orleans to New York and the Caldor fire’s carnage in California have made July’s Pacific typhoons and German floods seem like ancient history. All the while, a question nags at us: “What on earth is coming next?”
It’s become increasingly clear these past months that extreme weather is on the rise — and in order to survive, businesses have no choice but to adapt. For the shipping industry, this means accepting extreme weather events as the status quo and integrating them into strategic planning from end to end.
While most companies will develop new strategic plans and review their supplier networks every three to five years, the reality of our current environment means that, regardless of when plans were last made, companies should be having these conversations today — and they should be having them often.
To ride out all these supply chain disruptions while preserving customers and profits, shippers should consider four major factors: inventory positions, risk tolerance for specific commodities, transit times and associated costs.
In recent years, many companies have edged out the competition by engaging data science and automation to better anticipate customer demand, thereby reducing the amount of inventory sitting idle in a warehouse. This delicate balance of supply and demand depends on precise transit time estimates so customers aren’t left waiting past their expected delivery date.
Unfortunately, a single storm can throw these estimates to the wind. We know that even a minor disruption at one end of the supply chain can result in extreme delays at the other end, in a phenomenon known as the Bullwhip Effect.
When you tie in the freight capacity market, think of a giant Slinky that is pulled in different ways. As capacity shifts from one area to another, rates, availability and dependability all vary. When you tie in larger events, these are more impactful to the capacity market.
In the wake of Hurricane Ida, the number of loads delivered in Louisiana declined by 28% in the week of Aug. 30. After Typhoon In-Fa thrashed coastal China, the Port of Shanghai’s container intake dropped by 52%, and those containers took twice as long to reach unloading.
And the last mile is no better off.
During the Caldor fire in California, officials evacuated cities and shut down 50 miles of highway traffic for a month, resulting in gas and grocery shortages in the Tahoe basin. Note that these statistics were collected during those specific periods of disruption; but given this is an asset-driven capacity model with constrained capacity, it takes time to recover once an event has occurred, and the impacts are felt well beyond the event’s initial geographic scope.
In the face of this new reality, companies must consider the inventory tradeoff, i.e., the value of holding more safety stock in anticipation of weather-related delays. For example, a customer who sees that Company A’s product will arrive too late may choose a similar product from Company B, just for the quicker delivery window – even if Company B’s product is more expensive or lower quality. Next time, Company A might be willing to lose the inventory battle — keeping more items in stock, ready to ship, at a higher cost — in order to win the war for customers.
While it’s impossible to predict exactly when and where the next Ida will hit, we do know there are seasons for everything. Hurricanes form in the Atlantic between July and November — just as we know that wildfires sweep the West every summer and snowstorms bury the Midwest every winter. We also know that these regions are known for certain products and commodities — oil and gas in the Gulf of Mexico, for example.
Knowing that these events are likely to occur with greater strength and frequency, companies should weigh their sourcing options for the commodities specific to those regions during the above seasons. Companies might be able to source critical products from more stable regions at different points of the year. Some lower-value products might not be worth sourcing at all during some of these extreme events. While complicated and potentially costly, this kind of product-specific evaluation is essential to strategic planning in today’s environment.
We know that extreme weather events can slow down or cut off the supply chain, from production to distribution to the “last mile” of delivery. Hurricane Ida slowed shipments for a thousand miles, with on-time shipments declining 14% in Louisiana and 10% in New Jersey, and dwell time increasing 14% in Delaware.
With this knowledge, forward-looking companies would be wise to calculate their tolerance for longer transit times if it means getting their products to their final destination safely and predictably.
While longer routes and lead times sometimes equal higher costs, they may be the answer to protecting profits. After all, that same customer who chose faster shipping could very well return to reliable Company A if the shipment from Company B was delayed in transit by an airplane-grounding blizzard, a traffic-stopping wildfire or other factors that could have been avoided by climate-centric planning.
Companies should be reevaluating their networks, as well as their locations of sourcing, manufacturing and shipping, all with climate events in mind. Alternate seaports might be considered for import or export — for example, avoiding Shanghai during typhoon season or favoring Long Beach over Houston when hurricanes are in the forecast.
Whatever the business decisions, companies should reach them by weighing the cost impacts of shifting sources and routes against the predicted savings realized by customer satisfaction and retention.
As the sun sets on a record-breaking summer, the holiday season looms — accompanied this year by shipping delays, capacity shortages and sky-high freight costs. Throw in a few extreme weather events, and we’re looking at a season for the record books.
Companies that hope to ride out the storm are already ramping up their holiday production. But companies that want to thrive must go far beyond that, taking a hard look at their inventories, sources and routes not only for this year, but for a predictably unpredictable future.