Just a lot of hot air?
Written by Nick Martindale
The eruption of the Eyjafjallajökull volcano in Iceland and subsequent ash cloud covering European airspace prompted daily reports of air traffic disruption. But how were other firms affected?
The closure of European airspace in April - and the subsequent second stoppage in May - presented business continuity teams with a rare scenario. Airlines affected by the incident are thought to have lost around £130m a day during the two incidents, according to the International Air Transport Association.
But the disruption also hit food and flower retailers, restaurants, pharmaceutical firms, high-tech and car manufacturers, as well as those directly linked to the travel industry such as holiday operators or major events and supplier organisations.
"The main lesson to learn from these 'black swan' events is that simply using forecasting and trend analysis to look at risk may not be sufficient," says Guy Dunkerley, principal adviser at KPMG. "There is a whole class of event out there that is not subject to forecasting and these can have an amazingly disruptive potential."
Yet the very nature of most companies' supply chains, with their reliance on a just-in-time model of delivery, means certain companies - particularly those with physical products to transport - are inevitably going to be at risk of all-out blockades to individual methods of travel. Only about one per cent of the UK's imports arrive by air but businesses could just as easily be affected by inclement weather at sea or on land - such as the high winds that closed Felixstowe port back in 2007 - or strike or terrorist action.
"People working on just-in-time delivery try to keep as little as possible in the supply chain and get things as they need them but that's a real problem from a resilience point of view," says Martin Caddick, business continuity service leader at PricewaterhouseCoopers. "If you're being risk averse you'd keep buffer stock locally or take alternative suppliers. But if you're encouraging your supply chain or procurement people to take stock out of the supply chain and cut costs then this is what you get."
The economic downturn has also brought customer pressure on organisations to ensure their supply chain is robust and can withstand even the most unexpected scenario. "A few years ago it was rare for a customer to come to you as a supplier and ask about your risk and business continuity planning but that has now become almost the norm," says Dunkerley. "Any customer that got badly hit by the volcano [incident] will be thinking about how they can check they won't be exposed in the same way again."
He suggests companies need to take a conscious decision as to what level of risk they - and their customers - are prepared to accept. "If you do the maths and say you'll reduce your exposure to obsolescence and excess stock but accept that you have an increased risk, whether it's of a volcano or industrial action, then at least you're making that conscious trade-off. The ones who need to be asking themselves questions are the ones who didn't realise they were so exposed."
"It's not just about the widgets themselves but how you get the widgets to where they've got to go," offers Rod Ratsma, UK head of business continuity management at broker Marsh, who says it's important that organisations identify the value chains that are essential to the success of their critical business lines. Rick Cudworth, head of resilience and testing at Deloitte, adds: "Take a look at your critical supply chain to ensure appropriate resilience and rehearse your planning through a series of progressive tests and exercises to ensure that they are practical and fit-for-purpose."
Dunkerley gives the example of one firm that examined various geological factors to understand whether it was over-concentrating supply in areas that were prone to flooding or other weather-related events such as earthquakes.
Ultimately, though, he believes companies will continue to opt for efficiency over peace of mind. "There won't be a massive slide into moving things by ship, not least because it actually takes...time to change. You're also opening yourself to a big risk on the other side, which is that all of that stock which is floating on the water runs a much greater risk of obsolescence by the time it reaches you."
The fallout following the eruptions at Eyjafjallajökull also highlighted the perils for organisations of having staff stranded around the world for an undetermined period of time. Those companies with effective business emergency transport plans in place were able to arrange for alternative means of returning staff to the UK, says PwC's Caddick, although such planning was made more difficult in this particular instance by initial indications that it would only be very short-term disruption.
"A combination of technology and business continuity planning ensure that systems can be mirrored and staff safely transported to other work locations," he says. "A further emphasis by the business continuity planning process on staff welfare would only strengthen what is already a mature field of expertise."
Organisations that do find key members of staff stranded around the globe need to react quickly, warns Steve Turner, director of Business Continuity Transport. "You have to think about who is able to take over meetings in the next couple of weeks and what you can do constructively while you're over there," he says. "This is more of a problem with small businesses where you have people who are genuinely key and may need to get back for client meetings."
Many businesses were also caught out by the fact that standard business interruption insurance policies, which require there to be physical damage to property, did not cover the inability to trade as a result of the suspension of flights. Ratsma cites the example of a particular travel firm that saw tens of millions of pounds wiped off its bottom line.
Some insurers - including Marsh and Zurich - offer policies that cover non-physical damage that would pay out should a repeat of the volcano incident occur. "These propositions will typically feature the need for an added value risk assessment, which enables the customer to better understand their risks and for the insurer to be able to price the risk," says Nick Wildgoose, supply chain proposition manager at Zurich Global Corporate, which launched its All-Risk product in June 2009. "These assessments will typically feature questions around business continuity in the supply chain."
"Maybe that's the thing to do," says Dunkerley at KPMG. "If these issues are fairly rare but potentially very damaging maybe you take the view that you can't protect against the risk and it's cost-prohibitive to hedge against the risk - for example by building up your inventories - so your last refuge is to insure against it."
The disruption caused by the volcanic ash cloud has certainly served as a reminder to organisations that may have let their business continuity preparations lapse during the current downturn.
"Some will say they have got through this and so they don't need to put in place special plans," says Caddick. "Others will ask what they can learn from this and will be much better prepared for the more complex scenarios that may occur. For example, pandemic flu can shut down airlines and stop travel between continents. Businesses need to think much harder about risk and factor the cost into cost efficiencies, because if something goes wrong it will cost them far more than all the savings they've made in the last five years."