Monday, January 2, 2012

In 2011, Natural Disasters highlight importance of Business Continuity Planning

The most significant event of 2011 was the effect natural disasters had on global business. In April 2011 an earthquake in Japan, spawned a Tsunami which later went on to cripple a nuclear reactor at Fukushima resulting in a disturbance to the power grid, radiation emission, withdrawal of expat labour from Tokyo and  a  disruption in the supply chain of several global firms. In Nov 2011 floodwaters in Thailand inundated seven industrial estates north of the capital, crippling global supply chains.
Although natural disasters are not very common, the magnitude of their impact is severe, and governments are never fully prepared for such disasters because the consequences tend to be largely unpredictable. Japan, for instance designs all it’s building to be earthquake resistant. Even though Japan suffered multiple high magnitude quakes the resultant loss of life through fallen buildings was minimal, it was the unpredicted Tsunami which created a catastrophe.
Of the many companies which were affected by these disasters. Honda Motor Company was one. The company suffered lost production, stock declines and business losses. The Honda plant at the Rojana Industrial Park was a major production base of Honda in the Asia and Oceania area.
The press released by Bloomberg Oct 31 2011 “Honda Misses Profit Estimates, Scraps Forecast” redacted below, fully outlines the business impact of the disaster on the company.
“Honda Motor Co., Japan’s third- largest carmaker, reported second-quarter profit that missed analysts’ estimates and withdrew its forecasts after flooding in Thailand crippled its production in Southeast Asia.
Net income was 60.4 billion yen ($761 million) in the three months ended Sept. 30, compared with 135.9 billion yen a year earlier, the company said in a statement. That missed the 66.1 billion yen average analyst estimate compiled by Bloomberg.
Honda, which made more than 170,000 cars in Thailand last year, scrapped its full-year forecasts as it reels from a disaster that’s inundated 10,000 factories and flooded more than 80 percent of Thailand’s 77 provinces since July. Automakers will produce 300,000 fewer vehicles than expected this year, according to the nation’s automobile industry group.
Honda shares have fallen 22 percent since August, the steepest drop among Japan’s three biggest carmakers. The stock fell 3.7 percent to 2,406 yen today.
Second-quarter operating profit fell 68 percent to 52.5 billion yen, below the 78.5 billion yen average analyst estimate, with the company blaming the strong yen for eroding earnings. Revenue also missed analyst estimates.
Most companies do not actively plan or invest against natural disasters as the cost for managing such risk is high and probability of occurence low.

The three learning’s from these incidents are:

1.    Natural Disasters cannot be accurately modeled or planned for. They do happen and due diligence in site selection helps.
2.     In Thailand, costly equipment was damaged because the communication was not in an international language or as timely to foreign managers, hindering precautionary actions. this has to be anticipated and built into the plan.
3.    Time to recover varied from a minimum of 3 months onward for large firms

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