Introduction:
Physical threats posed by fire, explosions and extreme weather
events are increasingly ranking among the top business risks for
companies worldwide, causing them significant economic
damage.
According to Allianz's latest Risk Barometer report
1, fire and explosion – considered the most
frequent driver of business interruption losses – ranked as
the sixth most important corporate concern for 2024, up from ninth
the previous year. For companies dependent on the heavy-asset
model, such as chemicals, engineering, manufacturing, and oil and
gas sectors, it was rated the fifth top risk.
A recent report by the global reinsurance broker Gallagher Re
estimated that the economic costs of natural hazards, including
direct physical damage and business interruption, stood at $357
billion in 2023 2. Insured losses have reached an
estimated $123 billion of that total, marking the fourth
consecutive year that insured losses have exceeded $100
billion.
Traditional threats are extremely hard to mitigate through risk
management efforts, therefore presenting a significant peril for
businesses. Besides the immediate threat to people, disruptions
from fire are particularly severe due to their typically longer
recovery times, which can last for months. Industries dealing with
highly flammable materials, such as chemicals, often face
years-long processes to rebuild damaged facilities and restore
production to full capacity.
There's also a cascading impact on suppliers and the broader
value chain, alongside unpredictable effects on brand reputation,
customer satisfaction and employee morale. Unsurprisingly, fire is
the leading cause of business interruption insurance claims, as
evidenced by Allianz Commercial's analysis of 1,000 claims
worth more than $1.3 billion over the past five years.
A stark illustration of the risks posed by critical events is the
fire at Renesas Electronics Corporation's Naka N3 factory in
Japan in 2021, which forced the company to halt its 300 million
production line for about a month 3. According to
estimates by Fitch Ratings, the closure was expected to result in
approximately $150 million of revenue loss and temporarily impact
EBITDA margins due to lower utilization and ongoing fixed
costs.
The incident placed the business under further financial strain, reducing its free cash flow generation and slowing the deleveraging process at a time it was seeking to raise new equity to fund an acquisition. With limited options for outsourcing due to a global semiconductor shortage, the disruption also affected the firm's ability to serve its customers.
Planning emergency responses: a four-pillar approach
To minimize the impacts of critical events on people, assets and
business continuity, and enable rapid recovery, effective
pre-planning and crisis response is of utmost importance.
Management, employees and financial stakeholders must trust that
every person will know what to do when a crisis or operational
security incident occurs.
For industrial businesses operating outside of large corporate
conglomerates, this can be harder to achieve due to often limited
capacity and experience to respond timely and effectively to the
complexity of the tasks. Many may need additional manpower and
consulting by senior experts to tackle the many different areas in
need of support, from the cleaning of facilities to dealing with
production shortfalls and customers' relationships. This lack
of expertise and/or resources can result in longer recovery times
and extended losses.
In our experience from various disaster recovery projects, an
effective crisis management plan must start with active leadership
during the initial response, focusing on the following key
pillars:
1. Communication and stakeholder management:
Critical events are inherently holistic and therefore complex, requiring rapid and coordinated efforts across several internal and external stakeholders. A comprehensive stakeholder management approach should aim to:
- Ensure C-level management, local management, subcontractors, global finance function and supply chain team quickly get on site and inform employees on what the situation is (frequent updates when its developing);
- Prove leadership and responsibility by informing ad hoc key customers and suppliers, lawyers, insurance brokers and forensic accountants as well as the public on the situation – what you know, do not know, what we are doing against by reconfirming we care for their situation;
- Communicate with investors to secure reputation and trust and avoid consequently bad rating which might cause additional financial pressure.
2. Restoration:
Our approach to bringing back the damaged facilities into operation and quickly relaunching production includes:
- Identify opportunities to reduce business interruption such as improved scheduling and paralleling of work activities;
- Support selection of and negotiations with subcontractors, including introduction of success fees to strengthen the commitment negotiated;
- Create an overarching detailed project plan on cloud-based project management with clear responsibilities, as well as project dashboard for weekly monitoring;
- Proactively identify possible risks in the execution plan;
- Monitor closely the progress to keep momentum alongside ad hoc support for delayed tasks.
3. Supply chain:
Protecting customers and minimizing long-term damage to these relationships is crucial to reduce business interruption. We recommend the following actions in that regard:
- Identify and qualify alternative sources for supply and assist with temporary supply contracts;
- Prioritize certain customers on long-term importance to mitigate future business loss;
- Develop a detailed weekly supply chain implementation plan for each product group;
- Tactically allocate inventory and alternative supply to key customers, followed by coordination of the alternative supply;
- Assist in rescheduling own supply chain to reflect production interruption.
4. Insurance claim management:
To maximize the payout by the insurance companies, we focus on the following activities:
- Coordinate and align perspectives among client, insurance broker, lawyer, and other internal and external workstreams;
- Align capex and opex plan with operational perspective to minimize the insurance claim impact on the normal operations
- Gather the costs and losses associated with the critical event to support the insurance perspective;
- Quantify BI damage and communicate the business rationale of alternative supply measures to the insurer, to maximize the compensation for the client.
A&M's crisis response in practice: a case study
A specialty chemicals company, partly owned by a private equity fund, was hit by a fire on one of its major production facilities. The accident destroyed one of the plant's production assets, disrupting the material flow and bringing the output to a complete stop.
A&M was engaged by the company to provide a holistic project management support during the crisis response. The critical work was delivered through three workstreams – centered around the pillars of restoration, supply chain and insurance claim management and framed by active stakeholder management.
Some of the major outcomes of the project include:
- An overarching project plan that enabled stakeholders to understand dependencies and urgencies within all workstreams, ensuring efficient coordination of all activities;
- Partial resumption of production after two months, following the installation of a new temporary production asset;
- Reduction of restoration timespan by five months, due to several acceleration measures, coordinated project execution and strict controlling;
- Due to a successful claim management process, the client obtained more than 50% of the total property damage claim as advanced payments to support the restoration.
Footnotes
Originally published 18 October 2024.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
