In late August of 2005, Hurricane Katrina, a Category 5 storm, hit the Gulf Coast of the U.S. like a massive steamroller, flattening everything in its wake and causing tremendous loss of life and property damage. The scope of the damage became quickly evident, as news crews almost immediately sent images of destroyed houses and flooded neighborhoods across the world. But Katrina's long-term impact on the chemical and energy supply chain specifically was at once significant, sometimes subtle, and often spread far beyond the southern states.

In the weeks after the storm, the biggest short-term impact was tighter chemicals supply and increased prices. The Minneapolis StarTribune talked to companies across the upper Midwest and found many of them reeling as a result of Hurricane Katrina. For example, H.B. Fuller, a glue and specialty chemical products company in Vadnais Heights, Minn., admitted it was facing unexpected cost increases for its fourth quarter due to out-of-service ethylene plants that had disrupted its normal supplies. Similarly, Blow Molded Specialties in Foley, Minn. saw its resin prices rise by 50% over a two-month period, forcing the maker of playground equipment, camper roofs and gas tanks for generators to jack-up the prices it charged its customers.

For many organizations, the storm was a watershed in terms of showing the vulnerability of their chemicals supply chain. A Purchasing survey immediately following the storm found almost half of buyers polled didn't have a contingency plan in place for such an event. Bob Parker, an analyst with Manufacturing Insights in Framingham, Mass., says Katrina and the West Coast port strike a year prior combined to show purchasing and supply chain decision makers that they needed to balance the relentless pursuit of cost-cutting and efficiency with actions that could make supply chains less brittle and failure-prone due to unanticipated events.

Analyst Bill Polk at AMR Research in Boston says, to some extent, purchasing and supply chain professionals have the deck stacked against them. Thanks to the physical location of many natural resources as well as a range of governmental policies, as of 2002 there were nearly 500 chemical plants in the Gulf Coast region, representing nearly half of the nation's petrochemical manufacturing capacity.

Although he stresses that the fallout from Katrina was an unusually catastrophic event, its duration was limited and "What many folks came to realize is their need for a good contingency plan." Of course, building a realistic contingency plan is no small task but Polk says a good starting point is data. One of the first steps in a risk mitigation plan, he says, is developing a standard set of data across the company to provide full visibility into suppliers across the supply chain.

"For example, BASF was able to put this in place before Katrina so that through their SAP ERP system they could monitor their suppliers and they knew where all their shipments were so they could make necessary adjustments," says Polk. "That helped them to literally weather the storm much better than most organizations," he adds.

But Polk says one of the other steps toward building supply chain resiliency, developing multiple sources for chemicals, is becoming more difficult as the chemical industry cuts cost, consolidates facilities and continues to go through a wave of mergers and acquisitions. Still, he notes, despite the dominance of the Gulf Coast, there are some alternative sources and shipping points, and buyers would do well to become familiar with them.

Steve Lucena, a commodities manager at MAPEI, a multinational building materials company with U.S. operations based in Deerfield Beach, Fla., says what Katrina taught him was that his company was in a vulnerable position, with three-quarters of its products manufactured with feedstocks routed through Gulf ports.

"Without them, we were clearly in trouble," he says. However, prior to Katrina, his company had decided to line up additional suppliers and checked to make sure alternative distribution arrangements were available. That helped. Still, Lucena notes, those alternative plans often depended on transport by rail rather than by ship and, in the case of Katrina, flooding north of New Orleans put even those plans in jeopardy when tracks were inundated or washed away.

In addition to getting a better understanding of suppliers and their distribution capacity "we issued instructions to our people to always have orders on the books—either blanket or rolling ones—so when a disruption hits we would have a history with the alternate supplier and would be part of their allocation," Lucena says. Furthermore, his own manufacturing facilities were encouraged to build up some extra inventory. "The accounting department wasn't happy but after Katrina when our competitors couldn't ship, we could," he adds.

Subsequent to the storm he says he has gone back to suppliers to try to better understand how they acquire or manufacture their products. "We wanted to be sure we knew how they got raw materials, for example, so that if they ran into problems, we would not be hurt."

Digging deeper still, Lucena found suppliers did not predict the logistical and human impact an event like Katrina would have on operations. He cites a supplier in Louisiana that was confident its own building would be okay in a big storm. It was. But the supplier did not predict employees would be unable to make it to work for more than a week, rendering the building useless.

The lesson Lucena draws is that buyers and suppliers must think about all the external factors such as people, utilities, fuel and transportation that can be critical to operations and, by implication, the ability to function as a supplier.

"If your company has only one facility or if all your facilities are in the same area, you could still be vulnerable, so long-term you should look at dispersing your own facilities, too," he adds.

However, in this game that is often dominated by giants, it is the small companies that are most vulnerable to damage, says Polk. "Companies like Dow Chemical, DuPont or ExxonMobil can spread their supply and production capabilities fairly easily but smaller firms usually don't have that ability," he says.

A longer-term solution to reducing storm-related risks could involve persuading the government to encourage more dispersed refining capacity and opening up more of the continental shelf to exploration, he adds.

Polk acknowledges there are some global forces that may still thwart any such an initiative. "With rising feedstock costs, it makes financial sense to build closer to large supply regions." For instance, more chemical capacity is being built near the oil fields in the Middle East for financial advantage, but having more capacity in one location can mean more supply risk.

For the near-term, chemicals and energy buyers will need to balance costs of supply on a day-to-day basis with the potential risks of disruption.