Supply Chains in Katrina’s Wake

Even for companies far from the storm, Katrina may eventually result in billions of dollars in lost revenue. Business-interruption insurance may help them recoup their losses, but the hurricane also offered a reminder on the limits of ''lean and fast.''

Finance executives working outside the Gulf Coast need only to have been watching television in the aftermath of Hurricane Katrina to be moved by the devastation of human lives and to grasp the catastrophe’s potential effects on energy costs and the environment. But even for companies far from the storm, the impact is likely to be more direct: lost profits resulting from broken supply chains and absent business customers, as well as from the lengthy disruption of one of the country’s largest commercial ports.

This secondary toll on businesses could stretch into the billions, experts say; in insurance terms, the losses are likely to represent “a substantial exposure,” says Robert Hartwig, chief economist of the Insurance Information Institute. They’re likely to affect a “wide swath of Corporate America,” he adds, and may surpass the losses spawned by the September 11 attacks because New York is less of a manufacturing and marine hub than New Orleans.

In particular, revenues are likely being slashed by the disruption of shipping through the Port of New Orleans, the country’s fourth-largest port in terms of metric tonnage, and to a lesser extent by disruptions at the Port of South Louisiana, the second-largest. The Port of New Orleans did come back into service by the middle of last week, months earlier than some had predicted, and the Port of South Louisiana was almost fully operational the week before. But according to press accounts, a fair number of companies had already rerouted exports and imports through other ports after the storm. Those changes probably increased supply-chain costs, according to Gene Long, president of UPS Consulting. Assuming that the Gulf Coast ports were on the most direct route, he says, rerouted cargoes “have to travel further to go the same distance.”

Other companies, however, found rerouting impractical. Minneapolis-based grain supplier Cargill Inc., which buys soybeans, corn, and wheat from Midwestern farmers and ships the crops on its barges to four Louisiana export facilities, saw those hubs go out of commission for two weeks after the hurricane struck.

Instead of sending its cargoes by rail or truck to other ports, Cargill chose to wait out the crisis, to track down its 300 employees in the region, and to restore its facilities, according to company spokesman David Feider. In any event, rerouting wouldn’t have made economic sense, he notes; Cargill would need 15 rail cars or 60 semi-rig trucks to carry the same volume of cargo as a single barge.

Particularly hard-hit by the loss of suppliers was the chemical industry, which relies heavily on petroleum-based products, says Finley Harckham, a lawyer with Anderson, Kill, & Olick who represents corporate policyholders. For example, companies that depended on the Dow Chemical Co.’s St. Charles Operations in Hahnville, Louisiana for polypropylene — which is used in textiles, food containers, automotive parts, lab equipment, and many other products — had to scramble to find other suppliers.

Like many other companies with plants in the affected area, Dow declared that because of the action of a “force majeure” (a “greater force,” i.e. the hurricane) it was excused from liability for failing to provide 30 polypropylene products. About 37 percent of Dow’s North American production capacity, which totals 1.35 billion pounds of polypropylene annually, was affected by Katrina.

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