ARE YOU READY TO DEAL WITH A POTENTIAL CATASTROPHIC EVENT?

In view of the unfortunate weather conditions causing the loss of lives, infrastructure and business in the USA , India, Pakistan and many other places, I am re-publishing my 2015 Article on loss adjustment.

Please consider this a friendly advice and feel free to contact me should be interested in asking me questions. With disaster recovery missions all around the world, we are the leading experts in dealing with loss adjustments in the corrugated and Paper based packaging industry.

What to do when the unthinkable happens?

An article about Loss Adjustment , Risk Management and Contingency Planning in the paper based packaging Industry.

There must be more than 100.000 significant paper based packaging production sites around the world and it comes to nobody’s surprise that every year a large number of them are hit by catastrophic events.

Cartisa Barcelona, Smurfit Kappa Almeria, Thai Container, Orora (Amcor) Brisbane, Smurfit Kappa Herzberg, Cargal in Israel.

There are many plants in the Corrugated Packaging Industry that have experienced what it takes to handle the most feared disasters.

They all had major catastrophic incidences ranging from sever fires to floods, storms and earthquakes.

There is almost no plant that did not at least experience a minor incident that could have turned in to a major disaster under different circumstances.

They were hit by surprise! Or were they not?

In all cases it was the action taken by a few that prevented the worst. Not just for that reason alone, to prepare the managers and workers of factories for what could come their way must be an important part of an overall contingency plan for any company.

Production plants that are in close proximity to rivers that are know to cause floods frequently, plants that are located in areas of extreme weather conditions, or located in the neighborhood of other risky production businesses, can not claim that they did not know it could happen.

While extreme weather conditions are something we can’t control, think about what you can control in order to avoid a severe incident.

The reason for avoiding preventive actions is simple; It’s human nature! It is human nature because our mental defense kicks in automatically once we start thinking about the incidents that could affect our lives negatively. – We hesitate to deal with this as a pre-caution because the average person will feel overwhelmed. It also delegates responsibility to people that may not be ready for it.

And even after we forced our self to work with the pre-cautions and preparations that we all agree are necessary, we still put them aside and believe it’s done and good.

We forget that people are leaving our companies, they move to different positions and they simply forget what they have been trained to do while the company continues to grow and develop.

So when the catastrophe hits us, we will usually find out that we are not as well prepared as we thought we would be.

Thankfully, we also find out about those who rise to the challenges at hand, safe lives and prevent us from even greater damages. This article is about becoming one of the leaders that are prepared for the challenges that could arise.

We at Treneco AB have worked directly and indirectly with many loss adjustment cases. Ranging from minor damages on single machines to complete losses of mega plants, we have seen it all. We have provided expertise and project management to the insurances as well as to the insured party all over the world

No matter where we went in the world, all these situations had a great deal of skill limitations in common.

·     No Fire/Storm/Flood training with the people in Management positions.

·     No contingency and recovery plans

·     Lack of understanding Risk Management.

·     Insufficient experience in large Project Management

·     Legal rights representation.

·     Understanding current building codes

·     Data Collection for business interruption assessment

·     State of current technology

·     Updated asset evaluation

·     Contingency back up supply for customers

·     Negotiation skills for building, utilities and equipment.

In business as in private life it is not uncommon to see the peoples lack of experience in dealing with the unspoken negative surprises that could come their way.

Unfortunately, as mentioned earlier, that is common human behavior. We tent to ignore what we don’t want to happen. We may think that the insurance we pay and take care of everything when it happens.

Don’t be surprised but that is a wrong suggestion!

Your insurance will most likely pay, but you have to do the work fixing it!

In your own interest, consider once if your company has the expertise to rebuild a complete plant today and with no notice?

Think of the fundamental failing of governments all over the world whenever a catastrophic situation appears. Even well organized countries have frequent catastrophic events like floods and fires and will struggle with getting on top of the needed actions.

In defense for the insurance industry we can confirm by experience that they truly want to help and be fair. However, it’s pretty much like any other business transaction.

You get what you pay for!

Those of us who have lived through major disasters in business will remember grown man and women falling completely apart over such challenging issues, but also not forget those who grew beyond previously presumed leadership skill while maintaining their humanity.

The ability to handle emergency prevention and preparation is a fundamental prove of leadership. Whenever it is handled well and to the best possible results, tremendous efforts for training and education had been made prior to the event.

The good news is that it is learnable. Although there is lots to learn and to think about when you want to become pro-active and work out contingencies that you have no experience with, it is no different than any other subject you need to address.

But where do we start?

This is where the PARETO PRINCIPLE can be applied and become very useful. For those of us that are not familiar with the Pareto Principle, here is what it says in a simplified version: “In business approximately 80% of the result are achieved through approximately 20% of the efforts.”

But it also means;

„To get the final top 20% for full achievement may take you 4 times the energy, resources and efforts of the first 80%!“

Naturally the understandings for priorities and sequencing are crucial.

Interesting enough, and when you think about it, you may agree that, approx. 80% of your profit is achieved with approx. 20% of your customers. This is not uncommon for many industries.

For a discussion about catastrophe prevention this could translate in to understanding that 80% of the negative results impacting your business, could be prevented through following up and preparing on the top 20% of the preventive measures.

With other words, already a relatively small amount of contingency planning can have a huge impact on how we are able to deal with such situations.

So, a good starting point would be to understand what has to be insured under which conditions and what we can do to minimize risks through training and preparation.

This is where assessments come in.

At TRENECO AB we observe and experience the most extreme needs for risk management and contingency planning with our clients. Be it the insurance that is asking us to consult or a Box Plant, they are usually a mile apart in their understandings. This is where we try to help finding the common ground that a business has to stand on in order to make sure that the health and safety of the people is covered, and the contingency of the operation is addressed while insurance premiums stay affordable.

Insurances look at contingencies and current conditions when assessing their clients needs. They look at the paper and corrugated industry with the experience gained also from other industries such as the car or electronics industry. They know about contingency planning and loss prevention from those other industries and consider that know how when assessing the risk that come with insuring your operation.

Considering this comparison and an understanding of what other industries do to prevent losses and damages to the health and livelihood of people, there is no excuse for not meeting the standards that would apply elsewhere.

Typically TRENECO AB would assess the contingency and the health and safety regulations of an operation prior to assessing the value of the equipment and buildings.

This is simple because it matters severely for the overall assessment of a business.

So after the organizational health and safety regulations and the maturity of the contingency plan has been determined, the value of the insured assets can be worked out.

Besides the assets you must consider:!

·     Is the machine model that is installed still available in the market?

·     What current Equipment would match the lost equipment?

·     Will the new equipment fit in to the old building?

·     Do I need new buildings?

·     How can I make sure the insurance understands the relationship between space and the new production machinery requirements?

·     Will I get permits to rebuild my business on the same plot of land?

·     Which environmental rules have to be considered for the rebuilding of the plant?

·     What new utilities like water, air, electricity and steam are needed with the replacement equipment?

·     Do these utilities match my new equipment and will they comply with current codes?

·     What logistic changes are required to fit the replacement equipment?

·     What is the right compensation value for an outdated piece of equipment?

·     Should the replacing equipment match original production needs or future needs?

·     Do I need new spare parts and consumables with the new equipment?

·     Will dies and stereos for my client orders work on the new machine?

·     Will my foundations and building structure comply with the replacement?

·     Who needs how much training of what kind and is that covered with my insurance?

·     What can I do while I wait for the new equipment?

·     How long will it take until my new machines can produce at full capacity?

·     How can I prove the business interruption loss for just that Machine?

·     Does my maintenance team have the skill and manpower to resurrect a major piece

of lost machinery, or do I need outside help?

·     Where can I find the help that I need and what will it cost?

·     Am I entitled to my own expert consultant and where can I find them?

From Treneco’s experience this list can be extended to many more questions that need answering.

The assessment of a potentially insured manufacturing asset is much more than just the purchasing price that you will get with a machine manufacturers proposal.

Typically we find that neither the insurance, nor the insured party, or even most professional assessment companies have a full understanding of what is needed and what it will cost to recover from a loss in the corrugated industry. Utilities, foundations, and logistics must be addressed.

Most Assessment companies will get a standard proposal from a machine supplier and use it for their assessment without understanding the specifics of the packaging industry. To base an assessment on proposals alone will not take care of your individual situation. You may end up being under insured or pay a too high premium.

The insurance will base the premium on the insured value and the contractual terms.

Consequently all side costs should become a part of the insured value.

That is simple enough, but how can I make sure that value is right and that my coverage is fair?

Further to that, how can I make sure that my operation stays current with the investments that are done every year?

Would a Sprinkler system help to reduce cost?

Start with differentiating between those things that can be insured and replaced and those that require training and education. You will find that many risks can be minimized through procedures, training and education. The insurance will take notice and it will be reflected in your insurance fees.

Business interruption.

Large risks can be insured. What can not be insured is your business model. Loosing your profitable customer base is hard to recover from. A starting point could be to reconsider how your company wants to deal with customer expectations and how you want to comply with this commitment.

As with many other businesses that live with short lead times and low profit margins of 6-8%, they can be brought down by the loss of these few profitable clients. There is no lawyer and no insurance that can bring back a customer. That will be your job alone!

The Pareto Principle could serve you well for determining where your minimum focus should be.

Customers are loyal to their suppliers mostly because they are reliable and delivery on time of what was promised. Your customer can’t afford to shut down his business because of your unfortunate situation!

Consequently you will most likely loose your customer if you can’t supply them.

At this point large groups often make a major mistake by assuming that a sister company could pick up the delivery to a specific customer. Our experience at TRENECO shows that with more than 70% of the orders this assumption is simply wrong.

Amongst other things consider this;

–      Paper grades and qualities must be available as well as flutes and calipers.

–      Procurement must be set up.

–      Capacity must be planned and labor be available.

–      Machine sizing

–      Printing stereos and dies must fit the sister plants machines.

–      Accuracies and specs must be achievable from the sister plant.

–      Training and education

–      QC integration

–      Storage space

–      In-house logistics

–      Cost and margin calculations will vary between sister operations.

–      Logistic capacity must be increased.

Even if you technically can move the production to a sister plant, you still need to consider that statistically 80% of your customer reject claims are associated with first time order deliveries.

Practically we have found that every time when there is a major loss with a production plant, it is essentially like their entire order book becomes the subject of a new open tender to all your competitors.

There should be no doubt that having a business interruption component insured is essential for your business.

The business interruption damage is often greater than the material loss of assets.

It serves no purpose to have insurance for assets alone. We all know that it takes years to build up a customer base while it may only takes hours to loose them again.

If the damaged operation is part of a group, or if it has a friendly connection with a neighboring supplier that in spite of the previously described hurdles has the production capability that is required, you still need a contingency plan for the business interruption insurance component.

 And still you must be prepared to loose a majority of clients during such times.

That is why the business interruption insurance is so important.

In order to cover for a Business Interruption a clear understanding for sales and finance must exist;

·     Current and repeat order information per client over time.

·     Material and manufacturing cost vs alternative supply source.

·     Profit margins with every individual client.

·     Increased logistics cost from alternative supply source.

·     Reclamation cost due to learning curve with the alternative supply source.

·     Dies and Stereos to produce these orders with a different machine.

·     Cash flow based on supply and payment terms.

·     Estimated cost to win a client back after the operation is back on track.

·     Potential travel and accommodation cost to have operator temporarily work out of a different production site.

·     Workers compensation to keep staff on the payroll while not producing.

The struggle to keep a customer, suppliers and staff while dealing with a catastrophic event adds to the complexity at hand.

To understand all their needs and how to fulfill them while being in a state of disorder is a major part of the contingency plans for every company. This is a major challenge for the leadership team of any company and can’t be taken lightly.

What to do?

So let’s face it like it is! Most of the paper based packaging producers have tremendous room for improvement in this area.

At the most, the average manufacturing operation has a fire drill now and than.

But do you know where the nearest fire department is and if they are equipped to comply with the disasters that could happen to your operation? 

Contingency planning is one of the most important duties of a company. This means to look beyond the daily routines and to prepare for the infrequent and unexpected events that can disrupt our business.

Start by differentiating between those risks that you can address through training, discipline and education and those that you have to find solutions for outside your direct operational responsibilities.

Contingency planning for any industry should contain;

·     Catastrophic event (fires, floods, storms, crimes, earthquakes) emergency planning.

·     Continuous health and safety discipline.

·     Updated asset assessments.

·     Financial plan

·     Updated supplier lists and contact information.

·     Contingency plan training.

·     Staff contingency updates.

·     Supply chain alternatives.

·     Logistics

·     Recovery plans.

·     Project Management training.

Reading this article may remind you of some tasks that you wanted to look in to or even overwhelm some of you as you start to understand that there is lots to do in your company.

When ever asked for advice , TRENECO’s answer is very direct and simple.

“There is no such thing as tomorrow! Be aware that you have responsibilities for the health and safety of your associates and the economic value of a company towards your shareholders. Professional help is available to work through your risks and always remember Murphy’s law.”

“ANYTHING THAT CAN GO WRONG, WILL EVENTUALLY GO WRONG AT SOME POINT OF TIME!

So better be prepared than sorry!

About TRENECO AB and the Authors

Andreas Tingvall is the Managing Director of the TRENECO AB Consulting firm located in Gothenborg, Sweden with branches in Germany and Poland. Prior to founding TRENECO AB he has served the Corrugated Industry as President of International Operations for Barry Wehmiller ( BW PAPER Systems) and Technical Director of Kappa Packaging and ASSI Domaen.

He has been in charge of 7 complete new Plant set ups and done loss adjustments after storms , floods, fires and earthquakes in dozens more.

Lothar Jacobmeyer is an independent Consultant associated with TRENECO AB and best know for his life long commitment with the European corrugated Industry. He has held CEO positions Stone Container, ASSI Domaen, Bauernfeind and served one term as FEFCO President.

Besides conventional management consultancy TRENECO AB is specialized in supporting Insurances and clients with loss adjustments in the paper based packaging industry world wide. TRENECO AB is certified by several major Insurance companies as expert advisor. Be aware that most insurances pay the fees for expert recovery advisers and loss adjustment professionals.

We know this industry inside out and can help you becoming prepared for the unpredictable event that strike us while we are busy doing other things.

Andreas Tingvall