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Of Weather and Risk Management

Posted by admin on March 11, 2015

If you live in many parts of the eastern U.S., especially the Northeast, you’ve probably been the victim of what one of our associates calls “weather hype” this winter.  This is when forecasters predict impending doom from record snowfall and little or nothing materializes.

The most notorious of these occurred in January when up to two feet of snow was predicted in the New York City area but the storm moved further east and left the city with just a few inches of snow.   The problem was that city managers took extreme measures to prepare based on the forecast, including declaring a state of emergency the day before, putting emergency workers on overtime, sending most of the commuter railroad cars into storage, etc.  When the storm failed to live up to the hype it cost the city millions of dollars in overtime pay and lost revenue.  This is in addition to the untold millions in lost productivity and revenue to companies due to closures.

Of course, if the city had not taken the warnings seriously, it would have been criticized for not preparing when the storm hit.  So city managers we’re a bit damned if they did and damned if they didn’t.

What can we learn from all this as business leaders?  Maybe the most valuable lesson is to plan based on probabilities.  By this we mean laying out plans based on the likelihood that various scenarios will play out.  In the example of the snowstorm this might entail three scenarios:

  • The storm moves very far east and no snow occurs
  • The storm moves 50 miles further east than predicted and there is moderate snow
  • The predicted level occurs and there is significant snowfall

With each scenario, there is a plan of what actions will be taken, when the plan needs to be activated, and who is responsible for making the decision and implementation.

When we teach executives and managers our Potential Problem – Risk Analysis (PP-RA) process we first focus on what changes can be made to avoid a problem from occurring.  While there is not much that can be done to change the weather, businesses can plan in advance on what actions they will take if a weather event occurs.  These should be built into the company’s business continuity plans and include not only the nuisance snowfall, but the major natural catastrophe that can close a building for weeks, avoid raw material from reaching the plant or impact other suppliers proving products needed in final production.

After considering changes that can be made to prevent a potential problem, we focus on those problems that can’t be avoided, the likelihood they could occur, the impact they will have if they occur and the plans needed to minimize the damage from them.  This is where scenario planning is so critical.  A potential problem with high likelihood of occurring and high impact warrants more attention to planning than a potential problem with a low likelihood of occurring and low impact.

In workshop sessions, executives and managers apply our PP-RA thinking to real life situations such as planning for shut-down/outage maintenance work and subsequent start-up; new equipment installations; process or procedure changes; and equipment modifications.  These situations have as much risk as any “snowstorms” Mother Nature can throw at you.

By taking a rational approach to potential problems a company can avoid panic situations and making purely reactive responses when a potential problem does occur.  It can lay out scenarios of how to deal with the range of potential problems and be in control of the situation, whether it’s the never ending cycle of weather events or man-made situations.