While the tragedy in the Gulf Coast and the Southeast unfolds our hearts go out to all those impacted. If the experience of Katrina is any example, the impacts of these natural disasters will reshape the complexion of the area for years to come. The economic hardship many will feel in fleeing these hard-hit areas will render them powerless to return to life as they knew it.
Everyone focuses on the area impacted by the high water and devastation. From a supply chain perspective, the impact goes far beyond what is visible to those impacted. Residents displaced by the devastation will impact the demand on other areas. People helping those impacted will buy goods and services in their local markets. These items will be purchased at a level most likely not typical for the season.
This leads to a displacement of demand that will forever be in the history of the locations impacted. Developing a way to quantify the impact will be critical to ensuring that computed inventory levels will not overstate the required levels. Demand planning teams must recognize the situation and work to uncoil true demand from the abnormal shock they are now experiencing.
In times of uncertainty, families will relocate to safe areas. Whether, a city far from the projected event path or another family member’s home, impacted areas disperse to other areas. The consumption of products before the event by those hoping to dodge the storm is not dispersed to other areas around the country.
So where do they go? Using Katrina as our guide, people flee to the closest metropolitan areas. Concentric rings 50 miles in radius collect the impact with the closest ring absorbing the largest impact and the outer rings feeling a reduced impact. People fleeing the impact zone move to these major metropolitan areas opposite to the projected path of the storm.
Figure 1: Archimedes Principle
The Displacement Affect
Trying to understand the principles at play may best be described by a similar affect used in chemistry. An ancient Greek mathematician, inventor, physicist, astronomer, and engineer in the 3rd century created principles to quantify the disposition of a liquid when a solid is placed into it. Known as the Archimedes' principle, he explained the forces at play when an object is immersed in a fluid and becomes buoyant by a force equal to the weight of the fluid displaced by the object.
This is like the effect of a natural disaster, in that population is dispersed based on the magnitude of the event and the ease to which one can flee the impacted site.
Modifying our variables, we would use:
Archimedes’ formula was defined by the density and the volume. In our application, density equals the intensity of the event in terms of size, scope, and destruction delivered. Volume relates to the amount of water released and the destruction water causes.
In our application refers to the economic and social trade-off between returning and staying displaced. We use gravity in our application for the distance from the epicenter. The farther you are from the epicenter, the less the impact.
Being able to quantify the displacement affect during the event and after the event is critical to realigning the inventory to support the new demand.
What Happened with Katrina?
Before talking about the result, you must first understand the impact of Katrina. The effect of Katrina was felt over 93,000 square miles of land. Before impacting land, 75% of the 819 manned offshore oil rigs were shutdown. This storm destroyed $200M of the Louisiana sugar crop and halted the operation of the 50 chemical plants that produces 25% of the nation's chemicals. More critically, the storm damaged the oyster beds and the shrimping industry which is the backbone of the coastal town economy.
Figure 2: Great Dust Relocation 1930's
In human terms, the storm displaced nearly 800,000 people which is larger than the Dust Bowl displacement early in the 20th century. Ten years later, over 100,000 of these residents never returned to their original city or county from which they were displaced. On a national level, the country was growing at a 3.8% rate. After it rolled through, the country slowed to 1.3% level until it could get back on its feet and returned to a 4.6% level.
On a local level, getting the stores and infrastructure running again took weeks and months. Residents slowly returned to the devastated areas to rebuild or to recover what they could before moving on. Of the residents impacted, only a single digit percentage of them held flood insurance.
Where Does the Demand Go?
When people evacuate to safety, they move to areas of higher ground and where they can be with family. Demand is both temporarily and permanently removed to other areas.
Families are the first place to go when times get questionable. In reference to caregivers, 26% of them live ≥ 25 miles from their loved ones. From a marriage perspective, 10% of marriages contain partners who are ≥50 miles from their partner, 28% of children live in a split parent situation. This is a greater factor for African Americans due to 69% of families being split.
This gives insight into the places demand will move, as well as, locations where additional supplies will be purchased.
- Largest Closest City
Many use this as a chance to get to a large city where they can find accommodations and things to do. Residents leave for the largest cities nearest to them and move beyond this as hotels fill-up. Given the end condition of their home, low income residents often remain displaced and start new lives in their city of relocation.
It times like this, the best of people often come out. Friends in unimpacted locations often offer their homes to impacted friends. Once the waters recede, impacted individuals will often stay with friends until they can get their homes into a condition where they are again habitable.
- National Support
As those not impacted provide their heart felt support, they buy goods to support those impacted. This support is strongest closest to the impacted area and wanes outward in a 50-mile band of support. Demand patterns should recognize the increase in demand for “basic” items and de-build this for future planning.
All of this leads to demand being displaced to areas where they would not usually be. Demand teams should be aware of impacted areas and “adjust demand” for future planning purposes based on the projected impact.
The magnitude and dispersion of the demand is based on the overall size, scale, and impact of the storm. The dispersion affect helps compute the impact and helps to define the magnitude of demand that needs to be manually adjusted. A failure to recognize this dynamic assures you will carry more inventory than desired.
What We Can Learn?
The advantage of this from a demand perspective is that it helps to define true based demand. Review your performance history by day during this timeframe. True basic items will be sold out within the first day or two of a pending activity. This is meaningful because it provides valuable insight into true demand drivers.
The subsequent week will provide valuable insight into the trade-off or substitute products your customers will consume. These may provide insight into price impacted items and ones that will be consumed but are not the true customer desire. These are products you want to minimize where possible.
The next week will show items that are not in demand. They may have a specific customer in mind, but in general are not heavily desired and should be managed very closely in the future. For the most part, they are profit drainers and should be critically evaluated for go forward selling.
Luxury items will fall into the last category and may be critical to the assortment. They may not sell during this time, but should be critically evaluated to ensure they provide a strategic advantage. They may be very important to the go forward strategy, but this occurrence gives you a chance to step back and review their criticality to the go forward strategy.
Getting a true understanding of your assortment is valuable in completing assortment planning and inventory rationalization. While, the go forward demand should be adjusted to minimize the impact it has on go forward inventory levels, the insight this experience provides is extremely valuable in defining the relative strength of competing items to your customers.
In recent years, the level of weather activity has intensified. While, the resulting number of hurricanes to make landfall in the United States has not been impacted, the number of storms has increased.
Figure 3: Hurricane History 1900 to Present
Every time one of these storms impacts a trade region, the resulting demand is impacted. Understanding this impact of the growing number of storms is critical to defining “true” demand. While each storm takes its own path, being able to manage the resulting impact is critical to effective inventory management.
Figure 4: Overall US Storm History
While your heart breaks for those impacted by a natural disaster, it provides valuable insight into the true demand of your customers. Developing a strong understanding of the impacts of your customers and the demand that will result is critical to “adjusting” historical performance to manage inventory levels appropriately. Taking a tragedy and getting value from it is critical to helping better manage the business.
Recognizing the patterns of weather and the impacts they deliver will help teams better manage the impacts and long-term effects. Understanding the demand relocation and end customer displacement is critical to recognizing the demand patterns that will result. Failing to take on this actively will result in supply shortages in areas the team does not understand.
Due to the nature of natural disaster, no one storm is the same. While, the patterns and behaviors may appear similar, the power and punch that each storm brings will be different based on the topography of the impacted area and the socio-economic position of those impacted. We must learn from these experiences so we can help our business optimize the opportunity being presented.