The costs of warehouse fires extend beyond inventory losses and construction expenses: unanticipated interruptions in the supply chain, diminished cash flows, as well as increased labor and third party expenses pile onto the total bill.
When Gap's primary distribution center in Fishkill, NY, caught fire last month, the company was forced to pay large sums to quickly redirect goods to other distribution centers. The center accounted for 30% of Gap's total distribution space and serviced roughly 10% of the company's orders.
Gap's case, while being investigated as arson, provides a useful lesson in
- the dangers of over-reliance on single warehouse space
- the importance of having an incremental shipping, storage and distribution plan to mitigate risk
Indirect impact to supply chains
Warehouse fires are commonplace and costly: The National Fire Incident Reporting System cites approximately 1,210 warehouse fires every year, recording roughly $155 million in total property damage from 2009 to 2013.
"The impact of a fire in a warehouse can be devastating for a supply chain, especially given the long standing trend towards centralization of inventory," John Manners-Bell, CEO of Transport Intelligence and supply chain risk writer told Supply Chain Dive.
"Even if the fire is localized within the warehouse and brought quickly under control, smoke and water damage can be extensive," he added.
Bell went on to say that companies used to be able to divert stock from dispersed warehouse locations to fill the void and keep the inventory moving throughout the system.
But not any longer.
Warehouses have become centralized nodes in a supply chain, he said, and risk of disruption is much greater not least because companies are running so lean. In addition, tightened fulfillment timelines have decreased the margin for disruption management in many supply chains — so a single fire could have disastrous effects.
Risk management practices
Despite the inevitability of warehouse fires, various steps can ensure that, if it happens, costs and disruptions are minimized. Most important is having a continuity plan and being aware of the concentration of goods at any given location.
A few years ago U.K. based clothing e-retailer Asos suffered a devastating fire which left 20% of its stock compromised by the fire and the facility's sprinkler system. The facility accounted for 70% of the company's stock and left Asos unable to fulfill orders.
A Dun & Bradstreet supply chain risk specialist, Lee Glendon, said that Asos had to stop trading because the company had not prepared a business continuity plan and a "single point of failure should have been identified as part of good supply chain risk assessment and mitigation put in place."
Glendon suggested that it is not a good idea to "over concentrate" inventory in one location. Additionally, in order to prepare for potential fire, companies should prepare a fire map to be aware of the potential damage and secure their most essential goods in low-risk zones.
Companies usually put these risk management practices on the back burner since it is difficult to quantify the financial costs of such events, opting instead for insurance. However, when such incidents happen, it's not insurance that poses the biggest burden — it's the logistics costs and production disruptions.