What Do Waffles Have to Do with Risk Management?

July 6, 2011
According to an Olin Business School professor at the Washington University in St. Louis, a waffle chain, of all places, demonstrates that companies vulnerable to supply-chain disruptions from natural disasters can gain a competitive advantage by implementing strong risk management plans.

Panos Kouvelis, Ph.D., the Emerson Distinguished Professor of Operations and Manufacturing Management and director of the Olin's Boeing Center for Technology, Information and Manufacturing, says that companies like Lowe’s Companies Inc., The Home Depot Inc., Walmart Stores Inc., and Waffle House Inc. are role models when it comes to disaster preparedness.

“These companies have many stores in the southern part of the United States that are frequently exposed to hurricanes,” Kouvelis explained. “They have good risk management plans in place and are great examples of how their supply chains get affected in two different ways.

“On the one hand, your own supply chain is exposed,” he continued. “At the same time, your stores are supposed to be the first to react and provide the basic supplies. Your supply goes down, while your demand goes up.”

Waffle House Index

The “Waffle House Index,” first coined by Federal Emergency Management Agency Director W. Craig Fugate, is based on the extent of operations and service at the restaurant following a storm and indicates how prepared a business is in case of a natural disaster.

For example, if a Waffle House store is open and offering a full menu, the index is green. If it is open but serving from a limited menu, it’s yellow. When the location has been forced to close, the index is red. Because Waffle House is well prepared for disasters, Kouvelis said, it’s rare for the index to hit red. For example, the Joplin, Mo., Waffle House survived the tornado and remained open.

“They know immediately which stores are going to be affected and they call their employees to know who can show up and who cannot,” he said. “They have temporary warehouses where they can store food and most importantly, they know they can operate without a full menu. This is a great example of a company that has learned from the past and developed an excellent emergency plan.”

Kouvelis added that the earthquake and resulting tsunami in Japan this past March affected numerous supply chains, from silicon wafers to flash memory to automobiles.

“The Japanese car companies, even though most of their assembly factories are to the south of Japan, and of course have much capacity outside of Japan, definitely were affected by the earthquake,” Kouvelis said. “They brought their production levels down to 70 percent. Now we are hearing they are ready to bring it up to 90 percent and hopefully by July they will be close to full capacity.”

In the face of a natural disaster, a company’s ability to handle the scenario will either put it at a disadvantage or ahead of the game.

“Disaster management and risk management in global supply chains can actually be a competitive advantage,” said Kouvelis. “It’s not pure risk minimization. You have to think of it as an opportunity to get ahead of the game by being better prepared.”

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