When a fault on the Victorian electricity transmission network stopped production at industrial giant Alcoa's Portland aluminium smelter, many business chiefs and chief financial officers around the country stood up and paid attention.
The question they posed was, if a power outage could curtail operations at one of the country's most significant smelters, what is the risk to other businesses with similar operations around the country?
David Byrne is Managing Director at BWD Consulting, which provides procurement services. He says thinking through the effect of a power outage on a business's operations should form part of every company's operational risk planning.
“The first step is to identify all the business's key functions, including the supply of goods and services. In this case the service was electricity. Once you've identified those key elements it's important to put in place contingency plans to ensure that the business can adequately cope if an event does occur," he explains.
Build a consequence scale
Byrne says the idea is to assess each element on a consequence scale for the business from insignificant, through to minor, moderate, major and catastrophic.
“Then look at what the implications are for the business. Are there financial, reputational or regulatory implications, as well as others, and how will they affect customers, staff and other stakeholders?" says Byrne.
Byrne believes that scenario-planning must include contingency plans which limit damage. “Look at potential system disruptions for the business. Then when thinking about those key consequences for your organisation, as CFO understand as part of your contingency plans, what you can do to control that," he adds.
“Alcoa shut down one of their pots and moved production to the second pot. While that would have been a huge disruption to the organisation, it would have been something that was probably well planned for and thought through," he explains.
Byrne says every company should think through how a similar scenario may affect its operations.
“Typically, a business like [Alcoa] will have thought through this scenario and planned to use back-up generators or move services to other companies. So, it's important to find alternate suppliers that could assist you during challenging periods. Open up a communication channel with alternate suppliers and establish a relationship as part of your contingency planning. Then, if an event does occur, it's not a huge issue," he advises.
The CFO and executive team should be involved in this process, to ensure responsibilities are clearly defined if a power outage does affect operations. It's also important to create protocols before an event occurs. Contingency plans should detail what actions should be taken and the timeframe in which these should be taken.
Making supplier connections
“Power is a challenging issue. Let's take a bank as an example and assume one of its energy suppliers has a power outage. This is easy to predict so most banks will have formed relationships with additional suppliers so they can move the service directly to the other supplier if power goes down," Byrne explains.
This is also common practice in IT, for instance, in data centres where third parties store their servers and constant energy supply is essential.
“A back-up generator is essential if your premises have a power outage and you only have a single site for the business. Ensure it is tested regularly as part of regular maintenance," Byrne advises.
For other businesses working in a big city building, ensure the facility has a back-up generator so that if the power goes out, the business won't be disconnected. Ask for a report on when a test on the generator was last completed and its maintenance schedule.
“If you lose power, you'll lose your computer systems and if you lose that, then you'll lose your communication with the outside world. No business can be off the air in the digital economy," Byrne warns.
Aside from ensuring power supply by using another supplier or firing up the generator, it's important to think through how each area of the business may be affected.
“Think through whether you can move the business's IT systems to another site. An offsite backup system where the business may be moved to in the event of a longer power outage should also be part of scenario planning. Usually, it shouldn't be located in the same area as the main business. But staff need to have easy access to it, so ensure the back-up location is within one or two hours' drive away from the main premises," he adds.
Remote facilities for key staff
It's also an idea to ensure key staff have all the tools they need to work remotely if necessary, including laptops and a reliable internet connection.
Byrne says that potential energy disruption in response to extreme weather events or other unforeseen circumstances needs to be part of an overall suite of contingency plans.
“It's important to be prepared for many eventualities in business. Fog or bad weather often results in cancelled flights, which can affect a business's operations, for instance. And this is just one example of an unforeseen event for which all businesses need to be prepared. The idea is to do regular, thorough scenario planning to ensure that the organisation is ready for every eventuality," he says.
- Think through potential scenarios before they happen and categorise them on a scale from insignificant to catastrophic.
- Assign responsibilities in the senior management team for managing these scenarios and timeframes by which important steps need to occur to restore power to the business.
- Investigate building relationships with multiple energy suppliers so that in the event one cannot guarantee supply, an alternate solution may be put in place.