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Executive Roundtable

Plan Ahead to Fend Off Blackout Headaches

Business Owners, Company Presidents and CEOs Share Advice

July 22, 2001

TEC Worldwide is an international organization of more than 7,000 business owners, company presidents and chief executives. TEC members meet in small peer groups to share their business experiences and help one another solve problems. The following questions and answers are based on recent TEC meetings in Southern California.

Question: I run a small manufacturing firm in the Los Angeles area and we are very concerned about possible power outages this summer. We estimate that each hour of downtime will cost us $15,000. I'm also concerned about lost sales due to fax, phone and e-mail orders that don't get through when our Web server and communications systems go down. Backup generators big enough to power our plant cost $125,000 and require storing diesel fuel on the premises. They also create a lot of pollution and are expensive to run. At this point, however, I don't see any other options. Do you have any suggestions?

Answer: You're wise to address these issues ahead of time. Thinking outside the box a little may provide some solutions to your dilemma.

First, suggests Richard Kreidel, president of Adams Rite Manufacturing Co. in Pomona, try looking beyond your own internal power needs.

Are the generators you have priced just large enough for your plant, or do they have any excess capacity that you could sell to others in your industrial park? If not, it may make sense to look at larger generators that could supply power to several companies at once. That way, you could spread the costs with one or more of your neighbors.

You also might look into leasing instead of purchasing. Chances are you will need the generator only during peak summer hours. Nobody knows how long the energy problem will last or how severe it will get. But does it really make sense to spend that much money on a hard asset that will--we hope--be used very infrequently?

George Mayer, president of Riverside-based Pallets & Accessories, identifies two additional options. If your operation is single-shift, you might avoid power outages (which generally happen in the middle of the day) by moving production to a later shift. You also might talk to your power supplier about how much it would cost to guarantee that the juice remains on for your firm.

"Getting on the 'uninterruptible' list may be prohibitively expensive," acknowledged Mayer, "but at this point you want to get all the data so you can make the best possible decision."

Kathleen Ellison, president of B&K Electric Wholesale in Industry, raises the possibility of getting a smaller generator and using it to keep your Web site and communications up and running.

That wouldn't solve the problem of production downtime, but it would keep you from losing sales and would require a smaller cash outlay, regardless of whether you buy or lease the generator.

Alternatively, you could set up a backup Web server at a different location. Should the lights go out in your plant, you could route all incoming orders to your emergency Web site.

These represent some possible solutions from CEOs who have already given the issue some thought. By pulling your management team together for a brainstorming session, you probably can come up with more.

The key, said Karyl Gately, president of Shea Mortgage in Walnut, is to address the issues before a heat wave knocks the state's power grid for a loop.

"Our employees have already begun asking questions like, 'If the thermometer hits 110 degrees, will you let us go home? Will you bring in fans? Can we wear shorts?' " Gately said. "I don't want to have to answer those kinds of questions when we're sweltering in the heat because the air conditioner shut down. In some ways, it's a lot like earthquake-preparedness planning, which we have already done. Under what conditions do we let employees go home? How long does the power outage have to last before we release everybody? It's far better to think these things through in advance than wait until the lights go out."

One final word of caution. If you suffer financial losses due to power outages, don't count on any business interruption insurance you may have.

"During the rioting in '92, we couldn't ship for three days," Ellison said. "However, because we eventually got the product to our customers, we couldn't prove we had a loss of sales. Our insurer didn't pay us anything, even though we had to pay our employees for not working. If you have business interruption insurance, check your contract carefully. Don't assume it will automatically cover you for a power outage."

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If there is a business issue you would like addressed in this column, contact TEC at (800) 274-2367, Ext. 3177. To learn more about TEC, visit http://www.teconline.com.

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