Business Continuity Dealing with Disasters The Makro Case Study

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Business ContinuityDealing with DisastersThe
Makro Case Study

• Michael Jordan
• Finance Director
• Makro SA

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An introduction to Makro as background to this
presentation

• Makro is part of the listed Massmart Holdings
  group and includes
• Game, Dion, Builders Tile Warehouse, Jumbo,
  CBW, Shield and Furnex
• Makro generates in excess of R7bn sales annually
• Makro operates 12 large (7,000-20,000m2) urban
  warehouse clubs
• Trades in food, general merchandise and liquor
• Makro has a card-based membership which
  integrates with a CRM system to manage customer
  data
• Makro serves 1.5m customers per year in
  commercial, resale and own-use segments
• Makro has 2,600 permanent employees

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Makro has had three devastating fires, which have
lead to tremendous learnings in business
continuity

• Amalgam 12 June 1994, R101m financial impact

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The presentation is structured as follows

• Precautionary measures
• Risk Management
• IT Architecture and processes
• Emergency procedures
• Key objectives in disaster management
• Customer management and retention
• Employee management and redeployment

• Supplier management and involvement
• External parties involved in disaster management
• Insurance claim preparation
• Store rebuilding and reopening
• Unintended consequences

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Firstly, learnings from the Woodmead fire led to
improvements in precautionary measures

• Following the Woodmead fire, Makro escalated the
  importance of Risk Management principles
  throughout all the stores to ensure business
  safety and continuity
• The precautionary measures included
• Appointment of a National Risk Manager
• ASIB approval of all hydraulic sprinkler
  protection systems (SABS 0287)
• Water continuity was addressed
• Due to erratic and low pressure municipal
  supplies, our own standalone water tanks required
  additional electrical water pumps and motors,
  with diesel stand-bys, while all batteries were
  upgraded
• Fire and evacuation procedures were enhanced and
  fire marshals assigned
• Racking and stacking procedures were implemented
• Only small quantities of oxidisers and corrosives
  (especially calcium hypo chloride) are kept in
  stores
• Subcontractor processes were reviewed hot/cold
  work permits
• Daily close-of-business inspections now conducted
  throughout all stores

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Learnings from the Woodmead fire led to
improvements in precautionary measures

• Precautionary measures (continued)
• Daily safety inspections are conducted when
  dangerous work is taking place
• Regular fire safety equipment testing carried out
• All staff are inducted in the Be Safe work
  programme
• Store OHS structures include Risk Managers, OHS
  Officers, Section 16.2 appointees and safety reps
  who are properly trained
• Makro has 175 First Aiders, 334 Fire Fighters,
  273 Safety Reps and 50 zone controllers
• Employees participate in bi-annual emergency
  procedure drills
• External audits are done bi-annually to test
  compliance, interpretation and application
• These precautions not only assisted us in
  reducing the risk of fires, but also created a
  structure and system to deal with any potential
  fire
• From Woodmead, it became clear that a Makro fire
  would inevitably lead to total financial loss
  therefore, these measures also had to satisfy our
  insurers

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But despite all our best efforts

• We attempted to mitigate against all known risks
  following the Woodmead fire but the
  flammability of the existing roof insulation was
  a totally unknown risk, with disastrous
  consequences for all concerned

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Apart from risk management precautions,
pre-emptive data management is applied

• Reliable information is absolutely critical in
  dealing with a disaster of this magnitude
• The major difference between Woodmead and
  Strubens Valley was the installation of the SAP
  system
• There is one national SAP server, which is always
  live
• A three-tier architecture exists at stores
• BackOffice server POS Server POS
• All this data is replicated at Head Office with a
  national view
• Transaction data reaches HO data centre within
  minutes
• Information is archived for 5 years
• A detailed backup strategy is in place
• Daily, weekly and monthly backups are done at the
  BackOffice and Head Office servers
• This makes it easier to recover from a disaster

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Apart from risk management precautions,
pre-emptive data management is applied

• Sales data
• POS trickle-feeds to national server ensures no
  data is lost
• From POS data, we can determine how much money is
  in each till
• Credit and debit card slips were lost, but
  protected because EFT process online
• Cash, cheques and gift vouchers remain
  problematic, along with cash office data
• Debtors data is kept on SAP no data lost
• Stock data
• Goods Receiving done in SAP no data lost, but
  paperwork destroyed
• After Woodmead, started replicating repairs data
  to national server due to customer impact no
  data lost at Strubens Valley
• Customer data is kept on SAP and no loss occurred
• Mail and file servers were recovered from backup
• IT hardware losses cannot be eliminated
  altogether the IT asset register information is
  therefore important to establish extent of losses

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However, when disaster strikes, the in-store
Emergency Procedures kick in

• The fire is detected by the smoke and heat
  detectors and the message is transmitted
• Fire Brigade, Security Company, Store General
  Manager, Risk Manager and Store Emergency Team
• 60 fire fighters and 13 fire appliances responded
  to the Strubens Valley fire
• Attempts are made to control the fire, but if it
  cannot be contained, the store is evacuated by
  trained zone controllers
• 300 employees plus customers were evacuated from
  the Strubens Valley store within 10 minutes
  without serious injury or loss of life
• Makros fire suppression systems are advanced and
  aid tremendously in dealing with fire
• Pressurised water tanks with primary electric and
  secondary diesel pumps are activated by the
  detection systems

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Business continuity key objectives are addressed
during disaster management after the fire

• Key objectives are managed by a high-level team
  under leadership of the CEO
• Manage and retain customers
• Manage stakeholders
• Local community and general public
• Employees
• Suppliers
• Shareholders
• Manage process to get insurers to accept
  liability
• Insurance investigation and claim management
• Mitigation of loss
• Information and technology data reconstruction
  and business continuity
• Rebuild store and reach pre-fire profitability
  levels
• Design and project manage the rebuild of the
  store
• Plan and execute the re-opening

Communicate as widely as possible
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Management of customers and public is
interrelated - messages will reach both groups

• Customers worry for various reasons, the
  community is inconvenienced (smoke, dust), the
  public speculates and the share price drops
• Our customer retention process hinges on the
  following principles
• Inform customers of events and be proactive in
  accommodating customers elsewhere during the
  rebuild period
• Consider and address reputation risk by allaying
  concerns, especially in the areas of health and
  safety (particularly in-store)
• Deal with perceptions and rumours
• Advise of the number injured, the cause of the
  event once finalised, and environmental impact
• Use all available mediums to reach customers
• Aggressively manage customer database or use data
  collected on customer

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Marketing takes control of managing customer
communication

• Makro is in the enviable position of having a
  state-of-the-art CRM system which allows us to
  contact specific customers directly, based on
  their spending patterns and specific needs
• After Strubens Valley fire, 50,000 customers were
  contacted within 24 hours to inform and redirect
  them to other nearby stores
• All existing mediums are used to convey the
  message
• SMS, e-mail, white mail, press, radio,
  billboards, inserts, ad campaign
• The marketing plan for the relaunch must be
  commenced promptly
• Customer analytics allowed us to track customer
  churn, spend patterns, demographic changes, loss
  of income
• A focused marketing approach aids in mitigating
  the loss of the disaster and bringing the new
  store to pre-fire profitability levels

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Due to its importance, public communication is
handled at a high level

• The media should be used to carry your story
• Use all available mediums
• Have a single spokesperson
• In Makros case, this was done by the Chain CEO
• Quell conflicting reports and rumours quickly
• Since this leads to public speculation and could
  affect the share price
• Share environmental impact and health and safety
  information
• Misinformation could affect potential customers
• The public should also be informed of the
  relaunch
• The Group CEO is responsible for ensuring ongoing
  communication with major institutional and other
  investors

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An effective employee management process should
kick in immediately

• A professional counselling service is rendered to
  the employees
• Permanent employees are assured that their jobs
  are not in danger, while temps, casuals and
  contractors are cancelled with sufficient notice
  (to be re-employed at relaunch)
• In the Strubens Valley case, all employees were
  deployed to other Gauteng stores and the
  management team worked from the DC
• Re-deployment avoids resignations, keeps
  employees in a high state of readiness and they
  can assist other stores (especially commercial
  customers from their old store now shopping
  elsewhere) and be ready for opening. Some
  employees assist Loss Adjusters with the salvage
  operation
• Where possible, employees are encouraged to take
  leave
• Employees are constantly kept informed of the
  situation at their new stores
• The team is reactivated before the new store
  opening

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Suppliers are important stakeholders to be
managed by the Merchandise Teams

• Suppliers are informed of the event, and their
  concerns in terms of payment and business
  continuity are allayed
• Orders are delayed or redirected to other stores
  to minimise the impact on suppliers
• The Woodmead fire highlighted the importance of
  capturing stock movements (receipts and returns)
  on the system immediately, in order to avoid or
  reduce the need for reconstructing data (system
  and paper-based) lost in the fire.
• Work with suppliers to reconstruct lost data
  (goods receiving) on the day of the fire, using
  documentation like PODs
• The possibility exists for unscrupulous suppliers
  to take advantage of this situation and claim
  that goods were delivered when they were not or
  deny good returns

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Be prepared - many external parties become
involved during and after a disaster

• The following parties become involved
• Media, press, reporters
• Emergency Services - Fire department Dealing
  with the fire and subsequent investigation
• Police An arson docket is opened and
  investigated
• Loss Adjusters
• Appointed by the insurers
• Take control of the site immediately
• Manage the investigation of the cause of the
  fire, salvage operations
• Employ additional experts for the forensic
  investigation (CSIR)
• Make recommendations in terms of acceptance of
  liability
• Owner of building
• Rebuild team consultants (architects,
  electrical, QS etc.)
• Holding company
• Shareholders
• We have learnt the importance and benefits of
  continuity of the Loss Adjusters and rebuild team
  since this speeds up the recovery process

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The Finance Team plays a lead role in the
insurance claim process

• The FD becomes the key point of contact for the
  insurers, and together with the team, manages the
  claims process
• The main components of the insurance claim have
  to be addressed
• Building, fixtures and equipment
• Stock
• Loss of profits
• Administrative issues like salaries, money loss
• Accounting records are very important when
  compiling the claim
• Detailed and accurate store PL accounts, fixed
  asset registers, store inventory ledgers are
  crucial
• Cash flow impact
• Contractors have to be paid during demolition and
  rebuild, which severely impacts cash flow (no
  insurance proceeds, as insurers may not have
  accepted liability yet)
• It is critical to compile the claim as quickly as
  possible to ensure the business is reimbursed for
  cash outlays
• In the Strubens Valley case, we had to self-fund
  for a 2 month period while a number of crucial
  and legitimate insurance issues were resolved

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The Operations Team is responsible for the
rebuilding of the store

• The Operations Director takes responsibility for
  the rebuild
• All our external consultants are immediately
  called in
• Demolition and clearance of the site can commence
  as soon as the all-clear has been given by the
  Loss Adjusters and various authorities
• The original design of the store is used, which
  speeds up the rebuild process
• Insurance will pay out for the original design
  with any building extensions for own account
• Ordering of critical supplies
• Steel availability is a major factor when
  building a Makro store and orders have to be
  placed immediately

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From an IT point of view, the store opening
process has been refined

• SAP enables an article master re-initialisation
  process to send all relevant data down to the
  store servers
• Data purification is necessary because not all
  articles are needed at store level (e.g.
  discontinued articles)
• This process also triggers the automatic printing
  of signage
• Detailed processes are in place to re-install
  servers
• Standby servers and swop-out units are available
  at all times
• In the case of Strubens Valley, the store opened
  with new POS hardware couldnt follow the same
  protocols as at other stores

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The relaunch comprises many facets, which have to
be planned promptly

• Store Management
• Employees, suppliers, ranging, layout, inventory,
  goods receipts (abnormal amounts), merchandising,
  ticketing, signage, marketing, advertising,
  traffic, police
• Merchandise
• Planning, ranging, layouts, inventory (especially
  imports), supplier involvement
• Suppliers
• Opportunity for suppliers to recoup turnover lost
  during the rebuild period, which is important
  since they are not protected against business
  disruptions
• IT
• Blueprint for IT architecture and infrastructure
  available for planning the relaunch
• Immediate order replacement of IT equipment,
  considering lead times
• Marketing
• Start planning the relaunch immediately
• Advise customers of plans for reopening
• After opening, follow up on customers not yet
  shopping again

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The effectiveness of the team dealing with
such a disaster is seen in the prompt, efficient
and profitable opening of the new storeAs a
result we achieved the biggest one day and one
week store opening sales targets in SA retail
history
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There were also some unintended consequences from
these catastrophes

• With the Exec teams attention focused on the
  fire, it is important to ensure that day-to-day
  operations continue unaffected
• In order to mitigate this, the management of the
  disaster was ring-fenced
• Dealing with all aspects of the fire takes a very
  long time
• The Finance team has worked on the Strubens
  Valley fire since May 2004 which is very
  disruptive to day-to-day operations
• A not unexpected substantial increase in
  insurance premiums due to the magnitude of the
  losses incurred by insurers
• Insurers become extremely reticent to continue
  insurance coverage, but to their credit AIG stuck
  by us, thus cementing a great relationship.
• Financial reporting becomes onerous and
  disjointed
• The roof insulation that propagated the fire had
  to be replaced in all stores at great cost to the
  business