Waffle House Serves Up Lessons in Risk Management

What can Waffle House teach about disaster preparedness and risk management, especially in the wake of this spring’s devastating tornadoes?

Plenty, says a supply chain expert at Olin Business School, Washington University in St. Louis.

“The companies that are most frequently exposed to supply-chain disruption are the ones that have the best risk management plans,” says Panos Kouvelis, PhD, the Emerson Distinguished Professor of Operations and Manufacturing Management and director of the Olin’s Boeing Center for Technology, Information, and Manufacturing.

Natural disasters, such as hurricanes and the series of tornadoes that caused severe damage across the United States this spring, can have drastic effects on business operations.

Kouvelis is an expert on supply chain management. He teaches his students about the “Top Four” companies — Lowe’s Companies Inc., The Home Depot Inc., Walmart Stores Inc., and Waffle House Inc. — that are models for disaster preparedness.

“These companies have many stores in the southern part of the United States that are frequently exposed to hurricanes,” Kouvelis says. “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. 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.”

Kouvelis teaches his students about the “Waffle House Index,” first coined by Federal Emergency Management Agency Director W. Craig Fugate in the wake of the Joplin, Mo. tornado May 22. The index, based on the extent of operations and service at the restaurant following a storm, indicates how prepared a business is in case of a natural disaster.

“If the Waffle House is open and serving food and has a full menu, then the index is green,” Kouvelis says. “If it is open but has a limited menu, it’s yellow. If it isn’t open, that’s red,” Kouvelis says.

It’s rare to see the Waffle House index hit code red and close, he says. Waffle House is very well prepared in the event of a disaster. The Joplin 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 says. “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 teaches risk management and supply chain management to top executives from around the country in courses ranging from supply chain basics to understanding how technology affects supply chains.

Three years ago, a new course in the Master of Science in Supply Chain Management program, titled “Supply Chain Risk Management,” was created to help executives deal with managing all aspects of risk, including natural disasters, commodity prices and exchange rates.

“We put students in simulations where they have to make decisions in the presence of disasters, and suddenly they realize how their thinking is different when faced with a worst-case scenario versus the everyday operation of a business,” Kouvelis says.

The earthquake and resulting tsunami in Japan this past March provided Kouvelis with several teachable moments in relation to supply chain management.

Numerous major supply chains, from silicon wafers to flash memory to automobiles, were affected by the disaster.

“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 says. “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.”

Even though companies are exposed to natural disasters, their ability to handle those scenarios will either put them at a disadvantage or ahead of the game, Kouvelis says.

“Disaster management and risk management in global supply chains can actually be a competitive advantage,” he says. “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.”