Managing Supply Chain Risks With a Business Continuity Plan

For decades, corporations have thrived on a "lean and mean" attitude. Stripping every process down to its core has meant that streamlined manufacturing, low inventory, and just-in-time movement of goods have become standard practice. The upside has been obvious: Costs are more predictable, corporate profits increase due to higher efficiencies, and important innovations in supply chain management lead to new ways of doing business.

The downside becomes apparent, however, when "efficiency" becomes "inflexibility." Natural disasters like the earthquake and tsunami in Japan turn an unforgiving spotlight on supply chain decisions. It becomes clear that decisions made solely on the basis of cost -- relying on a single source for materials, for example -- can quickly turn disastrous.

Many companies have disaster recovery plans in place to handle emergency scenarios such as natural disasters, security breaches, or local power outages. The key to mitigating supply chain risk, however, is a business continuity plan.

Business continuity plans target critical operations that must continue, regardless of the type of disruption. Critical operations include such areas as production, distribution, order management, invoicing and accounts receivable, and customer management. Business continuity addresses all disruption scenarios, not just natural disasters -- a loss or severe delay in critical supply, whole or partial damage to a plant or distribution center, disabled distribution channels, and product tampering or failure.

Business continuity plans not only mitigate risk, but also address specific plans to respond to and recover from disruptions. For example, they address operational capacity, create decision hierarchies and processes, define a framework for ensuring that demand gets prioritized and filled, and establish the maximum-tolerable downtime for each business unit.

Is your company's supply chain prepared for a significant disruption? The following questions will help in formulating an answer:

• How long would it take to recover from significant damage to your primary distribution center or a core product line plant? Would it be days, weeks, or months?
• How much inventory would be lost, and how much would it cost to recover?
• In the case of a significant inventory loss, how quickly can production lines and plans be shifted based on new production priorities?
• Can critical suppliers ramp up quickly? Or, if a product is de-prioritized, how will loss of revenue impact them?
• How much revenue would your company lose if orders could not be taken or filled for a week, two weeks, or a month?
• What legal and financial liability exists if contracts can no longer be met?
• What are the longer-term implications of market share and brand?
• What sales and marketing efforts will you have to initiate to manage customers, recover revenues, and regain lost market share and goodwill?

Answering these questions will give you an idea of what your continuity plan must cover so that when a business disruption occurs, appropriate strategies and plans are in place to reduce the impact.

At first glance, developing a business continuity plan may seem daunting, but with the right team, the work can be accomplished quickly and efficiently. We recommend a cross-functional core team, augmented by subject matter experts as needed. Of course, if your supply chain is particularly complex, you may benefit from outside guidance to facilitate the process.

We also recommend that you test your business continuity plans regularly and insist that your suppliers do the same. Remember, to be effective, business continuity planning must extend beyond a one-time initiative and become a living process that adapts and evolves as your business evolves. Supply chain risk mitigation is more about flexibility than efficiency.