Advertisement

Blog

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.

4 comments on “Managing Supply Chain Risks With a Business Continuity Plan

  1. SunitaT
    April 19, 2011

    “business continuity planning must extend beyond a one-time initiative and become a living process that adapts and evolves as your business evolves”

     

    Charlie,

     Thanks for the article which suggests that business continuity plan is the key to mitigate supply chain risk. Definitely business continuity planning should extend beyond one-time initiative because things are evolving so fast these days that you never know what event will throw up supply-chain disruption challenge.

  2. Barbara Jorgensen
    April 19, 2011

    That is a handy little check list for determining how sufficient you plan is. The hardest part about planning for something like this is knowing where to start. Obviously, the day after the earthquake is no time to assess your recovery plan. It's a fairly risk-free exercise as well. When it comes to implementation, of course, you have to invest…but assessment is a good beginning.

  3. elctrnx_lyf
    April 20, 2011

    Developing the framework and appointing the key people in decision making would be a difficult part of the business continuity process. I think the continuity plan is mandatory for any high volume production setup. But at the end the results will be good for any company who is ready to invest in developing such a process.

  4. CharlieCovert
    April 28, 2011

    You make a good point about knowing where to start.  I think the first step is to identify potential disruption points, then rank these points in terms of the economic impact.  So the priority is based not on the likelihood of disruption, but rather the magnitude of the economic impact.  Then develop alternative plans based on the disruption.  There really isn’t a need to identify every possible cause of a disruption; just what would you do about it.  For example, it doesn’t matter if a disruption is caused by a natural disaster or political unrest, just that you have well developed contingency plans in place and ready to execute.   The next question to ask is can your business live with the results of the disruption with the associated contingency plans.  If the answer is no, then consideration should be given to adding additional sourcing points.

     

    The points about making sure the appropriate people are involved and that it’s a continuous process are very valid.  An outdated plan would need to be updated in the event of a disruption; that’s critical time that would pass without action.   Likewise, time will be lost if the people who will actually make decisions in the event of a crisis weren’t the same people involved in the development of the continuity plans.  

     

    One other thing that should be included in the plans is who can make what decisions, and empowering multiple people to make these decisions.   For example, the US military has always enjoyed an advantage due to battlefield commanders being empowered to make decisions versus enemies with centralize power and decision making (i.e. German army before D-Day).  There is currently speculation in the media regarding this being an issue with the nuclear plant operators in Japan as it relates to the timing of a decision on venting radioactive gas.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.