The Unexpected Happens: Is Your Supply Chain Prepared?

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Relatively few companies have a detailed and tested plan for responding to potential supply chain disruptions—great or small. Those that do have a distinct advantage.

Investing in supply chain contingency planning is like buying insurance—you commit time, manpower, and resources to something you hope you'll never need.

But if you do need it, that planning can mean the difference between staying afloat and sinking.

It made the difference to Solectron, a $10.6-billion contract manufacturer with U.S. headquarters in Milpitas, Calif. The company serves the communications, computing, networking, automotive, consumer, and medical industries. Its supply chain stretches around the world and involves close to 5,000 material suppliers, transportation companies, and other vendors.

When Hurricane Rita threatened Solectron's Austin, Texas, facility in September 2005, the company set its contingency plan in motion.

"Once the hurricane was predicted, we immediately began notifying our supply chain partners, tracking the storm's progress, and compiling and distributing checklists," recalls Mike Haikola, Solectron's global business continuity manager.

Through that process, Haikola addressed pressing questions: "If the Gulf area is decimated, how will that affect our logistics in the area? Where are our materials coming from? Are we transporting shipments through the Gulf?" he says.

Solectron pinpointed the specific locations its shipments were moving through, and contacted suppliers to hold additional shipments until the area was out of danger. In the end, Rita missed the Austin site, "but the preparation put us through a valuable exercise," says Haikola.

Another valuable exercise took place last May when a quick-spreading fire burned down much of the cargo section at Istanbul's Ataturk International Airport.

Solectron quickly learned of the fire because, as part of its contingency planning, it "constantly monitors the news, looking for potential impacts to our business," Haikola says. "We immediately contacted our site in Turkey to determine the impact, and if we had shipments or products in the airport's cargo storage area.

"It turns out we did, but fortunately we were able to identify the products quickly, contact the supplier, and order another shipment so our ability to supply product to customers was not disrupted."

A Perfect Storm of Contingencies

Supply chain contingency planning has become a significant issue for manufacturers and distributors for many reasons, including the following:

Lean supply chains. "Supply chains are getting leaner and distances are growing longer," says Randy Strang, vice president, consulting services for UPS Supply Chain Solutions. "Lean supply chains eliminate inventory that in the past created some buffer for unexpected events. Without that inventory, dealing with unexpected events and supply chain inconsistencies grows more urgent."

Outside risks. Natural disasters such as earthquakes and hurricanes are always a threat, for example, as are labor issues including strikes, lockouts, and other work stoppages.

And, with the increasing globalization of many supply chains, terrorism, geopolitical unrest, trade regulation, currency exchange rates, and supplier dependability also become factors to consider.

"Couple all that with raw material and energy price increases over the last few years, and a range of supply-side risks begins to unfold," says Jade Rodysill of global consultancy Accenture.

"U.S. companies are dealing with tight logistics capacity, along with tight raw materials capability," he says. "Add a number of catastrophic natural disasters to industrial areas, combined with globalization, and a perfect storm begins to brew.

"Many companies have been hit with one or more of these risks, and are bombarded with so much information and so many warnings that they are now making contingency planning a strategic imperative."

Contingency planning isn't important only to large companies managing elaborate supply chains, it's also important to companies "manufacturing or distributing dishes or towels in the Southeast," notes Joe Dagnese, a vice president with Menlo Worldwide, a third-party logistics provider that offers backup warehouse and logistics services in the event of disruptions.

"If a company operates only one facility and it goes down, what then?" he asks. "They can't just find another facility when the time comes. They need a clear operational recovery plan that vets all the 'if-thens': If the power goes out, do I have a generator? If the roof gets blown off, can I still pick and ship?"

Bottom-line impact. Corporate executives are also growing more aware of the potential threat supply chain disruptions pose to their bottom lines, market position, and stock value.

"A supply chain disruption can put a company at a disadvantage compared to its competitors," says John Brockwell, who heads JPMorgan Chase Vastera's Global Supply Chain Management consulting practice. "If products are not available on the shelves, or can't be delivered to customers, a company will lose sales and market share.

"When companies announce a dip in earnings, and blame some element of the supply chain, their stock takes a hit," he says. "It can take months—or even years—to recover."

While the odds of a specific facility being hit by a catastrophic event are slim, the more facilities involved and the farther flung the supply chain, the greater the risk.

But "the collective chance that a portion of the supply chain will face some type of disruption is high," notes Yossi Sheffi, director of the MIT Center for Transportation and Logistics and author of The Resilient Enterprise.

Evaluating the Threat, Weighing the Risk

Supply chain contingency planning begins with identifying the potential risks, but few companies are doing even that, according to a recent Accenture survey of 151 supply chain executives in U.S. companies with revenue of more than $1 billion.

While 73 percent of companies participating in the survey experienced supply chain disruptions in the last five years, and 32 percent of those say it took more than one month to recover, "only 17 percent indicate that supply chain risks are formally identified, assessed, quantified, and prioritized," says Accenture's Rodysill.

"Couple that with the fact that 67 percent of executives say that risks are generally understood but not specifically quantified, and that's a large group who don't know the potential impact a disruption could have on their organizations."

How should supply chain managers begin to prepare? The first step is to list and prioritize events—earthquake, hurricane, strike, sabotage—that can lead to disruptions. The second is to list disruptions—reduced production capacity, critical parts shortages, severed transportation links—and analyze their causes and impact.

"The first step is more useful when thinking about reducing the probability of a disruption, because the relevant actions involve treating the source of the problem," says Sheffi. "The second step is more useful when considering how to recover from a disruption, because the cause may be less relevant than the consequences and severity at that point."

While few companies have taken even these steps, Solectron is an exception.

Because it is a contract manufacturer, most customers require Solectron to maintain regularly tested contingency plans and to allow customers to audit those plans. The company requires the same ongoing process of its suppliers.

"If we manufacture at four sites, and one goes down, we have to know in advance where to go with our product," Haikola says. "We put together comprehensive alternate site transfer matrix packages that identify all unique applications—suppliers, equipment, test fixtures, skill sets.

"That plan gives our transfer teams the ability to move the business to where it makes sense. Some of our contracts even require us to stipulate transfer times."

Coming Up With a Plan

Another exception is Nordson Corporation, a Westlake, Ohio-based manufacturer of adhesive and coating application systems operating in 30 countries with more than 35,000 customers worldwide. Contingency planning is an integral part of the company's culture, arising from its focus on customer service and safety.

"If a company sets safety and meeting customer expectations as top priorities, it needs a best-practice contingency plan," says Beverly Coen, who heads Nordson's worldwide contingency planning. "Then, in the event of a disruption, nobody gets hurt and customers are not disappointed."

Nordson takes a bottom-up approach to contingency planning—it develops plans for responding to specific risks at each location. Nordson also focuses on the results of a disaster or disruption rather than trying to identify all the potential causes.

"If something happened that made it impossible for us to access our employees, materials, or locations, for example, what would we do?" Coen asks. "For the most part, it isn't the event itself but the result of the event that causes business interruption."

At each of its locations, Nordson starts with a business impact survey that focuses on recreating the facility if needed.

"We determine how long it would take to produce at certain levels, which provides a time frame," Coen explains. "Next we identify alternatives—could we outsource, or move production to another Nordson location? Finally, we review the plans and identify and quantify any gaps."

Nordson's contingency planning process also evaluates and identifies suppliers that can meet the company's requirements and quality standards in case of a disruption. In addition, "we look at IT issues and practices in terms of restoring data if necessary," Coen says.

Nordson also reviews its suppliers' business continuity plans to see if they have evaluated their risks, and to ensure their recovery and continuity plans are complete. If plans are incomplete, Nordson works with the suppliers, and provides tools and materials so they can develop their own plans.

"Every company should have a business continuity plan," states Coen.

Two teams at each Nordson facility are responsible for implementing the contingency plans in the event of a disruption. A crisis team is responsible for ensuring the safety of Nordson employees, and preserving Nordson assets. A short-term recovery team focuses on beginning the workflow—restoring normal production and maintaining market share.

"When we draw up a location-focused contingency plan, we test it with those teams, then roll it out for approval at all levels," says Coen. "We also test the plan regularly to ensure that it is current and relevant to the changing business environment."

Testing Your Readiness to Respond

Testing is key to effective contingency planning. "It's naive to think you can commit a plan to paper, then go to sleep at night assuming everything is OK," says MIT's Sheffi. "You have to test your plan, run drills, and conduct tabletop exercises as well as actual exercises. You have to exercise the crisis team so they develop a muscle-like memory of how to react in the event of a disruption."

"Exercising the plan—taking time out of the day to do some dry runs—is important," agrees Brockwell. "Run scenarios for a day or two, and get employees thinking about what could happen and how they would respond. Logistics providers should also be involved.

Test their contingency plans, and communicate different scenarios."

Exercising those muscles helps people prepare for an actual event. "While you can't simulate an event as it will actually happen, if people have at least thought about it they can engage more quickly," Brockwell notes.

"We continuously work our contingency plans," says Solectron's Haikola. "Each facility is required to exercise its plans and its teams."

Solectron conducts team-building exercises, but also runs scripted exercises that train site coordinators on facilitating responses for specific types of disruptions—lightning strikes, snow-related scenarios, bomb threats—and take team members through their various roles and responsibilities.

"We base our scenarios on annual risk assessment and business impact analyses," Haikola says. "We train site coordinators to identify the most likely risks, based on our assessments or current events, then meet with the site team to create a realistic response."

A typical tabletop exercise might take between two and three hours, or longer for full-scale drills such as evacuations or hazmat responses. Solectron has even started to conduct joint exercises with customers.

Overall, Solectron's facilities management and crisis management personnel spend approximately 40 to 60 hours each year in emergency response-related training and exercises, more if it is a new facility or a new management team.

The company also conducts quarterly reviews of its contingency plans. "Every three months we review the plan, and make necessary changes that arise from our exercises or real events," Haikola adds.

States and government agencies are also getting into contingency planning mode.

Integrated Warehouse Systems (IWS), a Woodridge, Ill.-based material handling systems integrator has adapted its IRMS warehouse management system for use in statewide emergency health care distribution in the event of a natural or man-made disaster or health crisis. State agencies using or considering its product put it through rigorous testing, says IWS CEO Scott Upp.

The product, a mobile emergency response system, or "Go-Kit," is essentially a pre-configured WMS in a box, and includes bar-code labeling printers; labeling scanners; laser printers; a communications system capable of landline, wireless, or satellite linkup; and portable power supply.

The kit allows a state response team to set up immediately in a disaster area, and, at a moment's notice, have the capability to record patient data and distribute incoming health care supplies—such as vaccines, pharmaceuticals, and donated items.

Georgia is currently implementing the system as part of its statewide emergency response effort. The state will test its usage capacity—up to 3,000 simultaneous users and 300,000 patient data entries per hour—before rolling it out, and will continue to test regularly after rollout via health crisis simulations.

Make Risk Part of the Strategic Equation

Mitigating threats to the supply chain, and reducing risk by building more flexibility, can be accomplished in a number of ways: developing backup sources or suppliers, or some dual-source capability closer to your facility, for example. But these solutions come with a cost.

It's not likely that companies will step backwards by building more inventory or redundancy into their supply chains. "It's just too costly," says MIT's Sheffi. "No company can have enough inventory safety stock to cover all contingencies. The cost is too high, and supply chains are too lean, too Six Sigma, too just-in-time, and too competitive to be able to do that."

Building in excess inventory and redundancy "gives you time to catch your breath and decide what needs to be done if a disruption occurs," Sheffi says, "but it's not a solution."

There are ways to build more flexibility into the supply chain without increasing inventory. Postponement strategies, for example, are one option.

"Companies can postpone adding value, or leave material in a semi-finished state for as long as possible, depending on the need," Sheffi says.

Another strategy involves getting different functions to think more holistically about supply chain risks. "Permeate the idea of risk management throughout the organization so that all functions—engineers, procurement officers, logistics, manufacturing, and sales—think not only about the cost or profit to be derived from a transaction, but also the risk involved with it," suggests Sheffi.

In fact, one way to sell the cost of a contingency plan to corporate management, says Sheffi, is to demonstrate how building in flexibility and the ability to respond to a disruption gives the company a leg up on the competition—not only when a disaster occurs, but daily as markets grow more volatile and demand becomes less predictable.

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