Business Continuity: Ready, Set, Prepare
From labor slowdowns, port congestion, and power outages to wildfires, hurricanes, and terrorist attacks, we've seen no dearth of disasters that can shatter a company's supply chain and transportation networks. Here's how to plan for supply chain continuity—no matter what the obstacle.
As one hurricane after another took aim at Florida last summer, officials at TNT Logistics hunkered down in meetings. Their goal? Determine how best to keep their customers' goods moving in spite of the wind, rain, and floods battering the region.
Once the expected path of a hurricane grew clear, "we got together regularly—usually once a day—to discuss what plans to put in action," says Jeff Hurley, chief operating officer, TNT Logistics North America.
For example, when the National Hurricane Center predicted Hurricane Frances would pass directly through Jacksonville, TNT's North American headquarters city, the company set up a contingency command center in Atlanta.
"We highlighted our communications requirements for that command center," Hurley says. "We bought airline tickets for the TNT employees going to the command center. And we bought good-luck charms for those remaining in Jacksonville."
From the terrorist attacks of September 2001, to a labor slowdown and massive congestion in West Coast ports, a widespread power outage in the Northeast, wildfires in the Southwest, last summer's big rainstorms, and the recent tsunami in Southeast Asia, we've seen no dearth of disasters that can shatter a company's supply and transportation networks.
Such events have spurred a growing interest in business continuity planning for the supply chain.
Years ago, when companies developed plans for business continuity or disaster recovery, "they were done strictly to get the auditors off your back," says Steve Lipsky, director of Jacksonville-based SLA Contingency Planners, which provides consulting services to third-party logistics provider TNT. "But today, all you have to do is watch the news. The what-ifs are realities."
The risk of disruption is especially high in this era of taut supply chains, says Jeffrey Karrenbauer, CEO of Manassas, Va.-based Insight Inc., which is adding new vulnerability planning tools to its supply chain planning software products.
"There's very little room for error, because a lot of facilities have been eliminated," Karrenbauer says. "Many programs—just-in-time manufacturing, efficient consumer response, and vendor managed inventory, for example—are predicated on very rapid response, and on nothing going wrong."
All Kinds of Crises
High-profile events such as hurricanes and blackouts pose only part of the risk to the supply chain. Many other disruptions keep goods and materials from reaching factories, distribution centers, and stores.
"A technology interruption is the first thing that comes to most people's minds," says Hurley. That's an important focus for TNT, he says, because the 3PL relies so heavily on information technology to support its clients.
Transportation interruptions are another obvious concern. A storm less dramatic than a hurricane—perhaps a heavy snowfall—can close a highway or rail line. So can an accident, says Peter Masterman, vice president of logistics and customer service at Nova Chemicals in Pittsburgh. "In some cases, accidents have shut down an entire rail's main line," he says.
Companies must watch for a host of vendor difficulties, from production line breakdowns to business failures. Some executives also look for vulnerabilities not only among their own vendors, "but up to their third-tier supplier organizations," says George Zsidisin, assistant professor of supply chain management at Michigan State University, and co-author of a study on effective practices in business continuity planning for the supply chain.
Watching for problems such as financial instability—and developing alternative sources just in case—can protect the inbound supply flow, Zsidisin says.
Problems at a customer's facility may also disrupt the supply chain, at least for companies such as Nova that sell in large quantities to relatively few trading partners, Masterman says.
"When a large customer shuts down unexpectedly, and you haven't discretely planned for that, you might not have a home for the product and it backs up into the system," he says. "If you can't sell it or move it, you might have to shut your own plant down."
Equipment shortages caused by unexpected jumps in demand, and random security inspections at border crossings, cause supply chain disruptions as well, Masterman says.
One type of disaster that companies often overlook is the sudden loss of employees whose knowledge and skills are essential to the operation, says Lipsky. An illness, death, job change, or strike may leave a firm without key personnel.
Keys to planning for supply chain continuity include:
- Thinking through all the potential disruptions that might strike your company.
- Analyzing how each of these might affect operations.
- Developing backup processes and contingency plans that you can immediately put into action when a disruption occurs.
- Reviewing and updating plans as circumstances require.
Working with TNT, SLA Contingency Planners examines the work flow involved in servicing each of the 3PL's clients.
"We look at communications strategies, procedures, vendor information, and resources, and put together strategies to make sure we will have delivery of those services," Lipsky says.
Strategies might include: installing generators in case power goes out; installing backup servers to run key software applications; securing backup vendors for crucial supplies; making sure vendors have alternative plans for delivering goods; and cross-training employees so they can take over one another's work.
To make sure the plan is effective, a company can test its strategies through tabletop exercises or live drills. For example, "periodically, we conduct a variety of tests on our technology, including shutting down the systems and allowing backup to take place," Hurley says.
The Automotive Industry Action Group (AIAG) offers automotive suppliers a one-day course on crisis management and business recovery, based on a process document created by DaimlerChrysler, Ford, and General Motors. The Big Three developed the process to protect their own inbound supply chains, and in many cases they require their suppliers to implement crisis management plans as well.
A spate of natural disasters that hit the United States in recent years prompted the automakers to develop the process, says Morris Brown, product manager for materials management at AIAG, Southfield, Mich.
The AIAG course walks participants through methods for assembling a crisis management team, getting support from upper management, establishing an emergency command center, assigning responsibility for different tasks, defining communications protocols, and coordinating the response with local government authorities.
Four Elements for Continuity
At Michigan State, researchers studied four companies that developed effective plans to protect the integrity of their inbound supply chains. From those companies' practices, the researchers derived a framework for supply chain business continuity planning. It includes four elements: awareness, prevention, remediation, and knowledge management.
1. Awareness. Understanding that supply chain interruptions can occur is a concept one cannot take for granted, Zsidisin says. To build awareness, planners must educate stakeholders within the organization, communicate expectations to vendors, and investigate vendors to make sure they are capable of meeting the company's needs.
2. Prevention. This step includes identifying and prioritizing possible risks and devising strategies to reduce them—such as developing alternative sources for goods and materials, and putting backup transportation plans in place. It also means monitoring developments that could increase or decrease the risk of various disruptions.
"These developments might include changes in the economic or political environment, changes in supply markets, or the status of individual suppliers," the study says.
3. Remediation. Despite a company's best efforts to prevent them, disruptions sometimes occur, and officials must do their best to control the consequences, Zsidisin says. That's where remediation comes in. In this step, "time is absolutely critical," he says. Companies should establish a team in advance to resolve problems when they arise.
4. Knowledge management. The last step is to analyze how a crisis was handled, and what can be learned from the experience. "After a crisis, companies need to share the good, the bad, and the ugly" and apply that knowledge in the future, Zsidisin says.
Nova developed four tools to help manage the supply chain in a crisis. The first is the "freight universe," a large database of all the company's shipment transactions.
"When you're in a situation that wasn't anticipated, the first thing you do is go to that database" for information to support a crisis response, Masterman says. The data might indicate, for example, how much business a company does with different customers, or how feasible it would be to switch a given customer's deliveries from truck to rail.
Nova has also established a "situation communications protocol"—a document outlining who should talk with whom during a crisis. Nova used the document in January 2004, when a strike at Canadian National (CN) meant the railroad couldn't handle all the chemical company's freight.
The Right Messages
Without a communications protocol, efforts would have been duplicated, explains Masterman.
"Some of our plants would have called the railroad, as well as employees in the logistics, customer service, and marketing departments," and officials at CN would be left wondering what Nova really wants, Masterman says. The protocol makes sure the right people communicate the right messages to the people who need the information.
The third tool is a carrier stewardship program, including a series of regular meetings with major carriers to discuss important business issues. These meetings strengthen the relationship between key officials at the shipper and the carrier, making it easier for them to cooperate when a crisis arises, Masterman says.
A similar program to strengthen ties between Nova's logistics operation and organizations within the company that rely on its services was developed as the fourth tool. When a supply chain disruption occurs, "having relationships with our internal businesses is extremely helpful," says Masterman.
Many of Insight's clients use its SAILS 21 strategic planning software to identify weak points in the supply chain, develop backup strategies, and determine how cost-effective those strategies are.
Often, it's not obvious where the vulnerabilities lie, "and looking at just the biggest facility can be a mistake," Karrenbauer says. "The idea is to carefully establish where the major vulnerabilities are. The analysis should also include an assessment of the cost, the capacity, and the service impact of every facility we could lose."
Capacity Outweighs Cost
Questions of capacity and service may outweigh questions of cost, Karrenbauer says. If loss of a major facility makes it impossible to deliver product, or to meet customer service expectations, "cost almost becomes secondary," he says.
But it's still important. A backup strategy—whether adding production facilities, relocating distribution centers, or cultivating secondary supply sources—carries a price tag, "and management wants to know how much," Karrenbauer says. "We like to think of this as buying insurance"—incurring a cost to implement a crucial safety net.
Using the planning software, a company can weigh the advantages of building different kinds of redundancy into its supply chain, figure out how to redesign its network to include backup facilities, and gauge the cost of each potential solution.
For TNT Logistics, last summer's hurricanes brought ample opportunity to test its business continuity plans. In addition to setting up a contingency facility in Atlanta, the company scrambled to complete the week's work at its Jacksonville headquarters before it released employees to prepare their homes for Hurricane Frances' expected landfall.
"We estimated payroll, ran it early, and shipped checks to the field locations prior to any sort of immediate impact," Hurley says. TNT also made sure officials could communicate if the storm knocked out the landline phone network.
"I think we got a little carried away with communications," bringing in cell phones and satellite phones, Hurley recalls.
The impending storms put special pressure on one of TNT's customers, Florida Power and Light (FP&L), based in Juno Beach, Fla. TNT operates a call center in Jacksonville to manage the utility's shipments from suppliers to its service depots throughout south Florida. As a storm approached, TNT moved some of that center's staff to another TNT location outside the impact zone so they could continue working, Hurley says.
In addition, TNT moved the parts and supplies FP&L would need to fix power lines downed by the storms. "We brought in external management from other locations to help support the higher demand that occurred once the storms passed through," Hurley says.
To make sure fresh drivers were available as needed, TNT shared trucks between FP&L and Home Depot, another Florida customer that saw a storm-inspired surge in demand.
Insight Network Logistics (INL, no relation to Insight Inc.), a subsidiary of Union Pacific that manages the plant-to-dealer distribution network for DaimlerChrysler in the United States, has prepared for hurricanes with help from simulation software. The Auburn Hills, Mich., firm worked with Simulation Dynamics to develop its VinLogic modeling system.
INL uses another information system, VinVision, to collect data on the status of all vehicles moving through the distribution pipeline. VinLogic combines this vehicle location data with plant production schedules, projections about where the vehicles will be shipped, data on available transportation equipment, and other information to forecast the future flow of vehicles through the network, says Andrew Siprelle, president of Simulation Dynamics, Maryville, Tenn.
INL uses the software mainly to anticipate bottlenecks and predict what resources it will need to keep the vehicles moving, says Roland Fortner, INL's CEO. "But it has a lot of tactical uses, and hurricane planning is one of them," he says. INL first used VinLogic for this purpose in 2003, as Hurricane Isabel threatened the mid-Atlantic coast.
"When you've got a hurricane coming, you first shut down your shipping activities in the areas that are directly affected," Fortner says.
But manufacturing plants continue building vehicles. These need to keep moving, "but at the same time, you don't want to ship vehicles into a situation where they'll be destroyed," he says.
To predict the effect of a hurricane, INL looks at its expected path and predicts how that will impact transportation facilities in the region. It then adds those constraints to the data VinLogic uses to forecast the flow of vehicles.
"For example, suppose we don't think we will be able to unload for at least a week at three or four locations," Fortner says. "What does that do to us? How many vehicles pile up? Where will we see the largest congregation of cars?"
Once the company knows where problems will occur, it can consider its options, and use the simulation software to test them.
"Sometimes we stop shipping vehicles into certain facilities and hold them at origin," Fortner explains. "Other times we make arrangements with railroads to stop and hold the vehicles en route. But in some cases, we actually divert vehicles to alternate facilities."
If INL learns of a potential disruption far enough in advance, the company might even adjust its production schedule to avert the problem completely, he says.
Along with hurricanes, the model could help plan a response to other predictable disruptions, such as strikes, Fortner says. Like Nova Chemicals, Constellation Wines USA, based in Canandaigua, N.Y., has seen efforts to build close relationships with carriers pay off in times of crisis.
Forging such relationships is "a process we started in earnest about 15 years ago," says Rod Dutton, Constellation's director of transportation management. "We set up a program that included all of the activities we could think of to make ourselves a good shipper."
For example, the company tried to accommodate carriers' needs when scheduling pickups; improved its loading, blocking, and bracing techniques; and made sure drivers had easy access to comforts such as phones, vending machines, and bathrooms.
"Over the years, we continue to develop practices that enhance our relationships with carriers," Dutton says. "We pay our freight bills on time, and offer only standard, legal-weight loads that are balanced and blocked properly within the trailer. We provide scales to weigh the shipments, EDI (electronic data interchange) freight bills, and EFT (electronic funds transfer) payment."
Constellation gives carriers an estimated volume of shipments per lane and a weekly forecast of orders for the following week, Dutton says. Recently it has offered them the opportunity to bid on lanes for its sister company, Constellation Beers and Spirits.
In return for such efforts, carriers work hard to help Constellation in the fall, when wine shipments from California vie for scarce capacity with holiday merchandise shipped through West Coast ports. Goodwill between the wine company and its carriers grew particularly important in the fall of 2003, when forest fires in California closed rail lines, making it even harder to move freight out of the region.
"If the tracks are closed, and you need a rail shipment, there's not much carriers can do," Dutton says. "But when the crisis is over, they can provide a higher priority to your freight."
Constellation's intermodal service providers did just that. "Once the tracks started opening, they tried to make sure our freight moved along as quickly as possible. They expedited whatever they could," he says.
Sometimes, a bad experience during one disaster prompts a company to make better plans for the next.
One Insight client in the Midwest learned its lesson when huge floods hit and inundated one of its large distribution centers. While it was too late to prepare for that crisis, the company used SAILS 21 to analyze how losing that facility affected its distribution network, and how best to compensate.
"Now they've done the analysis, and they've done it more carefully," so if a similar disaster occurs they will be prepared, Karrenbauer says.
Other companies used the software to choose alternatives when the work slowdown of 2003 clogged traffic at the ports of Los Angeles and Long Beach. The contingency plans developed at that time served companies well during the recent congestion in the California ports, Karrenbauer says. The software helped them calculate the most effective way to divert traffic further up the West Coast or to the Gulf Coast.
Although many company officials who ought to focus on questions of supply chain continuity haven't paid enough attention in the past, Karrenbauer believes things are getting better. "It has been a tough process," he says. "But I think the ideas are gaining some traction."