Supply chain disruptions are inevitable, whether resulting from natural disasters, technical failures, worker strikes, or other unforeseen incidents. And as supply chains have become increasingly diffuse over time, the likelihood that disruption in one region will have consequences that reverberate across the globe, is higher than ever before.
In a 2017 survey by the Business Continuity Institute (BCI), 65 percent of respondents had experienced at least one supply chain disruption in the last year, with 44 percent of the disruptions occurring at Tier 1. Such incidents have a significant impact on an organization's operational and financial performance; according to the World Economic Forum, for a Fortune 500 company the average estimated loss in market cap from supply chain disruptions is $3.2 billion.
For these companies, having a contingency plan in place could have minimized the damage by providing a clear plan of action and alleviating the urge to throw money at the problem. What can supply chain managers do to ensure that action is taken quickly and efficiently when disruption strikes? This is where contingency planning comes into play.
Identify Risks in Your Supply Chain
Supply chain contingency planning begins with identifying potential risks, but many companies are failing to do even the bare minimum. But in today's rapid-fire world, the wait-and-see approach is the most costly one, and is almost guaranteed to maximize the time and resources spent on expediting fees and last-minute scrambling.
A process flow map, from the design phase through order completion, can provide a high-level understanding of all critical inputs, outputs, and the routes on which they depend. It also gives insight into the interdependencies and bottlenecks embedded in your supply chain. Another method of evaluating risk is by conducting a SWOT analysis that indexes potential disruptions based on severity, allowing for the compartmentalization and prioritization of different functions within your operation so that the most essential ones can carry on with limited interruption.
Potential Sources of Disruption
- Unplanned IT or telecommunications outage
- Cyberattack and data breach
- Loss of talent/skills
- Outsourcer failure
- Transport network disruption
- Weather event
- New laws or regulations
- Insolvency in the supply chain
- Energy scarcity
- Flexible ~ Even after a disruption happens, there is no certainty regarding how it will unfold or whether aftershock effects will transpire. Give employees the tools they need to transition quickly into recovery mode under shifting circumstances.
- Detailed ~ Create an actionable crisis communication plan that leaves no questions unanswered. By assigning clear roles to specific individuals, you can prevent resource-draining miscommunications on the ground.
- Well-documented ~ Your contingency plan is of little value unless all relevant stakeholders are trained on it and prepared to jump into action when a disruption does occur. A strong, detailed plan provides workers with the big picture rather than a series of disconnected steps.
- Cognizant of vulnerabilities ~ Every business is unique; factors such as product mix, geographic location, and the structure of your supply chain will all determine which particular pain points your own particular plan should address first.
Identifying sources of risk and developing a plan are only part of the story. In order to get the most out of the investment, businesses must be self-disciplined and follow their own procedures, putting in the time and effort to ensure that production doesn't grind to a halt when failures occur. A best practice is to conduct dry-runs in order to verify that the steps outlined on paper align with tactical reality. It is also important to regularly test your contingency plan to make sure it is up-to-date, and is relevant to the current operational environment.
Tips for an Effective Contingency Plan
- Establish appropriate metrics that correspond with the steps outlined in your contingency plan.
- Take precautionary measures throughout your operations; minor, risk-mitigating actions (e.g., data backups) taken in the present can payoff immensely in the long run.
- Consider your suppliers' contingency planning strategy when selecting vendors, and test them regularly with different scenarios. They should be able to answer the following questions:
- How would they ensure continuity of supply should a disruption occur?
- What alternative plants/factories/sources of supply do they have at their disposal?
- Communicate with customers to keep them informed of any delays, changes, or other relevant information that impacts the brand experience.
- Evaluate and re-evaluate risk on a regular basis. Given their volatile nature, global supply chains need to be constantly monitored to ensure that contingency plans are relevant and based on up-to-date information.
Remember that investing in a supply chain contingency planning is like buying an insurance— time, manpower, and resources are going to be allotted towards something that a company hopes to never utilize. When a business experiences a disruption, a contingency plan helps minimize the loss of production, fortifying operational resiliency and boosting product availability.
Hurricane Maria Disrupts the Pharma Industry
Following the devastation caused by Hurricane Maria in Puerto Rico, drug manufacturing plants were faced with production delays, fueling nationwide shortages of basic medicines. Pharma giant Pfizer indicated that a preliminary assessment determined that two of the firm’s three production facilities in the region had minimal damage. The third had what was described as “minimal to moderate damage to parts of the facility.” With contingency plans in place, the company announced that it had a healthy inventory supply of finished products and did not foresee a risk to patient supply at that time.
West Coast Port Strike Disrupts Shipping Lanes
When a breakdown in labor negotiations led 20,000 dockworkers to go on strike at two of Washington state's largest ports in October 2014, cargo-laden ships were left stranded as the flow of goods came to a halt for six months. The slowdown had a final price tag of $770 million for Washington business alone—the sum of net delinquent shipments and additional costs such as warehousing and truck idling fees. Without robust contingency plans in place, American companies that were unable to ship their products in a timely manner began accumulating more and more extra supplies and products. This inventory glut crowded warehouses, eventually forcing companies to cut back on their new orders to clear out their backed-up storage facilities.
Tianjin Port Explosions Disrupt the Auto Industry
In August 2015, two explosions occurred at a dangerous goods warehouse containing over 3,000 tons of highly hazardous chemicals. The blasts killed over a hundred people, left hundreds more injured, and devastated the port city of Tianjin, Northern China’s largest port and the main oceanic entry point into the massive capital city of Beijing. The automotive sector was badly hit, and the explosions impacted most of the 285 ‘Fortune Global 500’ companies with offices in Tianjin. Supply chain visibility and strong contingency planning proved essential as companies scrambled to minimize losses and divert shipments.