The old slogan for the Timex watch of “Takes a lickin’ and keeps on tickin’” sums up business continuity nicely. Watches are already complicated. In supply chain, the complexity can be far greater. Business continuity management seeks to keep a supply chain working in the event of a problem. If breakdown cannot be avoided, BCM tries to minimise any impact. One way might be to have a backup solution ready to use. Another could be simply knowing how to fix the problem rapidly. The need for business continuity permeates all parts of a supply chain. However, enterprises do not always know where to start or what to do. Rather than just spending time and money on it, they can also learn how to make BCM add to their profit and growth.
Start with your customer. You must have enough links properly connected to each other in your supply chain to deliver what your customer wants, starting from the raw materials at the other end. Links may buckle or snap in between. However, the impact as seen by the customer on the value you deliver must be negligible. Better still, it should be zero. The first step is to find out what could interrupt your supply chain operations. This list may be bigger than you realise. Try the PESTLE formula below to see what could lie ahead. It’s no panacea, but it can open your eyes to risks that you might have forgotten about.
- Political P). Unstable regimes affect suppliers. Borders are closed. Customs and tariffs rise.
- Environmental (E). Natural disasters (floods, fires, etc.), pandemics hitting the workforce.
- Social (S). Industrial action, partners stop working because of disputes, sabotage, crime.
- Technical (T). Machine breakdown, quality defects, IT disaster, loss of knowhow.
- Legal (L). Court order to stop work, health and safety rules lead to shut-down.
- Economic (E). Cash flow stops, price wars make your company go bust.
Risk Assessment and Business Impact Analysis
Risk assessment is about spotting and evaluating the risks that could affect supply chain operations. As for the rest of our business continuity discussion, keep an open mind. Positive risk exists as well as negative risk. For example, customer demand for a product may suddenly rise. A supply chain will then be called on to deliver more, faster. This may mean additional suppliers. It may mean different production methods or logistics partners. Each change must be vetted for risk and business continuity.
You will have risks specific to your activity or location. It is also a good idea to keep track of general trends. For example, the Disaster Recovery Journal indicates the main sources of business interruption. At the top of the list are human error (43%) and power outages (39%). Natural disasters (8%) and terrorism (1%) happen much less often. Similarly, IT disasters in supply chains may be caused by rare events like fires, floods and earthquakes. Yet one of the biggest culprits is the simple hard disk crash.
Avoid silo thinking or assessing risks in isolation. Some combinations of risks can produce a perfect storm to halt a supply chain, even if no individual risk alone was enough. You also need a holistic view of BC across your supply chain over time. Gradual failure (brown-outs) can lead to supply chain stoppages. For example, faulty production equipment can lead to poor product quality. This can cause high rates of return. Profit drops and customers delay payment. Lack of funds prevents the company from paying its suppliers. The suppliers cease to supply. The supply chain comes to a halt.
Making the business impact analysis is the next step. The BIA describes the effect on your supply chain of the different risks. Armed with your risk list and your BIA, you can sort risks to the continuity of your supply chain as follows:
- High-probability/high-impact risks. These must be prevented or mitigated. For example, one of your competitors buys one of your key suppliers. Prevent the risk of supplies drying up by finding a new supplier.
- High-probability/low-impact events. Contain these by minimising the chances that they occur. For instance, individual light bulbs shatter easily. The loss per light bulb is relatively small. Suitable packaging helps keep breakages down.
- Low-probability/high-impact events. Plan how to handle these if they arise. Examples include having your factory located in an area prone to flooding every few decades.
- Low-probability/low-impact events. You may choose to simply accept these risks. The common cold is one case. A few workers may be off sick for a few days. Productivity may take a slight dip. On the other hand, think of a flu pandemic. This could affect a large percentage of staff. It would be low probability, but high impact (see above).
Choosing BC Solutions
Once you have a good idea about the things that can go wrong, you need to plan for solutions. Crossing your fingers and hoping it won’t happen to you is no answer. This sounds obvious, yet too many firms try to operate on this basis. This is a recipe for sleepless nights, worrying about what could happen and if you could cope. So, it makes sense to use as much business continuity as needed, but no more. Taken to extremes, reckless spending on business continuity might even make your business go bankrupt, which would defeat the point of the exercise.
There is no one-size-fits-all approach to #business continuity. Click To Tweet
There is no one-size-fits-all approach to business continuity. Even within a supply chain, BCM will differ according to the part of the chain concerned. Here’s an example. Suppose you use “right-sized” cardboard boxes to pack your products and optimise storage and transport. Suppose also that your supplier has a problem. Those boxes become unavailable. Using bigger “off the shelf” boxes and using more foam chips for packing might be a “quick and dirty” solution till you get more of your custom-made boxes. But now suppose a power line breakdown leaves your factory with no electricity. No “off the shelf” tactic will get you the emergency generators you need to keep going. Both problems can halt final delivery to customers. However, each needs a different BCM approach.
Lean and Agile Trade-Offs
Lean supply chains reduce waste and increase profit. At least, that’s the theory. To do this, they minimise redundancy. This makes business continuity less agile and more fragile. The lean ideal for using suppliers, for example, is to have just one that delivers just in time. The problem arises when that one supplier is unable to supply. The UK water industry found this out in 2001. Transport problems stopped deliveries from the one chemical plant supplying over 70% of the chlorine for water purification across the nation.
A suitable trade-off must be found between lean and agile. A small number of suppliers (but more than one) might be used for the same raw material or components. Multiple routes to market can be used. For example, a flexible transport strategy could use different freight forwarders or use rail and road in parallel. Selling through select retail outlets and via the web is another example. Enterprises must take care not to overdo BC. The bullwhip effect that results in huge safety stocks along the supply chain is also a panicky reflex to ensure continuity. The price to pay is the excessive costs of holding all the inventory.
Continuity Throughout Your Supply Chain Rabbit Holes
Supply chain partners must also be vetted for proper business continuity. The more critical the supplier, the more important their business continuity measures. Suspicion and scepticism are your allies here. Don’t take suppliers’ assurances at face value. Find out what each BC programme entails. Make sure it covers the products or goods you buy from them. Ask for proof that their plan works. Check that any key subcontractors used by your suppliers also have valid BC plans. Find out where your company stands in terms of the priority the supplier will give to you if supplies run short. You might not like the answer. However, in that case, you know you should look for another supplier.
The more critical the supplier, the more important their #business continuity measures. Click To Tweet
Taking supplier assurances at face value can be expensive. Consider this classic case about phone makers in the year 2000. Rivals Nokia and Ericsson were told by their chip supplier Philips that it could not deliver. Fire in the Philips production plant was the cause. Philips said it would take a week to start supplying normally again. Ericsson chose to believe and wait. Nokia poked around for more information. It found the one week estimate to be far too optimistic. The company rejigged product designs to use different chips and found other suppliers. The delay for Ericsson cost it dearly. That year, Nokia took the lead in the phone market. And Ericsson posted a US $1.7 billion loss for its phone handset business.
These remarks usually get heads nodding. But nodding heads are not enough. Try the following research results from the Business Continuity Institute. “18 percent (of organisations) are happy to rely on no more than a statement from the supplier. 27 percent ask only to read the supplier’s business continuity plans and a further 27 percent don’t know how the supplier’s plans are verified.” Ouch. And just to rub it in a bit more, remember this. Even if your business interruption is due to one of your suppliers, you company will get the bad press, rather than your supplier.
Engage, Educate and Test
Business continuity is best done top down. The CEO should be fully “onboard”. He or she should be in no doubt about why BC is such a critical issue for supply chain and thus for the whole organisation. Other senior managers to enlist include the directors of supply chain, production, logistics and procurement, and the CIO. Pay special attention to making BCM part of your company’s procurement strategy. Purchasing decisions should be “risk-aware”. Potential suppliers for critical materials should be ranked in terms of risk, as well as quality and price.
Once you have a business continuity plan in place, test it. Simulate the collapse of a key supplier. Check if people know how to handle the situation. See how well they maintain or recover normal operations. Update the plan after as required. Again, keep an open mind. Streaming media company Netflix “attacked” itself to test its BC. The company wrote a computer program to randomly take customer-serving IT systems offline, to check that its service would continue to run correctly.
Turning Business Continuity into a Profit Centre
Why do some supply chains still hesitate to put business continuity into practice? It may be because BC is perceived as one more expense that needs to be funded. The temptation is to put the expense off until the BC is really needed. However, this negates the idea of having it in the first place.
Instead, leverage business continuity for the following advantages.
- Cost savings. Show lower risk through better business continuity. Bring down insurance premiums and bank lending rates
- Improved efficiency. Identify critical suppliers, processes, and delivery channels. Ask yourself how much of the rest you need to do or keep.
- Reduced waste. Business continuity is about visibility of risks, impacts, and safeguards, including stocks. Better visibility lets you adjust inventory and trim costs, yet avoid stock-outs.
- Higher growth. Tell prospects and customers how good your BC is. Bid for more contracts where solid BC is a must. Win more business.
- Customer loyalty. Customers want suppliers they can count on. Stay competitive on price and quality, keep up the continuity, and they won’t want to look elsewhere.
Business continuity in a supply chain makes business sense. Don’t try to make it “bolt-on” or optional. Plan for BC as early as possible, whether you are just beginning your supply chain or now bringing new suppliers into it. Sleep better at night, boost profitability and keep more customers more satisfied. With the right business continuity woven into your supply chain, all this can be yours, and more besides.