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by Damian Walch
How resilient is your supply
chain? Retail and manufacturing
supply chains are
becoming more complex
every day. As they become
more complex, the risk of
disruption due to failure
anywhere along the supply
chain grows. The supply
chain behind your neighborhood
hardware store
stretches across the world.
Factories, warehouses, shipping terminals
and stores are vulnerable to the full range
of natural disasters and the loss of critical
resources such as people and power.
Transportation services, with their assets
everywhere on the road, may seem less
vulnerable to catastrophic loss due to a
natural disaster, but they can be crippled
by labor actions in remote locations.
Supply chains typically involve a maze
of third party suppliers, business partners,
service providers and, of course,
customers. Managing continuity risks
in the supply chain is a process that
inevitably involves working with these
third parties to plan, execute and monitor
continuity strategies. Supply chain
continuity management is an emerging
discipline. Nobody has all the answers,
but this article will point to some good
questions to ask and suggest a sequence
for asking them.
Several business trends are contributing
to a growing awareness of continuity
risk related to the supply chain.
Low cost global sourcing has become
a competitive necessity for most retailers
and manufacturers. Even small and
medium-sized businesses have global
sourcing strategies. Global sourcing can
increase continuity risk by increasing
the overall level of complexity and by
increasing the likelihood of disruptions
caused by certain threats such as terrorism
or by changes in the political
or regulatory environment. The supply
chain complexity brought about by
global sourcing can also complicate and
delay recovery efforts as, for example,
communications delays can result from
time zone differences, language or cultural
barriers.
To be competitive, many supply chain
enterprises are seeking to concentrate on
outsourcing functions which a service
provider can provide at lower cost and
perhaps also with improved performance
or effectiveness. IT functions such
as web hosting, data center operations
or application development are often outsourced. Other supply chain functions
which are typically outsourced
include transportation, logistics and
manufacturing.
While outsourcing is a proven method
for cost reduction and quality improvement,
it also adds to the complexity of
the supply chain. It typically reduces
the visibility and awareness of risks
within the outsourced process. If not
managed properly, outsourcing can slow
down response times for disaster recovery
or other supply chain events.
Supply chain managers have been
working hard for years to apply LEAN
management processes to reduce costs
by minimizing inventory handling and
storage and optimizing the use of factory,
distribution center and transportation
assets. To the extent they’ve succeeded,
they’ve probably made the supply chain
more sensitive to supply disruptions
by reducing the tolerance for error. As
more integration is achieved between
the supply chain processes of different
companies, the impact of a supply chain
disruption is likely to become greater
for all parties.
Planning for continuity in the supply
chain will ultimately involve working
collaboratively with suppliers and other
key business partners. Before we get in
a room with them, however, we need
to determine our own requirements.
Do a business impact analysis, identify
and prioritize your supply chain processes
and determine your recovery time
objectives.
Map the supply chain from raw materials
to the customer. Ask the questions,
get the answers and document the
results. Answering this question may
not be as simple as it may seem at
first. We know our suppliers, but do
we know their key suppliers? Are they
sole-sourced or multi-sourced? This
mapping effort can begin right away,
but it probably won’t be complete until
we’ve gathered information from suppliers
and other business partners.
A supply chain can be thought of as a
network of manufacturing centers, distribution
centers and stores connected
by transportation services that manage a
flow of goods. Suppliers on this network
will include raw material providers,
component or contract manufacturers,
transportation carriers and third party
logistics providers (3PLs).
The network that supports the flow of
goods is not the only network involved
in the supply chain. There is also a flow
of information and communications for
order and procurement processing supported
by data centers, and voice and
data communications links. Suppliers
on this network will include telecommunications
carriers, application service
providers, IT outsourcing providers and
even disaster recovery service providers
such as hot-site vendors.
All the networks and the nodes that
support them must be resilient.
Emphasis on “key”. With a map of the
supply chain in front of us, it’s time to
determine which suppliers are important
for continuous business operations.
What risks do they represent? How
are we impacted if this one or that one
fails? We will want to work closely with
the key suppliers as we move forward
with business continuity planning.
With key suppliers identified, estimate
the probability for a supply chain
disruption or business failure. Many
suppliers will potentially be assessed so
it is important to establish a consistent
analytical method for analyzing the
potential for disruption and the likely
impact of the failure. Apply the same
method or analytical framework to all
key suppliers. Consider the current
relationship with each supplier and
the contractual, procedural and technical
controls in place that contribute to
continuity.
Not all suppliers are key suppliers and
we will manage supplier risk in more
than one way. Commodity supplies
might best be procured from multiple
sources. Multi-sourcing not only
encourages price competition among
commodity providers, it also provides
fall-back options in the event of a
failure of one supplier. A given commodity
supplier can still be considered
a “key supplier” if it accounts for a
high volume of business or it otherwise
represents a significant risk to the supply
chain. Alternative sources, however,
represent a viable mitigating strategy.
Multi-sourcing isn’t always the
answer. Many companies turn to solesource
suppliers for highly engineered
parts or supplies where a high level of
quality control is essential. These solesource
relationships represent business
partnerships which must be managed
carefully and proactively for supply
chain continuity.
With our own business continuity priorities
understood and key suppliers
identified and profiled, we need to work
with key suppliers to understand their
business continuity capabilities and to
identify gaps between that capability
and our own needs. Many companies
use detailed questionnaires which cover
all traditional domains of business
continuity capability including organization,
governance, business impact
analysis, business continuity strategies,
awareness and training programs, incident
response, and crisis management
procedures and documentation.
Crisis management is an essential part
of any business continuity capability.
Essential elements of a crisis management
capability include the following
elements:
Trained local emergency response
teams with defined roles, procedures,
and communications protocols for emergency
response.
A pre-arranged command center where
key decision makers can be joined with
a communications hub.
An executive crisis management team
with roles and responsibilities identified
for specific processes such as supply
chain coordination, employee coordination,
and media communications.
In a supply chain it is important for
supply chain partners to be able to work
together closely during a crisis. Channels
for communicating and sharing
information with supply chain partners
must be established – or re-established
– in the event of a crisis. Contact
lists with crisis management roles and
responsibilities are needed on both sides
of the relationship. In some cases, supply
chain partners may have a seat
in the command center. Supply chain
partners talk about the importance of
a “shared situational awareness” for all
organizations involved.
A joint business continuity planning
effort with key suppliers is an excellent
start. But the ultimate goal is to
integrate business continuity goals and
objectives into existing supply chain
processes. For example, suppliers should
be answering questionnaires about business
continuity capabilities as soon as
they become candidates during procurement
selection. Contracts with suppliers
can mandate the periodic review of
continuity controls. An updated assessment
of business continuity capabilities
can be part of the periodic supplier
scorecards in vendor management.
A basic reality for all business continuity
planning extends to supply chain
continuity planning: if it’s not regularly
reviewed and tested, it’s not real. Supply
chain partners must work together
to periodically review and test their
joint disaster recovery plans and other
elements of the business continuity
capability. This is another understanding
that can be built into the contract
but it ultimately needs to become integral
to the culture and expectations of
the extended organization.
Supply chain continuity is one aspect of
a broader category of issues called Supply
Chain Risk Management (SCRM).
Consultants and trade groups can help
with a range of best practices for supply
chain management and these include
methods for building resilience into the
supply chain.
A strong partnership can make the
difference between survival and total
catastrophe in the event of a disaster.
Transportation carriers often have
experience helping retail or manufacturing
customers weather a disaster.
Truck carriers, for example, can turn
a secured parking lot into an interim
warehouse simply by parking trailers for
an extended period of time while distribution
centers or stores are in recovery.
Many carriers offer logistics services
and can provide temporary warehousing
space on short notice. Some carriers can
even leverage their other business relationships
by arranging for storage space
from their other customers while the
primary customer is recovering from a
lost distribution center or store.
When a disaster occurs, partners in
the supply chain are in a better position
to leverage each others’ operational
capabilities if advance planning has
been done to define contacts, roles,
contingency communications tools and
methods of information sharing.
Integrated networks and information
systems can greatly accelerate logistics
recovery efforts. With development
effort, companies with centralized,
integrated warehouse management systems
can script all the routing changes
necessary to compensate for a lost distribution
center, reducing a major part
of the recovery effort to a single mouseclick.
When a regional warehouse is
disabled, the script instantly routes all
deliveries from alternative, neighboring
warehouses according to the SKUs
available at those warehouses and the
routes needed for delivery.
A good planning process for supply
chain continuity begins with asking
the right questions. A strong supply
chain continuity capability ultimately
relies on strong, well chosen and well
managed business partnerships with
an environment that enables management
and staff from all organizations to
roll up their sleeves and work together
during a crisis. The benefits of a strong
continuity program include stronger
partnerships overall and a greater potential
for business success going forward.
About the Author
Damian Walch is a Director with responsibility
for delivering technology recovery and business
continuity services. This 18 year veteran
and frequent speaker was named to Consulting
Magazine’s 2003 Top 25 Consultants of the Year.
He can be reached at dwalch@deloitte.com. |
