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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.

What are my business requirements for supply chain continuity?
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.

Where does my supply chain begin and end?
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.

Who are my key suppliers of goods and services?
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.

Is my sourcing strategy a fit for my business continuity requirements?
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.

What are my key suppliers doing about business 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.

Can we survive a crisis together?
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.

How can I work with key suppliers and service providers to achieve and sustain my required level of continuity?
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.

How can I build resilience into logistics processes?
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.

Summary
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.