Managing for Catastrophes: Part III

Editor’s Note: This is the final installment of a three-part feature authored by Dr. Alan Kosansky and Michael Taus, Profit Point

People and process — then technology

The most important ingredient in supply chain planning is the supply chain management team and all the other people whose job it is to continuously analyze and improve the organization’s operations. Begin catastrophe planning by identifying and assembling a working group of informed and creative leaders who can adequately represent and coordinate across their areas of influence. Collaboratively develop a charter with the working group to identify high-level goals and priorities early on the process. If catastrophe planning is new to the organization this step will help to identify internal challenges and solidify commitment to the work at hand.

With the right team in place and focused on a common set of priorities, the next critical step is developing an agreed-upon set of processes. Remember to integrate an iterative approach to planning and take steps to explain the importance of these methods to the team. Catastrophe planning is a very fluid process that requires new information to be assimilated regularly and perpetually. Incorporate a communication loop that enables participants to bring new insights to the planning process at any time. Establish a process for obtaining feedback from the working group to assess the likelihood and impact of risks and plan to reassess those opinions at regular intervals. Create reasonable expectations for reporting within the group and identify key insights that should be shared with the larger functional teams that will be affected by alternate plans. Communicating both the purpose and the plan of the working group to the wider organization is best done well in advance of any catastrophic occurrence. Define a consistent schedule for testing and communicating the plan to all of the individuals who are integral to delivering the response when catastrophe strikes.

Once the right people and processes are in place, the final element in planning is determining the technology to be used in developing the plan. Many tools for risk planning exist and often are similar to the tools used for the best-in-class supply chain planning. When selecting a planning tool, consider the following key features:

• Bi-directional ERP Access: The planning tool should include direct access to the entire ERP data store. It is impossible to know which segment of the supply chain will be impacted, so being able to assess the impact across the complete data set (the entire supply chain) is critical. Furthermore, bi-directional access between the planning tool and ERP enables rapid ‘upload’ of an alternate plan in the event a catastrophe strikes.
• Built-in Optimization: With thousands, or even millions, of variables that could be impacted in any given scenario, revealing optimal plans can be nearly impossible without a robust optimization engine. A decade ago, developing a supply chain plan could take a supply chain planner days or weeks. Today, the best supply chain optimization tools will quickly crunch millions of data points to solve for the most relevant priorities in any given scenario. Consequently, planning for dozens of likely risk scenarios is not only feasible but expedient.
• Reporting, Mapping and Visualization: Quickly understanding the impact of a given scenario enables the supply chain planner to more rapidly qualify various scenarios. Since communicating these scenarios to others within the organization is equally important having the right reporting, mapping and visualization features can save time and accelerate organizational buy-in. The leading supply chain planning tools will include traditional financial reports, as well as map-based illustrations of the impact. Astute planners know how to use advanced visualization tools and pre-configured scenario templates, and can make them available for use at a moment’s notice.
• Accessible: Planning—especially risk planning—is a highly collaborative effort. Therefore the technology platform needs to support collaboration amongst people who are geographically dispersed, as is typical in today’s organizations. This allows each contributor to enter data, analyze alternatives and review the results of their own and others’ scenarios. In today’s world, cloud-based tools are most effective at providing the level of collaboration needed.

Developing high-probability risk plans

There are several methods for assessing risk related to an organization’s supply chain. While those methodologies are outside the scope of this article, it’s worth noting that two primary outputs of a risk assessment are likely to include the likelihood of that risk occurring and the scope of the impact of such an occurrence. For example, the World Economic Forum’s Global Risk Assessment (Table 1) surveyed for both types of outcome and the findings are informative: although the impact of a “major systemic financial failure” was deemed to have the greatest catastrophic impact, the likelihood that it would occur was only average when compared with other risks. However, other risks, including severe income disparity, chronic fiscal imbalances, rising GHG emissions and water supply crises all were ranked as more likely to occur and in the top tier of impact.
Understanding this balance of probability and impact empowers the supply chain manager to develop targeted plans to account for the highest risk and highest probability scenarios

Planning for the known unknowns

While much is gained from planning for known risks, the likelihood of an unknown, unanticipated scenario occurring is equally plausible. Fortunately, the processes and tools required to develop plans for known risks are the same processes and tools needed to quickly respond to scenarios for which no plan exists. Like the human body training through a diverse combination of physical fitness activities, a well-developed supply chain has the flexibility and resilience to outperform for both anticipated and unexpected requirements.
Most supply chain planners do not spend much time thinking about or preparing for catastrophic events. However, those who use the tools and processes available to them receive a dual benefit: Firstly, they are much better prepared when a catastrophic event impacts the company’s supply chain. Secondly, because of their preparation, they are more adept in dealing with the myriad of small failures that regularly occur in the supply chain during day-to-day business operations. Whether obstacles come in the form of delays in transportation, unexpected manufacturing downtime, weather disruptions, or unreliable raw material and component suppliers, knowing how to respond to the unexpected quickly and smoothly enables effective cost management and provision of a higher level of customer service.

Case Study: Managing through Crisis

The massive earthquake and resulting tsunami that devastated northern Japan on March 11, 2011 took an enormous toll on human life. Analysts at iSuppli concluded nothing in the history of the electronics supply chain has had as broad an impact as the Japan earthquake, tsunami and nuclear disaster. Additionally, it had a huge impact on the electronics industry by shutting down the supply of component materials that are used in larger consumer and finished goods. Consumer product suppliers and OEMs in other regions across the globe were forced to manage business operations around a very limited supply of certain key components. Some of those components could be sourced effectively from other locations; however, some became extremely limited for weeks or months.

Those companies that had robust and flexible planning tools and an organization prepared to respond to such crises in a rehearsed and organized fashion did a much better job of allocating a limited supply of components to their most necessary and profitable finished goods. They were able to manage the demand side of their business much more effectively by anticipating and avoiding disruptions that would not occur until weeks or months later as the shortfall of supply rippled through the supply chain. They were able to identify how best to consume the limited supply in order to meet both their customers’ most critical needs and their own. They enhanced strategic relationships across their supply chain by having the information and foresight to pro-actively shape their manufacturing and distribution plans over the upcoming weeks with both their suppliers and customers.

One example of a disaster-ready company was Fujitsu, which had developed a catastrophe plan following a previous earthquake in Japan. The company operates manufacturing facilities in various parts of the world, which enabled it to divert manufacturing away from affected regions. Additionally, the company had a plan in place to restore critical resources such as electricity and water to help bring plants back online more quickly.

Needless to say, those companies that had a robust disaster-recovery plan were far better positioned than those competitors who simply reacted to one crisis after another as limited supply cascaded through the supply chain and dealt with ongoing unanticipated challenges over many weeks.

Be prepared

A brief review of current events highlights the volatile conditions of today’s global marketplace and illustrates the necessity of being prepared for the unexpected. There are well established principles of operation, data management and technologies that will enable every organization to be better prepared to respond to both the next catastrophe and to the daily unexpected challenges of running a complex supply chain. Organizations that take the time to conscientiously prepare for and practice their response those challenges and catastrophes will be ready to perform regardless of what the future may hold. Having a flexible and responsive supply chain will result in improved customer service and better financial performance.

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