In part one of this series on supply risk, we examined how companies measure supplier risk and anticipate supplier problems. Here we look at what type of disaster recovery and business continuity policies you should expect from your suppliers.
Supplier Disaster Recovery
As part of your overall risk strategy, it is important to ensure that your suppliers have good disaster recovery / business continuity plans in place. This should be a requirement embedded in your contracts with key contract manufacturers and suppliers. It is particularly important during seasonal or end-of-quarter loaded timeframes when the majority of a company’s products are shipped and profits made. If disaster happens during that window of opportunity, it is vital to rapidly recover the critical processes and infrastructure or risk losing huge amounts of revenue, profit, and shareholder value.
For example, if a key server computer of one of your suppliers dies or loses all its data, the plan and mechanisms should be in place to recover within about a day. For longer-term events like a facility out of commission (for example by fire or earthquake) there should be a plan in place to get production up and running within some reasonable window. When companies are not prepared, production can take several months to resume.
Elements of Supplier Business Continuity
One company we interviewed had several useful elements to their supplier disaster recovery strategy:
- Audit and qualify the other facilities owned by their contract manufacturers as possible backup manufacturing sites. This allows this company to know ahead of time what they are working with, and pre-plan the necessary migration steps with their suppliers.
- Use inventory management to minimize the impact. This company carries inventory in key locations, but not all in one location. They have enough material in other facilities to continue in case of disaster.
- Have a very complete and up-to-date list of product-specific tooling – test fixtures, board fixtures. If disaster strikes, they won’t have to spend days trying to recreate that information, hoping their suppliers might have it. Instead, the company knows exactly what they need in order to recreate the entire setup.
- Key backup tools are locked in a safe vault. For example, there is one sophisticated custom-built electronics test board this company uses to test every product. They built extras of that board and store them offsite. If a disaster happened, destroying the board in their plant, this would save them the 22 week lead time of getting another one built.
- Priority clauses built into their contracts. They negotiated ‘go to the front of line’ clauses with key suppliers. If a disaster limits their suppliers’ production capabilities, this company will get served first. This provides valuable insurance, well worth the small added cost. A buyer with large volumes may be able to negotiate this type of priority clause without a price increase.
- Audit the supplier’s business continuity plans and testing. Checking that suppliers’ plans have all the attributes of successful business continuity planning and that suppliers are conducting tests of their disaster recovery and continuity plans on a regular basis (e.g. every 6 months). A recovery plan that has not been tested recently is often nearly worthless.
Of course the level of effort you put into ensuring supplier continuity will depend on the criticality of the supplier and the availability of alternate sources. For really critical suppliers, you will want to actively audit them. For the next tier of suppliers, it may be good enough to survey them about their capabilities (self scoring).
The Big Picture
Your supplier continuity program should be an integrated part of your broader supplier risk and supply chain risk program, which would consider things like whether you have too many resources across your entire supply chain concentrated in one geographic area. It takes time and effort to implement a decent supplier disaster recovery strategy. But the do-nothing-and-hope-for-the-best alternative is inviting a real disaster for your company… and for your career!
In Part Three of this series, we will continue our discussion of approaches to hedging, including the use of over-the-counter derivatives and natural hedges.
To view other articles from this issue of the brief, click here.