Business Continuity Planning in Manufacturing: Preparing for the Worst-Case Scenario
Modern manufacturing operations are running
leaner than ever before. While this is great for cash flow and the
bottom line, it can make responding to a business disruption next to
impossible. Learn what really affects the manufacturing industry and
how to prepare.
A serious crisis or disaster can irrevocably impair or destroy the largest company.
According to Labor Department statistics, more than 40 percent of companies hit by a serious crisis or disaster never resume operations. Of those that do, another 25 percent fail within two years.
Simply stated, business continuity planning (BCP) means making informed decisions about risk. Understanding the full implications of the risks you face, knowing your organization's tolerance for risk exposure, and developing organizationwide response plans for various scenarios are essential components of BCP. The scope and complexity are challenging for most business models, but for manufacturers, planning for possible business interruptions can be daunting.
Whether you are faced with a toxic waste spill on site or a September 11-type event that closes down transportation lanes, a manufacturer's supply chain compounds both risk and recovery complexity. The enterprise resource planning (ERP) that helped increase throughput and made capital available for more profitable (non-inventory) uses now works against you, adding its own constraints. Minimizing negative customer impact requires immediate coordination, both throughout the organization and across the supply chain.
Driven by competitive pressures, the leaning of manufacturing that has occurred over the last decade has forced the virtual elimination of safety stocks, excess plant capacity, and the human resources that, if present, could buffer a disaster's effect on the bottom line.
Critical Challenges for Manufacturers
American manufacturers today must fully employ the engineering,
processing, and logistical capacities of their entire supply chains.
America's drive toward customer responsiveness and business process and
supply chain optimization must be as relentless as our foreign
competitors'.
Developing strategies for responding to supply chain disruptions is particularly important because sustainable competitive advantage is typically driven by increased responsiveness and cost minimization. Even though we realize the inverse relationship between risk and efficiency, supply chain planning must also consider customer satisfaction. From a strategic viewpoint, we have a triangle of competing objectives:
- Providing world class customer service
- Reducing working capital
- Reducing transaction costs.
Balancing these competing priorities means that it is impossible to eliminate risk entirely. Managing the tradeoffs between responsiveness, efficiencies, and survivability must balance high-level organizational strategic imperatives against the ground-floor interplay of people, processes, and technology from inputting new customer orders to crediting the receipt of payment to a customer account. Integrated systems such as ERP facilitate tighter supply chain couplings, resulting in shorter business process cycle times, improved customer service, and numerous operational efficiencies.
Market Realities Meet Legal Implications
Manufacturing organizations depend on the continual flow of product to
meet customer expectations, financial obligations, and business
objectives--and even to achieve regulatory compliance. Manufacturers
can possibly face stiff penalties or cancellation of orders if they
fail to ship on time, and in the correct quantities. Unplanned business
interruptions from disasters or crisis events can, over time, result in
serious financial liquidity problems, increased operating costs, loss
of stock value, and erosion of market share. Further, a company may be
obligated to continue receiving raw material and parts shipments per
existing purchasing agreements.
Failure to prepare strategies and processes to manage such threats expose a company and its upper management team to legal sanctions and financial jeopardy. Employing the common law "prudent man rule," courts can hold senior corporate managers responsible for actions they should have taken to prepare for, and respond to, operational emergencies.
So What's the Answer?
BCP, tailored to your individual organization, can not only help ensure
survivability and minimize the impact of the next natural, political,
or technological disruption, but aid in your regulatory compliance
efforts as well. A thorough business continuity plan contains the
following elements:
- Risk assessment--Considers probability and severity of a disaster
- Business process mapping--Cross-functional and across the supply chain
- Business impact analysis (BIA--Establishes scope and critical time constraints
- IT disaster recovery plan--Including communication channels
- Testing--Includes procedures and making revisions to the test plan.
How Prepared Are We?
The issue of preparedness should be addressed in two parts: What
provisions has the organization made and how effective will they be?
What level of preparedness is acceptable? A BIA and risk assessment, two essential tools employed in the BCP process, are also useful here. However, that course runs deeper than needed if you just want to find out where you initially stand. Numerous stakeholders, from stockholders on down, will undoubtedly have an opinion. But without significant education and an enterprisewide perspective, their input will be of little value. The manufacturing supply chain must also be examined, even though including it adds complexity to the task. BCP, done right, is not quick and easy. It is an ongoing program that must become as pervasive as the threats it is constructed to mitigate.
For manufacturers, understanding supply chain processes, vendor criticality, and vendor continuity maturity is required to determine the best options to mitigate likely risks. This understanding comes as a result of conducting a limited BIA and risk assessment (similar to assessing your own organization) on each critical supplier, facilitating risk mitigation and/or taking corrective action as needed.
Plan Today for Tomorrow's Risks
In the event of a disaster, political or technological disruption, or
even a significant business change, impacts can ripple beyond immediate
financial. Rising backlogs, contractual penalties, employee problems,
negative publicity, and loss of market share--not to mention possible
legal liability--are real possibilities.
The potential for supply-chain disruptions means manufacturing operations are less predictable than most managers believe. In the current uncertain political and economic environment, a supply chain strategy must consider survivability as well as low cost. Following a disaster, an organization with a defined business continuity plan in place may actually make competitive gains. That company will have taken steps to mitigate risks within their supply chains, including planning significantly beyond the inclusion of alternate suppliers. The high costs of risk mitigation in manufacturing's more complex business model dictates that comprehensive planning, aligned with organizational strategy, is the only prudent course. Management must identify, quantify, and plan today for tomorrow's business risks.
Perry Depew, CRP, is the director for BV Solutions Group Business Resiliency Solutions division with more than 25 years of experience in disaster recovery, business continuity, and information technology.
Frank S. Brown, MBA, CQIA, Six Sigma Green Belt, is a senior business analyst and business process engineer with 17 years of experience in materials and operations management in mid-sized manufacturing firms.
