23

SUPPLIERS

Collateral Damage

Advice is the only commodity on the market where the supply always exceeds the demand.

—AUTHOR UNKNOWN

INTRODUCTION

Every business has suppliers. If you have not been farsighted in dealing with the impact that a disaster may have on your ability to work with them, it may result in financial and operational hardships for your company. Some disasters have the ability to not only shut down your business for a time but could also affect your suppliers’ ability to provide the necessary goods for your business. If this happens, your business suffers. For example, if a tornado hits a section of the community where your supplier for raw materials is located, that supplier might not be able to produce the goods you need for your operation. Their building may be damaged, and their employees cannot get to work. Even if they still could operate, their distribution channel may have been affected. They may not be able to get trucks to their building so they can ship their products to you. Either way your business will be in trouble; your supplier cannot deliver the goods required for your business, which results in your not being able to satisfy and ship your customer orders. In turn, your customers won’t pay for unshipped orders, and you suffer serious financial problems.

KEY SUPPLIER ASSESSMENT

All companies, large and small, need to address how they will be affected by a disaster experienced by one of their suppliers. Businesses are linked together in the supply chain, each needing the other to complete the business cycle. The adage “you’re only as strong as the weakest link” is so true when it comes to the strength of the supply chain. Every business must work out with its trading partners how to deal with disasters that may result in the link breaking between the businesses.

As you conduct a review of your business practices and operations, identify the suppliers critical to your business. These suppliers can be local, national, or even international. Also, don’t overlook third-party influences. For example, if you buy products or services from abroad, then don’t just look at your supplier’s ability to deliver the products or services you need, but also consider the risk of the shipper not being able to operate or a delay or failure in supporting import/export documentation. Your supplier may be healthy, but the transportation method may be affected by the disaster. This was all so apparent when the disaster struck on September 11, 2001. For days after the attack, airline travel and even air cargo transportation was either completely at a halt or severely curtailed. Even though the disaster took place in New York City, Pennsylvania, and Virginia, the whole nation was affected. How prepared were you? Did you have an agreement with your suppliers on an alternative transportation plan or how they would supply their services to you?

Identify all business operations that could be affected if your suppliers are unable to provide the raw materials, supplies, or services required for your company to function. It is all too easy to concentrate on the major suppliers of products and services in your business, such as telephone, electricity, and raw materials, but do not forget to examine the role of all the firms you deal with, both large and small. Your smaller suppliers could be equally or even more important than your larger suppliers. For instance, your supplier for raw materials may not be affected by the disaster, but what about your advertising agency or printer? More often than not, a small local firm may be very critical to your recovery efforts. Without additional advertising or collateral, you may not be able to advertise or market your products effectively, even though you can manufacture them. If your ad agency or printer were affected by a disaster, would you have an alternative supplier?

Sometimes, there is no other supplier you could use. In such cases, one option is to store enough of the supplies so that you can function in the event of a disaster until you can get resupplied. For instance, if your business relies on printed material such as direct mail pieces to generate revenue, print additional pieces and store them in an off-site facility. In the event that your printer cannot supply these materials, you can use your stored supplies. Storing these supplies may have an additional cost, but not doing so could result in reduced sales and loss of revenues. What if you can manufacture your products, but you can’t use a local transportation company to deliver them to a larger shipper? Could these local suppliers be affected by the same disaster that has affected you? What alternatives do you have if you don’t have access to your local distribution channel? Can you rent your own vehicles to transport your products to your national shipper? Is there an alternative shipping method that you can use?

And it bears repeating: Do not take for granted that your smaller and other third-party suppliers are not important in the supply chain; they just may be your “weakest link.”

Managing your vendors or suppliers in the aftermath of a disaster is critical. As with your customers, prioritization of your vendors is the key. Focus your business continuity planning on those suppliers that have the largest impact on your recovery efforts and are the most critical to the support of your business. Again, these may not be your largest suppliers.

Do you know who your supply chain partners are? Set priorities for the management process starting with:

Large and small suppliers

Service providers

Security alternatives

Public infrastructure service providers

Other agencies and business partners

Regulatory bodies

The public

The news media

RISK ASSESSMENT

Failure of an important vendor can have a devastating impact on your business. Whether the result of a natural disaster or bankruptcy, your plan must include steps to manage the failure of an important vendor. This vendor could be supplying a critical component on a just-in-time basis, or it could be your Internet service provider (ISP) that is hosting your online ordering system. Quick action on your part could mean the difference between keeping your customers happy and losing business to your competitor.

The basic steps involved in handling the loss of an important vendor are to quickly assess the situation, mitigate the risks to your business, and develop a plan to keep the business moving while the vendor recovers or is replaced. Put together a small team of three to five people to handle the crisis; a larger team can cause you to waste valuable time arguing things in committee, and this is a time for quick decision making.

The selection of the right team members is important to the success of this effort. The team should have at least one member who understands the technical issues involved. Depending on the vendor, this might require someone familiar with the company databases, web servers, or network infrastructure. Someone on the team should also have enough authority to cut through any red tape that might be in the team’s way. Team members should have experience with legal contracts and should also be able to evaluate new vendors if necessary. The team may also need to be able to negotiate service-level agreements with possible replacement vendors.

If the likelihood of the vendor not surviving is high due to a bankruptcy or major disaster, you may want to consider suspending all payments to the vendor. This is especially important if you have prepaid for some services. This will help to prevent any financial reclamation issues down the road.

The next step is to review carefully all legal contracts between you and the vendor. Make sure you understand your rights and obligations during this time. If a lawyer is not on your team, make sure you get advice from the corporate legal counsel. In many cases you will have a service-level agreement (SLA) that guarantees you a minimum level of performance and should provide for penalties if the vendor cannot meet the minimum service levels. An SLA should cover the following issues:

What is the minimum acceptable level of service?

What is the standard for measuring the service level?

How and when are service statistics calculated?

What is the process for notifying customers if service is affected?

Are there alternative sources of the service?

Once you have a complete understanding of the situation, your next step is to contact the vendor to discuss the problem. Work to help the vendor through the problem. If the vendor is providing technology, make sure you work out what you will need to continue operating. This may include software licenses, source code for custom software applications, and architecture documentation for infrastructure providers. Whether you ultimately switch vendors or see this one through the crisis, your first responsibility is to keep your own business functioning.

ACTION STEPS FOR YOUR PLAN

There are five steps to developing your plan to protect against supplier problems affecting your organization. These steps are:

1. Data Collection

2. Investigation

3. Assessment

4. Agreement

5. Mitigation

Data Collection

The first step is to collect your supplier’s vital information and data. Each internal department should appoint a supplier coordinator responsible for ensuring that the critical suppliers for that department or business unit are identified and documented. The department coordinator should document the process and specific approach to identifying the key suppliers. One good source for the initial identification process is to run an accounts payable list of current and past vendors. It’s pretty obvious that you need to identify and document the vital information of your current suppliers, but why include past suppliers? Past vendors are important because they may become your alternative vendors in the event that your current vendors cannot fulfill their obligations. Maintaining a dialogue with your past suppliers is extremely important for this reason. Some past suppliers may not want to work with you since you don’t buy from them any longer. Make sure you identify and document who they are as well so that if you need to select an alternative supplier, you don’t waste time finding out after a disaster occurs that a certain supplier doesn’t want to work with your business any longer.

Other means of identifying your suppliers should also be used because not all suppliers may appear on the accounts payable list. The supplier may not be paid through normal channels or there may be no record of payment for the service or product. Research “other” suppliers by conducting interviews with key personnel and research product documentation to identify suppliers that are not on the accounts payable listing. For instance, the supplier that packages your product may be a subsidiary of your company and no money changes hands for payment of their services. Their “payment” is only a journal entry in accounting. Missing this supplier as a key vendor may mean that if a disaster occurs, your products cannot be packaged and shipped to your customers. After each department has researched and compiled its supplier list, each coordinator should note the product or service that is supplied by the vendor or organization and how critical the product or service is to the organization. Each supplier coordinator should then assign an impact score for each supplier based on the criticality of the supplier’s product or service.

Apply the “KISS” (Keep It Simple Stupid) principle for developing your scoring system. Don’t overly complicate your decision process by dreaming up an intricate scoring process that requires a Ph.D. in mathematics to figure out and to maintain. A simple 1 to 10 scoring system is adequate, where 1 is very little impact and 10 is very high impact. The supplier impact score should relate to the impact on the organization based on the risk assessment for your entire organization, ranked by type of disaster and how critical the product or service is to the organization. Don’t give suppliers high-impact scores simply on the basis that they are your largest suppliers. As we observed earlier, your smallest supplier may just be the supplier that has the largest impact on your organization if they cannot supply you with their product or service in the event of a disaster. Use Form 23-1 from the companion url to organize the data on your suppliers.

Investigation

The next step is to communicate with suppliers to determine how you will operate together in the event of a disaster. After you have collected and analyzed the data and completed your master supplier list, get in touch with them to investigate their capabilities and to achieve agreement on how to operate in the event either of you experiences a disaster. Don’t forget it’s to the supplier’s advantage to work with you during this process. If you find a certain supplier is not cooperating and finds this process unimportant, then it may be time to find an alternative supplier. This supplier may be your weakest link in your supply chain; you must take measures to strengthen it!

The first step in forming a dialogue with your suppliers is to compose a letter that lays out the process that you are using for all suppliers and how each supplier fits into your supply chain. Let them know how important they are to your success in the event of a disaster. In the letter, ask a series of questions concerning the supplier’s own ability to recover from a disaster. Some questions that you might ask your suppliers are:

Do you currently have a disaster plan?

Does your plan provide for supplying products to my business?

How important is my business to your supply chain?

Do you maintain safety stock for my products?

Form a dialogue with your suppliers to make them aware that you are formulating a business continuity plan and that their input into the plan is important and necessary in the event of a disaster. Next, mail out the letter to each supplier. Make sure you indicate when you want the questionnaire returned to you. Once you have received all the questionnaires back, arrange to discuss in person any concerns you may have in regard to the supplier’s ability to keep you supplied with products or services. With each supplier, perform the appropriate level of investigation according to the priority and critical nature of the product or service. Determine if the supplier has completed a business continuity plan and to what extent that plan considers your operation. Determine if the plan adequately protects you, its customer, in the event that your supplier has to implement the plan in a disaster. If the supplier does not have a plan, offer to help develop one. You may even be able to charge for this service.

Discuss with your vendors the role they would play in the event that you experience a disaster. Discuss alternative processes in the event that suppliers cannot deliver on their contracts to you. You might also want to explore changing your purchasing policy for certain products and services. Historically, your business might have purchased single orders from the lowest cost supplier. This may not be the best approach to help you through a disaster, as you might not be confident that the cheapest supplier on any one day will be able to supply you after a disaster occurs. An alternative policy could be to form a longer-term relationship with a smaller number of trusted suppliers so that you can work with them to ensure continued supply in the event that you have to declare a disaster. This might cost slightly more money than a completely open approach to purchasing, but it might pay off in the long run.

Assessment

The questions that can be asked about a supplier to assess the impact criticality should include the following:

What happens if the supplier is struck by a disaster?

Will the supplier’s failure have an immediate financial or operational effect on your business?

Will the failure result in total or partial loss of support levels from your supplier?

Can you insulate your operations from this supplier?

Is there a workaround for this supplier?

Is this supplier a sole, primary, or secondary supplier?

What is your exposure based on alternative suppliers?

How long can your company function without the services or products from this supplier?

How does the supplier affect your operational processes?

Does your supplier have a business continuity plan in place?

Once each department has completed its individual supplier list and has scored the suppliers, compile one company supplier list that will now become the Master Supplier List. Once the Master Supplier List is completed, categorize each supplier by type of service or product. For instance, combine suppliers by raw material for production of your product; combine suppliers who supply communication services; and combine distribution suppliers that are used for delivery of products. The category type of suppliers will depend on your particular business and also on how many suppliers you have. If you have a large number of suppliers, you may want to break them down into very narrow categories; on the other hand, if you have a small number of suppliers, you may only have three or four categories. It all depends on your business.

Categorizing your suppliers is extremely important because it will allow you to see relationships of which you may not have been aware. It may point out that you may be able to consolidate suppliers to a smaller number. This will enable you to decrease your costs for certain supplies and streamline your supply channel, thus strengthening your supply chain. The process of categorizing suppliers may also point out alternative suppliers for the same products or services that you can use if one of your suppliers has been affected by an outage. You may also find that any one supplier may be the only supplier in a particular category. This would indicate a potential weakness or a single point of failure in your supply chain. Make sure that you address this issue immediately and determine if there is a quick fix for this potential risk. If there is not a quick fix then develop a separate plan to rectify this situation as soon as you are able. Once rectified, make the solution a permanent part of your business continuity plan.

Agreement

Agree with your critical suppliers on how you will deal with problems that surface as a result of a disaster. For instance, how will the supplier communicate with you if your communications lines are down? Do you operate with your supplier via EDI or another electronic means of communications? In today’s environment, look for ways to utilize the Internet to facilitate communications with your suppliers. Look for web-enabled software that allows you to communicate orders, invoices, and other documents and information. Get your suppliers to agree to use these same communications methods in dealing with you. Document these agreements, develop operating policies, and document how these policies will be enforced if necessary. Investigate workarounds, such as producing paper copies for use rather than relying on computer-generated documents; this solution may not be elegant but it might just save your business. After a disaster occurs, communications lines or electronic means to communicate with your suppliers may be offline. The main point to remember is that during a disaster a reliable process is one that is repeatable and standardized, and where terminology and techniques are clearly defined. The process doesn’t have to be elegant to work; it just has to work until you are able to restore your standard operating procedures.

One very important point is to agree with your suppliers on the framework for resolving any disputes that may arise during a disaster, theirs or yours. For instance, it may be pointless sticking to the letter of your supply contract in the event of a disaster. While you and expensive attorneys are arguing over the point in court, you still might not be getting the products, parts, or services you need for your business. Your business would not only suffer severe financial problems from not getting the products you need, but you will also spend valuable resources, time, money, and personnel on legal issues that could have been worked out in advance. You must avoid litigation during a disaster. You have leverage with your suppliers during this planning process to work out the details of how you will operate, utilize workarounds, and deal with problems. If you wait until the disaster strikes, your bargaining power is greatly diminished. It is always in your suppliers’ best interest to work with you during the planning stages of putting together a plan to determine how you will work outside the contract if the need arises. This planning process will also help you in future negotiations with other suppliers, as you can then include these agreements in a contract before you and they commit.

Depending on how important any particular supplier is to your business, you might want to investigate alternative sources. If you adopt this means, do not forget that merely identifying another vendor is not sufficient. You must ensure that the alternate supplier is in a position to supply you with your product or service as soon as possible after a disaster. Do a thorough assessment of any alternative suppliers the same way you did with your current suppliers.

Mitigation

Events and factors that cause or even contribute to supply chain disruptions cannot always be stopped or even predicted. Any associated risk to your supply chain should be viewed as a possibility, and plans should be put into place to mitigate those threats or you should document why the risk is not worth mitigating.

Mitigation of these disruptions can be accomplished in several ways. One of the best methods is to establish a technology-based framework that will allow the prompt exchange of data and information about your supply chain activities. This framework allows the integration of data and information between your supply chain partners; it monitors your supply chain partners’ activities to detect irregularities and disruptions in the “chain.” It also provides for rapid resolution of disruptions as they are detected and provides a framework to manage the entire process to ensure continuity of resolutions as they occur. Some other mitigation factors to consider are these:

Current Inventory Information. Know what products you have in stock, where your products are being stored, who is shipping your products, and if any are in transit. Knowing when your products are arriving or the scheduled arrival of products can be crucial to determining how you will respond to a disaster and how you might deploy products to your customers in the event of a disaster.

Knowing How to Communicate with Your Suppliers. As stated, good communications with your suppliers in the event of a disaster is crucial! If your suppliers don’t know what is going on, how will they be able to respond to your requests? Knowing who your supplier contact is and how to communicate that you have had a disaster may mean the difference between getting products or not.

Test/Test/Test. Documenting your disaster plans is essential, but that alone is not nearly enough. Exercising or testing your plan is crucial to the success of your recovery and the health of your company. Don’t just let the plan sit on your bookshelf and collect dust. Make sure it becomes a living, breathing document within your organization. The way you will interact with your suppliers in the event of a disaster will depend on how accurate and up to date your plan is and if you have actually tested your plan. Like any procedure you have in your organization, if you have never tested it, how will you know if it will work?

Conclusion

In summary, the five elements in supply chain management continuity are these:

1. Data Collection. Identify every supplier to your organization, the products they supply, how they supply them, as well as the product supply schedules and how you will operate with vendors in the event of a disaster. Collect data on your products or services, including how they are manufactured or delivered to your customers. Who are your alternative suppliers? Be certain that you collect all the data concerning your supply chain.

2. Investigation. Investigate alternative strategies with your supply chain. Can current vendors ensure product delivery if you or they have a disaster? Do they have a disaster recovery plan in place and are you an important element in their plan? Can the product be drop-shipped directly to customers? Can existing inventory meet the demands of high-priority customers? Who are your weakest supply chain links? Can you strengthen these weak links through better communications or alternative processes or suppliers? Recoveries have a much greater likelihood of success when a company has already investigated its supply chain and has the means in place to quickly react to a disaster with appropriate and tested procedure and policies.

3. Assessment. Once all your data is collected and a thorough investigation of possible weaknesses and appropriate responses has been conducted, assess the risk associated with each supplier if a disaster or an event occurs. Identify by supplier the associated risk and the impact that may occur if the supplier is not able to fulfill its obligation to supply you with products or services. This assessment will determine the correct course of action to be taken if a disaster would occur and any additional cost that may be associated with the recovery.

4. Agreement. Form agreements with your suppliers on how they and you will react to a disaster should it occur. Don’t wait until a disaster to determine if there are any associated additional costs if your supplier has to use alternative shipping methods to supply you. Get agreement from your suppliers on how to deal with contract points. Don’t try to negotiate new contract terms while you are in a recovery process—and for sure, don’t try to litigate a solution while you are trying to recover from a disaster!

5. Mitigation. As a company, you want a supplier that is a strong and viable partner, one that has planned for business interruption and has your interests as well as its own in mind. To ensure this, you should put in place a vendor management program while creating your disaster recovery plans. A vendor management program is a partnership between your company and your suppliers. Ensure that you have communicated to your suppliers the development of your disaster recovery plan and how they are important to its success. Work out any concerns they or you might have if they are not able to fulfill their commitment due to a disaster. If they do not have a disaster recovery plan in place, help them to develop one. The effort you take in helping your suppliers will be well worth the time if it clarifies everyone’s role in the event of a disaster.

Remember, business continuity planning in your supply chain is your responsibility; it is not your vendors’ or suppliers’ responsibility to manage the impact on your business.