supply chain


It is confirmed that Grimsvotn volcano in Iceland has erupted sending a plume of smoke and ash several thousand feet into the air.

In the past, this has not been a major issue, and air traffic was routed around a 120 nautical mile no fly zone. However, you may recall the challenges that many fliers to and from Europe encountered last year when another Icelandic volcano belched smoke and ash that was pushed to many of the major air hubs in Europe, slowing or stopping many flights and disrupting the flow of goods through the supply chain.

Hopefully the last time served as a wake up call to develop contingency plans to assure the smooth operation of your business.

One of the benefits of hind site in unexpected natural disasters is the opportunity to create a “lessons learned” document. By looking at the “pain points” that your organization encountered during the incident, you have the ability to develop contingency plans. 

What are some  common pain points?

  • Key personnel out of position due to transit delays
  • Inventory shortage levels due to interruption of supply chain
  • Increased costs due to spike in demand
  • Delayed deliveries
  • Decreased cash flow
  • Cancelled orders

I take a rather different approach to developing contingency plans by working backwards from the pain point (impact on the company) to the triggering effect.  So rather than looking at “Volcanic Activity in Iceland” as the starting point, I look at “delayed deliveries”. 

Why are there delays?  when brainstorming the reasons, think globally before locally.  

  • Limited shipping lanes
  • Lack of containers
  • Insufficient inventory
  • Lack of key components

Then ask Why?

Lack of containers -

  • Increase in demand
  • Not located where shipments are happening
  • Not being unloaded

Why?

Not being unloaded -

  • Customer using as free “warehousing space”
  • Dock strike at key receiving port
  • Unexpected inflow at key receiving point
  • Shipments aren’t moving  out of a shipping point

The why question asked 4 - 6 times will typically  drill down to a root cause, and root causes can be addressed by either establishing an alternative, or correcting the challenge to remove the obstacle.  They key is to not drill so deep that a plan must be generated for each possible reason, after all doesn’t a solution for delayed deliveries because of a volcano in Iceland require the same process steps as a dock worker’s strike in Los Angeles?  In both instances you would look at alternative transportation routes (perhaps moving the product from Frankfort to Madrid, depending on how the wind blows, or re-directing the container to Seattle from LA to get product into the country and stores quicker), or services (moving by ocean from Europe vs. air freight, or air freight from China to LA) and measure the cost and service impact against the cost and service impact for waiting out the obstacle.

The important idea here is to have a contingency plan for those items that may have a serious impact to your business, otherwise you may just erupt like Grimsvotn.

When Eyjafjallajokull volcano erupted on April 14th, the sky’s above Europe looked like the US sky’s after 9/11.  No major aircraft flew because of the danger to the aircraft, crews and passengers that may fly into the cloud and have all engines fail.  The result of this was passengers being stranded, product not moving, and the airlines loosing more than $200 million a day.  Who knows what the impact to other businesses was, due to delayed shipments, cancelled meetings, extended stays, and lost productivity to businesses around the globe.

This was the result of a continuity plan that has been put into place and has worked for more than 20 years.  Governments, airlines and aircraft manufacturers have long known what could result in flying a plan through a cloud of volcanic ash.  The engines can temporarily shut down because they are clogged with the material, causing the plane to lose power and potentially crash.   Because of this known hazard, a contingency plan was created that vectored planes around the ash plume to assure safety.  This contingency plan has been very effective, and  perhaps to effective.  According to a report in Bloomberg Businessweek (The Plume and The Planes), Marianne Guffanti, a vulcanologist, is quoted : “That’s kind of biting us in the back right now because the more successful we are the more people think there’s no problem.”  

It seems that these rarely occuring isolated environmental issues become forgotten about as time passes because they are either so monumental and low probablility that the feeling is not to put a lot of time building contingency plans that will never go into place, or the impact cannot be expressed in a way that individuals can comprehend.

Because the program put in place prevents a catastrophic accident, there is no “concrete” view of what could happen.  Any occurrences that have occurred are 30 years ago, and forgotten in almost every one’s mind (how many people not directly affected remember how many days the air space above the US was closed after 9/11?)  The challenge I see is that many corporations and individuals do not see the potential impact to them (from roller coaster like flights to death) and only see the impact that occurs from protecting them from these risks (delayed arrival, broken plans, lost profits and inconvenience).  

There is also a challenge to the airlines and transportation providers as well.  How they handle the flight stoppage will reflect on their reputation and could cause loyal customers to look at alternative carriers in the future.  How would you react to these different vendor scenarios?

The carrier throws their hands in the air and says “The government has closed airspace, there’s nothing I can do, deal with it.” and lets their passengers or customers fend for themselves while waiting for the sky’s to clear may have a significant backlash. 

The carrier that apologizes, and looks for ways to ease the burden (hotel and meal vouchers, establishing update phone numbers and web sites, offering assistance, etc.) or looks for ways to get the product shipped (alternative movement to an unrestricted area and then flying out from that location). will have customer coming back for more.

In my mind it’s pretty simple.  The supplier who works with you and shows an appreciation for your business and concern for your inconvenience will continually maintain my business over one who shows disinterest.

It’s the first day of 2010 and between the parades, football and food, I wondered what new years resolutions are on the minds of Risk Managers.   If you haven’t put together this years list, here are 5 suggestions for the coming year.

1.  Increase the awareness of Risk in your organization- In my experience, many decisions are made based on best case scenario, or what will put more money to the bottom line.  While this philosophy works very well, in many cases the decision makers do not realize the total extent of the upside and the downside to the organization.  It’s important to be aware of the risks and rewards to be sure that the decision is based on what is best for the organization as well as making sure that the reward is appropriate for the amount of risk that is involved.

2.  Monitor the credit health of your suppliers as closely as your customers - The roller coaster ride the economy has taken over the past 18 months have shown the vulnerability of all businesses.  The success of your organization may be tied to goods, services and material from an upstream supplier, and if that supplier is at risk of going out of business, the interruption to your supply chain may be a devastating blow.  Monitor the “health” of your suppliers as carefully as you monitor your own Accounts Receivable.  It may just help identify a stress point in your supply chain.

3.  Review your organizations risk tolerance- If you have already taken the initial steps to determine your company’s tolerance of risk, do a follow up to make sure that the mood and thoughts of the company has not changed.  If you haven’t established the risk levels your company is willing to endure, I would suggest completing the process.  Identifying the risk tolerance of an organization provides a benchmark to measure the risks that new proposals, ideas and opportunities present when green-lighting a project.  It helps determine the amount of insurance coverage your company may require, or which alternatives should be put in place to manage the risk at hand.

4. Review contracts and agreements for inappropriate risk transfer or lack of protection – Many contracts can call for you to take on additional risk, or require your company to maintain an inappropriate or unnecessary level of insurance coverage.  In my years of creating and establishing business relations with vendors and customers, I have found that many smaller companies do not fully understand the agreements they are signing and may not realize the full scope of the contract.   The clauses in the fine print and away from the unit price, can call for stiff penalties for errors, responsibility for damages that are not associated with the product or service you select, insurance coverage requirements (including the amount of coverage needed and the naming of the customer as an entity on the policy) and/or minimal reimbursement for the loss or damage to your product.  Reviewing the entire contract and accounting for all the bits and pieces of risk help you to determine if the price or payment is appropriate for the risk that is taken.

5.  Review of your insurance agent(s)/broker(s) and other Third Party Administrators - Your insurance agent, broker or third party claims administrators (TPA’s) are important partners to your business.  They represent you and your interests to the insurance companies and work to maintain or reduce your total cost of insurance.  Typically you will have contracts with the insurance broker and the TPA’s that outline the expectation you have of them for the fees you are paying.  Make sure that a review is periodically set up to measure how well they are doing both in managing your costs as well as looking for cost reduction opportunities.   Remember that there is nothing that would prevent you from placing your business out for proposals on a regular basis to make sure you are receiving the appropriate service for the appropriate price.  However I would put out a few caveats related to the RFP process.  First, make a determination of what is needed and craft the proposal very carefully to establish the core requirements and how these requirements are responded to in the proposal.  You need to be able to compare apples to apples and keep the ancillary issues, ideas and proposals separate so they do not cloud the comparison (they come into play after the core issues are reviewed).  Second, I would suggest that an RFP is not issued every year, unless the quality of service is unacceptable.  You should provide a sufficient window to allow the service provider to build a track record showing the quality of service as well as show stability when working with the insurance companies.  Third, remember that an RFP is not a sign that the current provider is unacceptable, and you do not need to make a switch. 

6.  Build better relationships with other departments to better understand the operational risks they are facing -  This one probably goes back to our first resolution, but the better relationships you have with other departments, the better understanding you will have with the overall operation of the company and in turn the potential risks that could pop up from unexpected places.

7.  Subscribe and read to a business or industry related magazine, e-zine or newsletter  - I am continually amazed at the number of ideas and new opportunities I find in Business Week, Fast Company, Wired, and Bnet.  They are sources of inspiration and thoughts from different industries and business areas that can be modified to fit my organization or spur on new ideas, products and services. 

8.  Update your disaster recovery and business continuity plans -  These plans are the things that minimize the oops in operations.  The plans are not just for IT service outages, but for any unexpected incident that can cause an interruption in your business.  Make sure you review the plans annually to adjust for any changes in personnel, operational locations or new impact areas.

There you have it, a listing of 8 resolutions for 2010, and I am sure there are many more out there.  Please feel free to contribute your suggested resolutions for 2010.

Wishing you a Safe, Healthy, Happy and Prosperous 2010.

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