Preparing for supply meltdown

Contingency planning is an exciting and important role for purchasers. But it is often a neglected area, as Anusha Bradley and Rebecca Ellinor report

The threat of a flu pandemic and the reality of terrorist attacks, together with the repercussions of natural disasters, are never far from the headlines. But it seems that more than half of UK businesses have failed to account for them in the supply chain planning.

Research from the Chartered Management Institute suggests 49 per cent do not have any plans in place to ensure they will be able to keep running if disaster strikes.

The findings are similar to those published in this month's London Business Survey. It found half of the capital's firms do not have plans to cope with a terror attack or emergency such as the Buncefield oil depot explosion. And small companies were worst prepared.

René de Sousa, senior procurement specialist at CIPS, says it is part of procurement's responsibility to ensure continuity of supply - and for that it has to draft contingency plans.

"It really is vital. You must identify where the constraints are and put procedures in place whether you're in the private or public sector. The consequences of not doing it can undo a lot of good work in your business, especially if you look at reputation as well - your customers expect you to be able to manage this."

When members of Ariba's newly formed CXO council met for the first time this month, supply risk management was the top of their agenda.

Head of the council is Javier Urioste, former procurement chief at JPMorgan Chase, who now runs Urioste Mercy & Company, an international business advisory firm. He says while risks such as currency fluctuations and energy costs are widely recognised, there are many other areas where problems can arise. "Globalisation and offshoring means working with suppliers in different parts of the world, which presents types of risk covering geopolitical, social and cultural issues."

He says as well as developing and implementing a risk management strategy, you need to inform people about it.

"You must talk to all stakeholders to educate internal clients, logistics and the supply companies of your plans. Risk management needs to be a culture for supply management."

Alan Day, managing director of supply risk management consultancy State of Flux, says even those who have considered risk may not be covered. He cited a poor assessment made by a pharmaceutical company that had five suppliers for a key base ingredient but did not realise they all came from the same earthquake-prone region in Japan.

Day believes manufacturing, telecoms and some parts of the financial services industry are further ahead, but the majority of firms, particularly those in services, lag behind. He says buyers must first decide which suppliers are critical to their business.

"Purchasers are used to considering the most important suppliers in terms of spend. But 20 per cent of your suppliers will contribute 80 per cent of your risk. So who are they? They may not be the ones you spend most of your money with."

Mark Hillman, senior research analyst for AMR Research, believes the complexity of supply risk management has prevented many firms tackling it properly. He suggests buyers either start with the most high-risk supplies - those from sole-source suppliers - or the most strategically important supplies. "Start with these and work backwards looking at everyone who is involved or connected to that product or supply," he says.

Hillman says buyers who haven't drafted plans should see it as an opportunity to raise the strategic profile of procurement and adds that involving finance will help because once they see the financial risk they will assist.

He recently examined US firms' preparedness for a flu pandemic and found while 43 per cent of respondents say they have a policy in place, but the majority do not have an effective supply chain risk management plan.

Plans must also be reviewed: "A strategy is no good if it sits in a binder on a shelf and is forgotten," he warns. The CMI study found only 37 per cent of firms with contingency plans tested them at least once a year. And of those, 79 percent found shortcomings in their plans.

"Disaster preparation is only as strong as the proverbial weakest link. Be sure you are not the weak link - and check the rest of the chain," Hillman says.