Industry Market Trends

Expert's Corner: How Manufacturers Can Preserve the Supply Chain After a Disaster

Oct 01, 2013

A smart plan that maximizes a manufacturer's supply chain can be a huge advantage in disaster recovery. In his latest Expert's Corner series on disaster recovery, Michael Keating offers advice and resources that can help businesses construct such plans. 

Quick planning helped one automotive manufacturer boost its market share following the 2011 Japanese earthquake and tsunami that created a shortage of electrical components, according to Phil Samson, a Dallas-based principal at auditing and consulting firm PwC. "This company removed high-tech options in short supply to keep their dealerships supplied with popular models," he said. "Other manufacturers had to resort to rationing popular models containing these high-tech components."

Samson added, "Having a solid response plan in key transportation lanes is critical to be a first mover in a disaster situation." Manufacturers should "have a creative 'Plan C' to execute as needed to continually serve customers and potentially gain market share" after a disaster, he said.

The 2011 Japanese quake and tsunami showed the need for speed, said Greg Kefer, vice president of marketing at Oakland, Calif.-based GT Nexus, a cloud service provider. "One of our clients is a Fortune 100 heavy equipment manufacturer," he said. "Their logistics team happened to be traveling in South Korea when the Japan earthquake hit. On that Saturday, using their laptops in a hotel room, they were able to have a laser-like, detailed view into the parts of their supply chain that were impacted by the disaster. By Monday morning, they had deployed their response plan and moved into action mode with their partners. That company later reported that the Japan disaster had no impact to their supply chain."

Kefer told IMT that most of his client's competitors spent weeks shuffling through papers and spreadsheets to get the same view into their supply chain.

As part of a disaster plan, manufacturers should set up transportation agreements with at least two carriers, and use each on a regular basis, said consultant Lisa Anderson of the LMA Consulting Group in Claremont, Calif. "Of course, your main carrier can have the larger portion of business. However, it is vital to give your backup carrier regular volume on a consistent basis to keep the partnership intact. Be upfront with your backup carrier that you want to build the partnership and are willing to commit volume. You never know -- even without a disaster, your backup could make improvements and become your primary carrier."

It's important that manufacturers ask their suppliers questions about their risk management practices, advised Ken Katz, a property director at Travelers Risk Control, part of the Travelers insurance company. They should also include business continuity language in their supply contracts. "Be sure to cover the specific supply needs of the business," he said. Other experts that IMT contacted suggest that manufacturers query prospective suppliers on their disaster recovery plans on questionnaires sent out as part of a supplier RFP, RFI, or RFQ.

Katz insisted manufacturers build a supply chain management plan. "Develop and document a plan for your most important inventory and services in case you ever experience an interruption. The Insurance Institute for Business and Home Safety (IBHS) Supply Chain guide takes you step-by-step through items to consider when developing your back-up plan," he said.

Katz urges manufacturers to talk to an insurance agent about Contingent Business Interruption Insurance. "This coverage can help to protect earnings should a key supplier or customer suffer damage leaving them unable to deliver your needed goods," he said.

Unfortunately, many business owners don't have this insurance, said Charles McGimsey, a CPA with Atlanta-based Windham Brannon, a provider of tax, audit, and accounting services. Businesses decline this coverage largely because of the cost, which can range dramatically, depending on the size of the enterprise, he said. "However, companies may want to reconsider getting the coverage, given the rise in frequency of natural disasters that we've been experiencing lately."

Manufacturers should keep in mind that there is also Contingent Business Income Insurance that covers economic loss resulting from physical damage to the property of another business on which they rely, McGimsey said.

Manufacturers should ensure that their suppliers upstream and downstream can continue to supply them should a disaster strike, said Chris Cooley, a senior director at Wayne, Pa.-based SunGard Availability Services, which partners with organizations to ensure IT availability.

Cooley offered three reasons why manufacturers' disaster preparedness plans fail:

  • The environment changes so the plan isn't relevant any longer;
  • The procedures aren't up to date;
  • A manufacturer lacks the right skills or training.

Combating these three scenarios requires that manufacturers be vigilant in staying current, Cooley said. "When production environments change, you need to update production configurations as well as recovery plans and procedures," he said. "These updates should occur on a monthly basis at the least. Once configurations and procedures are up-to-date, you must conduct data recovery tests to determine if you have the ability to execute. There are many issues related to data recovery that can only be discovered during a test."

Having emergency generators ready to go is a first essential step in preparing for a potential disaster, said Bob Kenyon, an executive vice president of Michigan-based Atlas Oil Co., which provides Emergency Fuel Solutions (EFS) in 26 states.

"Simply having an industrial generator onsite does not constitute an emergency power plan: it is the prerequisite for a plan," he said, adding that large diesel generators can go through upwards of 100 gallons of fuel per hour.

"When fuel supplies are diminished or disrupted, the truth about generators is driven home: they are only as good as their fuel supply," Kenyon said. "So what happens when all the gas stations in your area or your fuel supplier are out of power too? The key is to secure your supply ahead of time through an assurance program with a provider who has a diversified-enough supply that they don't rely on one refinery, or geographical area for their reserves."

Kenyon adds that generators are not the only systems that will need fuel in an emergency. Transportation is one of the most commonly overlooked (and most important) elements. "Your emergency planning should include sufficient fuel and resources to operate essential vehicles and potentially transport employees to and from work," he said.

Manufacturers need to do more to prepare for disaster recovery. Nearly 60 percent of respondents A recent BBK and IndustryWeek survey said they have developed thorough contingency plans to obtain critical parts and components in the event of supply chain disruptions. Larger companies with revenues of $1 billion or more are more likely than smaller manufacturers to have contingency plans in place.

Keating's series on disaster recovery for manufacturers returns in three weeks.

Read part one of this series, What Manufacturers Need to Do About Data Recovery After a Disaster.

Read part three of this series, Social Media Tools for Manufacturers in Times of Disaster.

Read part four of this series, Manufacturers Join Consortiums to Help Each Other After a Disaster. 

Michael Keating is senior editor for Government Product News and a contributing editor for American City and County, both published by Penton Media. Read his mid-year 2013 government budget and spending forecast at the Government Product News site. Go here for his IMT 2012 report on how to land government business. His most recent item for IMT was about Mid-year 2013 Update on the Government Market for Manufacturers. Keating has written articles on the government market for more than 100 publications, including USA Today, Sanitary Maintenance, IndustryWeek, and the Costco Connection. Michael can be reached through his website, MikeKeat.net.