The Eyjafjallajokull Effect: Part 2

Contingency Planning?

Last week’s blog posting discussed the impact of crises like the recent Eyjafjallajokull Volcano and their impact on our supply chains.

Many of you were thinking, perhaps, “I am not so concerned, we have Contingency Plans in place for such things.”

Ah, yes, Contingency Plans.

Why didn’t I think of that?  Oh yeah, I know.  They really don’t work in such cases.

Businesses worry about such things now and then.  Everyone was doing Contingency Planning in 1999 when we had false fears about Y2K.  Sometimes our insurance companies, banks, investors, insist on seeing a plan if they think we have too many eggs in one basket i.e. we are too dependent on one factory or have too much inventory in one warehouse.  Sometimes senior management thinks it is prudent to have Contingency Plans in place to minimize business disruptions is the event of crisis. 

Having a Contingency Plan is like having an insurance policy.  With an insurance policy many people pay a reasonable amount of money into a pool so that when one incurs a loss, the fund supports them.  Yet, force majeure events, catastrophic events like floods and hurricanes, require their own policies or are simply not covered.  Why?  The damage from these kinds of events can affect such large numbers that the pool of money cannot possibly cover all the losses.

The parallel to Contingency Plans is in the scope of the event causing business disruption.  If the event does not affect large amounts of capacity, a good up to date plan will help minimize business disruption.  If the disruption is large and effects all businesses in a geography or continent… most plans would be useless and simply be overwhelmed by the greater force or force majeure.  This was the joke in all the Y2K Contingency Planning efforts.  Everyone realized that to be truly prepared for the extreme scenarios required levels of investment for redundant systems and capabilities that no one in their right mind wanted to sign-up for.

In the Supply Chain, the problem really is that there is not enough excess capacity available to quickly fill the manufacturing, warehousing, or transportation gap.  Margins have gotten so thin and competition so intense that no one can really afford having n factories and be able to fulfill the same demand with n - 1 factories especially if n = 1 or 2.  It just does not happen.  Good companies run their lines at 80 to 85% capacity to allow some flex and maintenance.  It is hard to have a viable contingency plan in such a scenario.

There is more slack demand available in warehousing and transportation depending again upon the magnitude of the event or crisis.

When confronted with an actual situation or emergency, there is quick realization that an existing Contingency Plan is not helpful and the management team gets to work operating in a bunker mentality.  The Contingency Plan is an exercise and often just a check the box exercise at that.  When faced with a real crisis, there is a different tone and tenor to take hard decisions, allocate resources, and make things happen.  This kind of intensity and drive is hard to simulate in a Contingency Planning exercise for what is generally a low probability event.

Maybe the best Contingency Plan is simply to set up a crisis team structure to quickly assemble to quickly assess the situation and begin planning around and through it.  That is what seems to be done anyway.