Build Supply Chain Resilience to Prevent Potential Crises

A middle market firm needs cash flow and supply chain resilience to maintain daily business operations. Whereas most companies can predict the cycle of available funds and use 12-month planning to maintain liquidity, supply chain integrity is less predictable and not entirely within a company's control. For proof, look no further than the recent labor "strike with pay" at West Coast shipping ports as reported by The New York Times, which hurt companies across hundreds of industries that import raw materials, components or finished goods.

As a result, supply chain resilience — the ability to reorganize and continue the flow of critical materials during an outside disruption — is a business aspect that firms of every size must think about. When a company's supply chain is disrupted without a backup framework in place, the gears can literally grind to a halt: Orders can't be filled, resulting in customer dissatisfaction, loss of confidence and flight to competitors. If this happens even one time, a middle market firm could suffer financial damage that sets it back for years.

To prevent this, supply chain resilience should be built on a framework focused on risk management and mitigation. Here's what you should think about as you form a plan:

• Contingency planning should be based on the probability of events. First, outline the higher-probability developments, such as a business dispute; then, highlight the middle-probability possibilities, including cyberattacks; lastly, determine any low-probability events, such as economic turmoil that affects your supply and demand. You need to gauge these probabilities in your home region and, more importantly, your suppliers' base regions.
• Diversify among major and minor suppliers. Cost is a key consideration here, because executives must determine the amount of efficiency and savings they are willing to sacrifice in exchange for flexibility. It's all about finding the balance that will bring peace of mind at an acceptable cost.
• Understand your suppliers' present output levels and potential capabilities. With this information, you'll know what to do if you need to lean harder on any one of them at a certain point in time. Know the different costs this might involve, and prepare negotiating strategies with an eye toward minimizing expenditure.
• Consider having a dedicated emergency fund or credit facility on hand. This should be used only to remedy supply disruption or other critical failures. At the very least, be prepared to factor the effects of supply disruption into cash-flow projections throughout the year.
• Plan inventory levels based on supply chain flow and the likelihood of disruptions. Which items does the firm receive most frequently, and in what quantity? Which items does the firm receive infrequently, and how long does each shipment last? You should ensure the inventory of critical items is replenished to last through any known higher-risk periods.
• Establish backup communication channels with suppliers and transporters. Firms should know how to reach critical people in multiple ways. This is especially important when dealing with electronically delivered products such as e-books or electronic health records.
• Maintain active relationships with suppliers and transporters. Make sure to do this even with suppliers that you do not presently have business with. You still want to understand their capabilities in order to have a potential safety valve to open on short notice.
• Understand the subcontracting habits of each supplier and transporter. Determine the potential risks of subcontracting to your supply chain. This research will further help you decide which suppliers to use more or less, not only from the perspective of supply disruption but also that of quality control.
• Consider maintaining agreements with certain competitors for temporary emergency assistance. Each midsized firm has its own specific competitive set. Judge the landscape of your business's marketplace and determine which, if any, competing firms you could approach to establish a supply-aid agreement in the event that either firm has a disruption.
• Use exercises to "stress test" assumptions and plans. This might include occasionally using contingency supply channels for a short period. If you have real numbers to base any supply chain decisions on, this will further assist in helping you know the viable options for when a real disruption occurs.
• Prioritize clients to accommodate in case of chain interruptions. In a worst-case scenario when you can't fulfill all orders, you should know which of your customers to focus on first. Mitigate damaged relationships with lower-priority clients by moving them to competitors temporarily or through other high-touch means.

Which of your employees should lead contingency planning? Let us know what you think by commenting below.

Rob Carey is an NCMM contributor and a features writer who has focused on the business-to-business niche since 1992. He spent his first 15 years at Nielsen Business Media, rising from editorial intern to editorial director. Since then, he has been the principal of New York–based Meetings & Hospitality Insight, working with large hospitality brands in addition to various media outlets.