Minimize Disruption In Your Supply Chain: Design and Implement Your Plan B

A healthy supply chain is key to a sustainable, thriving business model, putting immense pressure on the procurement professional as the first line of defense. Priority monitoring of critical suppliers, which the company depends on for day-to-day operations, can dramatically decrease the possibility of disruption.

But sometimes, monitoring isn’t enough.

“If your relationship with a critical supplier were to be terminated at any time, your entire operation would be affected,” states Michelle Reyes Otero, a seven year procurement veteran of CitiGroup.

To avoid disruption, Otero emphasizes the importance of a Plan B. “You want to work out a contingency plan with critical suppliers and make sure a backup is in place,” Otero says.

Set Up Your Contingency Plan

A contingency plan - your Plan B - ensures you and your suppliers are on the same page when it comes to the services or goods they provide.

This is a no-nonsense agreement that outlines deliverables, requirements, and grounds for termination depending on the operating elements of different companies or industries, and is provided to the supplier up front. The plan can be tailored to meet the needs of the company and the supplier.

For instance, the contingency plan may include specifics regarding when and how the company can terminate an agreement with a supplier if it fails to deliver the materials or goods within a certain period of time. A company might include verbiage requiring a supplier provide quarterly financial statements to allay concerns regarding financial risk.

Otero stresses that anyone within the company--not just procurement professionals--who has contact with the supplier should be aware of the contingency plan.

Should the supplier fail to comply with the contingency plan, the company will want to have another supplier ready to move into position.

Have A Backup Supplier in Place

In advance of a crisis, it is essential to have a backup supplier already in place and ready to go in order to minimize supply chain disruption.

Once a backup supplier is sourced, it is necessary to detail the volume they can take on and the timeframe they will need to meet your requirements. “Talk to the backup supplier to find out exactly what they can provide and how much they can help,” Otero suggests.

When speaking with a backup supplier, you will want to assess the volume of work or goods your company needs to ensure minimal disruption. For instance, if the critical supplier is responsible for the company’s servers, knowing how much data runs through the backup servers will assist the transition.

One backup provider might claim they can transfer 75% of the server data in a matter of hours, while another potential partner acknowledges that it would take them days to handle 50% of your needs. This is precisely the decisive information that will help determine which backup option is best.

Otero states having measurable data in front of you will help when vetting backup suppliers. “You can ask them questions such as, ‘Are you able to take on 30% of the data from our servers should something go wrong? How much time will you need?’”

If your company is large and the critical supplier provides a hefty service, one backup might not be enough. Otero suggests having multiple backup suppliers on hand to make sure disruption is minimal.

Moving Past Standard Financial Assessment

Having a Plan B in place is an imperative measure to safeguard against disruption, but an adequate assessment of a potential supplier’s financial health could make the difference between simply having a Plan B and needing to use a Plan B.

Start with the financial documents. Otero tells us that frequency, depth of analysis, and personal relationships drive a cautious supplier assessment program.

“Collect public and private financial documents often,” Otero says. Once a year is essential, but bi-annually or quarterly is even better, especially if the supplier is critical to the business operation.

Collecting financials is not enough. Proper analysis of financials is also needed. “You want to look at the number of assets the company has, what their debt ratio looks like, and the number of clients they have,” suggests Otero.

Additionally, a procurement professional should have a contact person within the supplier’s company as well. This contact person needs to be someone with a full picture of the supplier’s financial health-- either a managing partner or an owner.

“If you notice a company is purchasing a bunch of assets, you need to know the reason, and it’s why an open line of communication is so important,” says Otero. This kind of activity could just be a sign of expansion, or it could be a red flag.

Along with regular analysis of financial activity, a procurement professional can minimize the potential of disruption and ensure a resilient and healthy supply chain.

Having a Plan B can mean the difference between an operation that keeps running and an operation that comes to a halt. Download the checklist, Employ Strong Practices to Detect Supplier Financial Risk and Minimize Disruption

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