We recently posted a blog, “The Crisis in Japan & the need for Contingency Plans”, and have had a few inquiries for more information on contingency plans. Allow us to expound a bit on our view of contingency planning.
There are many definitions for Contingency Planning and Contingency Plans. A representative and comprehensive definition of Contingency Plan comes from The APICS Dictionary, 12th Edition 2008:
contingency planning—A process for creating a document that specifies alternative plans to facilitate project success if certain risk events occur.
While we have great respect for and are members of APICS, the definition exemplifies the problem most of us have experienced with Contingency Plans and Contingency planning. The definition clearly and bluntly outlines the issue. Most companies view Contingency Planning as a “process to create a document…” When the process is put in place to create a document, that is exactly what the process will yield especially when demanded such by the management team.
The Y2K effort, the mother of all contingency planning exercises, was a document creation effort. Do we have Contingency Plans i.e. do we have documents called Contingency Plans that we can show anyone who asks about them? Yes, we do. Good. Check the box. Done.
No not done. More like a waste of time and effort.
The purpose of Contingency Planning is, or rather should, be to have a documented plan for business continuation should a high impact low probability of occurrence event happen. The events include but are not limited to fire, earthquakes, civil unrest, or devastating storms that cut off our ability to produce and fulfill orders. The disruption could effect one of our facilities directly or indirectly in that the disruption could have occurred at the facility of a key supplier.
Here is another definition from The APICS Dictionary:
Business continuation plan (BCP)—A contingency plan for sustained operations during periods of high risk, such as during labor unrest.
A Contingency Plan does need to be a documented. It needs to be a document that is focused on ensuring Business Continuation in case of a high impact low probability of occurrence event that disrupts our business.
Another more detailed definition comes from PC Magazine albeit it is focusing more on IT systems:
A plan involving suitable backups, immediate actions and longer term measures for responding to computer emergencies such as attacks or accidental disasters. Contingency plans are part of business resumption planning.
The process of developing such a plan involves convening a team representing all sectors of the organization, identifying critical resources and functions and establishing a plan for recovery based on how long the enterprise can function without specific functions. The plan must be documented and tested until it works effectively. Also called a “disaster plan,” a contingency plan must be updated continuously.
What was that last sentence? “The plan must be documented and tested until it works effectively.” This is most interesting… the plan should actually be useful i.e. the plan should have a high probability of actually working.
Contingency Plans need to be:
- Realistic in scope
- Economic to Implement before the disruption
- Readily Implementable upon disruption
Realistic in Scope: First and foremost, the parameters must be well defined. This was a problem in Y2K. Different levels of management would define and re-define the level of disaster that had to be planned for.
- Is the interruption catastrophic? Does it cripple all commerce in a region or continent?
- Or, is the interruption localized to just our factory/warehouse or that of a primary supplier or customer
- Are we planning for a specific set of events or anything and everything that might happen?
These questions will help use decide if we need to spend time working on a contingency plan or not. Here are two examples.
We own and operate a unionized factory or warehouse. The labor contract is to be re-negotiated in Q3 of this year. There is a good chance that the union could strike or management might lock them out. This will cause a potential business disruption. In this case, it makes good sense to have a contingency plan worked out and ready to implement. Such plans often include building up another month or two of inventory and flexing the non-union workforce to operate. In the case of the NFL, for example, the owners original contingency plan was to secure a television contract that allowed them to get paid even if a lockout cancels games in 2011.
Let us consider another extreme. What if a meteor were to fall out of the sky at 10 am on a work day and completely destroy our corporate headquarters and killing everyone inside. Though some might suggest, facetiously, that the business might actually run more smoothly, this will cause a disruption in the business. Is this kind of thing we should spend any time planning for? In terms of scope is this even something that can be planned for or around? Probably not, so why waste the time and effort just to have “a document.”
In between, these two extremes is an area of grey. Management teams should discuss and decide various scenarios and determine for which scenarios Contingency Plans should be developed.
Economic to Implement Before the Disruption: Most plans include some aspect of redundancy that one ensures is in place well before a disruption occurs. This involves having parallel or back-up capacity or sources in place. This method is well known and often practiced in our daily lives. Redundancy is good practice when it is economical and practical.
Here is an everyday example that illustrates the point exactly. We carry spare tires in our cars in case we get a flat tire. The cost-risk benefit analysis usually justifies this redundancy. Yet, most of us do not keep an extra car, just in case ours does not start one morning. This spare tire is not expensive nor does it take up much space. The extra car is a huge expense, takes up a lot of space, and requires maintenance. The cost-risk benefit analysis here does not justify the redundancy.
Every business carries spare light bulbs but not every business invests in back-up generators should the power go down. In the US and Europe, back up generation are only used in the most critical operations such as hospitals. In Latin America where the power grids are less reliable, many more factories and warehouses have back up generation.
Again scope plays a role here. In terms of back-up generation, the planning is often done for outages lasting hours rather than months.
Readily Implementable Upon Disruption: If and when a disruption occurs, can the plan be activated and executed or will everyone look at it and mutter, “this thing is useless.” It makes no sense to invest time and effort into developing a plan that will never ever work. The PC Magazine definition resonates very well in this regard. Any contingency plan must be viable and work. This does not necessarily mean the plan is easy to implement
When possible, and economical, the plan should be tested. We have fire drills for a reason. We do not want to test the plan for the first time in the heat of battle or the chaos of a disruption. This does not necessarily mean the plan is easy to implement. The plan may require lots of manpower operating in a well coordinated way. Think about salaried personnel operating a plant or warehouse during a strike. It will not be easy. The factory will not operate at the same efficiency and with the same throughput. But, it will operate.
Final Thoughts: Is it ever OK not to have a plan and to admit to not having a plan? It is better for everyone to know there is not a good viable plan than to simply a document simply to check a box. Consider these to scenarios that are very realistic in today’s supply chains:
- A factory operates 24/7 and is 80% utilized, it will be very difficult to replace some or all of that capacity if the need should ever arise.
- A supplier that is the sole global source of critical material will also be very difficult to replace.
- How much effort does the management team want to invest for some in cases like this to have excess capacity or to develop excess capacity? Or is it more prudent to take a calculated risk.
To summarize, Contingency Planning is an effective tool when the above mentioned guidelines are acknowledged and used to determine:
- Contingency Planning Scenarios
- Defining the extent and duration of disruptions
- Looking at the economics of redundancy making any preparations well before a disruption
- Testing the plan whenever possible
- Reviewing and updating Contingency Plans on an annual basis
