by Liz Stevens, contributing writer
No manufacturing operation is immune to supply chain risk. Supply chain problems can occur at any stage of the product lifecycle, and – for those who cannot avoid risk (think everyone) – a “belt and suspenders” mindset is vital to preparing for potential disruptions on the horizon. To minimize risk exposure and be better prepared when supply chain problems crop up, a risk avoidance professional stressed the importance of being proactive rather than reactive – and emphasized that companies can capitalize on their investment in contingency planning by using it as a competitive advantage.
Erika Melander is the industry manager leading the manufacturing segment at Travelers, the property casualty insurance company with the iconic red umbrella logo. In an extensive interview, she provided expert guidance on contingency planning, overseas supply chain links, employees, equipment and identifying specific pressure points.
Create a contingency plan
According to Travelers, the most effective contingency plans cover the entire manufacturing operation, with a special emphasis on responding to equipment issues.
“The contingency plan is a biggie for us and for helping manage risk within the supply chain,” explained Melander. “It really touches on all parts of the supply chain: upstream, in plant and downstream. The contingency plan is going to encompass the entire cycle, so you are going to plan for any disruptions in your ability to receive raw materials or supplies. You also want to plan for any disruptions within your four walls. But then, there may be disruptions for your customers. It’s important to think through the impact of your ability to ensure a really good customer experience during a disruption so that they would purchase from you as a manufacturer again – and possibly spread the word so that you are able to pick up new customers.”
Melander continued, “Creating a contingency plan is a crucial process to go through in order to maintain any type of competitive advantage. Per a report from FEMA, 40% of businesses never recover from a disaster. And, of those, only 29% are still operating after two years. It’s not all doom and gloom, though, because what Travelers focuses our efforts on is this: Let’s avoid that scenario and put you in the best position possible to successfully continue to operate your business should a disaster happen anywhere along the supply chain.”
To be prepared, write up a checklist that – at a minimum – covers all equipment scenarios including key machines, spare parts inventory, sources for specialized rental equipment and local repair contractors. And, ask what relationships with other companies are in place so that one of those companies might be able to lend a hand in an emergency.
Appreciate the upstream, overseas factor
With extreme weather, trade tariffs and global politics having an ever-increasing impact on foreign-sourced materials, proactive manufacturers can get a jump on managing their own overseas risk factors with a combination of knowledge and well-designed procedures. Knowledge is power, whether it be knowledge of regulations and standards, intel on overseas suppliers or thorough documentation of everything related to international business dealings. Some common procedures that give greater control over the risk of dealing with overseas suppliers include approval processes for changes, rigorous quality control programs and independent product testing.
Plastics Business asked Melander about knowing upstream overseas suppliers. Does that mean where are they, and what they are susceptible to? What might go wrong over there, and do you want to take that risk or consider using a different supplier or having a variety of suppliers available?
“What do people commonly miss when creating a contingency plan?,” asked Melander. “From our perspective, it’s thinking through the additional considerations, such as supplier risk. You work so hard to create a contingency plan for your operation, but what are your suppliers doing? How are they ensuring that they will stay in business should a disaster strike, and how are they ensuring that they can meet your orders?”
When asked about the notion of applying diversification as a supply chain risk management tactic, whether that be diversifying a company’s clients or diversifying its suppliers, Melander explained, “There are a couple ways to target it: Diversification is certainly one of them, but so is a backup plan. A good example is several years old, but the imagery is vivid: In 2011, Japan suffered from the effects of a tsunami. Japan, in that area that was hit by the tsunami, was the only place in the world that created a specific paint in a specific color of black. And, that black was used on so many vehicles being produced in the United States that it actually brought production to a halt.”
Melander continued, “It’s logical and reasonable to plan for a backup supply source, but you also have to think about how quickly you can get those backups up and running.”
Disaster isn’t the only risk to an overseas supply source; uncertainty about the impact of US tariffs is rampant throughout the manufacturing community. “The tariffs certainly are something we’re thinking about, and we’ve heard from some companies that maybe China is not where they’ll continue to do their manufacturing,” she said.
Monitoring quality control for supplies arriving from overseas also is a key part of creating a contingency plan, and Melander discussed what is most important about the quality control process.
“Should you have any overseas element to your supply chain, there’s a challenge when it comes to issues that might pop up and the time required to receive your product, identify problems and then replace the product,” Melander explained. “It’s good to have a rigorous process as soon as you are able to get to the product. A lot of large manufacturers have a QC team that lives and works in the manufacturing plant overseas. That, of course, is not a possibility for the average manufacturer, but the key is to implement a QC program in a formalized and rigorous way. That protects the quality of the products that are being produced, and the ability to meet your customers’ expectations to maintain your brand and reputation in the marketplace.”
What about downstream concerns?
In addition to planning for product and material sourcing, Melander urges manufacturers to consider the other end of the product lifecycle.
“If you think further down the supply chain, what about your customers?” asked Melander. “What are their contingency plans? How can you ensure that the orders that you are working so hard to deliver will get to your customers, or that your customers are still financially solvent and can purchase from you?”
Whether looking at upstream or downstream partners, Melander points out that transferring risk is a smart business practice. “When we think of transferring risk, we want to make sure our insureds are entering solid contractual relationships with their suppliers and their customers so that, if something were to happen, it is very clearly outlined who is responsible for what,” she said. “This eliminates some of the finger pointing and puts more emphasis on resolution of problems. “
Prepare to repair
When bringing additional equipment into a plant and getting it online, Travelers recommends that manufacturers prepare not only for the inevitable breakdowns that will happen over time but also for any custom modifications required at installation. Will costly or time-consuming modifications be needed before a new machine goes online, and will those modifications complicate future repairs? Facilities that are prepared for repair also estimate lead times for technician visits, calculate the time necessary for repair part deliveries and confirm that new parts will be available for older machines.
Having an on-site repair team can be part of a contingency plan, but Melander stressed that this isn’t always feasible. “Some facilities have the luxury of having a formalized repair or service group, but it’s most important to consider whether replacement parts are on hand or if they quickly can be obtained. Do you have employees locally with the skillsets to make repairs, or do you need to reach out to the manufacturer for support with repairs or equipment? It’s things like these that can have an impact, but you don’t really realize how great an impact they can have – until something goes wrong.”
Recognize the most valuable players
Travelers understands that manufacturers rely on specialized machinery that is, in turn, operated by specialized, highly trained employees. If those players are sidelined or worse, bottlenecks or even complete production shutdowns may occur. A continuity plan should identify the most valuable players (MVPs) in the facility, ensure that the alternative operators have adequate training and real-time practice, and draw up a succession plan for key players.
Melander explained, “It’s more than the folks who sit in a corner office. It’s really those individuals who meaningfully contribute to the operation and help the manufacturing plant stay effective and efficient. In our Bottleneck White Paper, we reference a very experienced technician who was let go because of contraction within the company’s workforce, and this individual was not seen as a key employee. Once the person was let go, the company realized the mistake in that a lot of their equipment wasn’t running as smoothly. They had more downtime, and they didn’t have the knowledge or resource to repair the equipment quickly, and so the long-term impacts were something they hadn’t considered when they let this person go.”
Locate unique pressure points
Each company is different, with a complex set of upstream, in-plant and downstream components. Travelers realizes that a strain or a break in any link in these unique supply chains may disrupt production or order fulfillment.
“Managing a risk and determining the supply chain link that is at most risk in a company is all very individualized, and it’s always evolving,” Melander said. “A tool like Travelers’ Supply Chain Pressure Test is a quick way to keep tabs on those parts of your supply chain that are continuously evolving and that might then need a different response so that your supply chain and the way you manage it does not go stale.”
Melander sums up the supply chain risk challenge succinctly: “The overarching theme is the recognition that the supply chain is ever-evolving and that we see businesses using their planning and strategy around the supply chain as a competitive advantage. If you look at the contrary – that is, if you don’t have a good process in place – we have that statistic that 40% of businesses fail after a disaster. That’s certainly a competitive disadvantage.”
The Travelers Supply Chain Pressure Test (https://www.travelers.com/quiz/supply-chain-management/supply-chain-pressure) presents a short series of questions to gauge a company’s distinct supply chain strengths and weaknesses and, in response, provides useful suggestions. The tips help manufacturers assess the possible risks upstream with their supplier/material sources, identify the most crucial players and processes in-plant, and imagine complications that may arise downstream such as logistics snags and product recalls.
More information: https://www.travelers.com/resources/business-industries/manufacturing