Why is a supply contingency plan crucial for your survival?

Summary: The COVID-19 pandemic showed how quickly unexpected events could disrupt global supply chains. The pandemic came as a death blow to the supply chain industry when there was a small buffer room for error and profit margins were squeezing. Here, we will discuss a few essential steps, how businesses can anticipate future challenges and what steps they can take to minimize supply chain disruptions.

Supply Chain Mapping

Firstly, supply chains include multiple partners working together to achieve a common goal. But it’s challenging to get a 360-degree overview of your partner company’s internal processes and operations and build robust relationships with their decision-makers. 

It’s time-consuming to get hold of all the points mentioned above. Still, it will allow you to identify the long chain of component suppliers, which is crucial for building a supply contingency plan. In addition, this exercise will give you the following benefits:

1. Perform a risk assessment test to determine the built-in vulnerabilities in your supply contingency plan. This test will allow you to figure out answers to the following questions:

• Identify supplier contracts of the highest value and most strategic importance to you.
• What steps can you take if these suppliers fail to deliver the points mentioned in the contract?
• To what extent are you dependent on vendors/suppliers/distributors in a particular geographical location, and how will you cope if that region faces unexpected problems?

2. Identify dubious clauses in the contract that allow your suppliers to claim benefits, withhold supply, demand payment, or terminate the agreement during a crisis.

3. Prepare and send a questionnaire to suppliers to identify potential vulnerabilities in the supply contingency plan and address other areas of concern beforehand.

4. Analyze your supply chain forecasts to determine how they might impact mutual agreements.

5. Identify supply chain partners who comply with social, environmental, and corporate governance benchmarks. This step will allow you to build a green supply chain.

Following are a few essential considerations to remember while brainstorming a supply contingency plan:

1. Identify the most vulnerable areas in your supply chain by conducting a risk assessment test.
2. Brainstorm an effective communication strategy and a disaster recovery plan to eliminate the impact of future supply chain disruptions.
3. Conduct credit risk reviews for key supply chain partners to determine their financial health.
4. Identify the highest value contracts and do timely cross-checks to determine whether you can rely on your most trusted suppliers.
5. Diversify your supply chain by expanding to different geographical regions and finding new supply chain partners to ensure you can access essential raw materials whenever required.
6. Explore and invest in new and innovative supply chain technologies to improve time-to-market and reduce logistic costs. 

Brainstorm and cross-check contracts 

Critically analyze and review supplier contacts from time to time to ensure you are making full use of all contractual provisions. You can perform this exercise during a crisis or use it as a tool for future planning. The following questions will provide a better picture:

1. Are there any default triggers or service contract regimes you don’t know about?
2. Are you taking the benefit of every volume discount?
3. Does the contract require the supplier to prioritize your requirements over other customers?
4. Under what conditions can you terminate the contract?
5. What happens if the supplier becomes insolvent?
6. What happens if the supplier becomes incapable of fulfilling contract requirements?

<<<Also Read: What is the correlation between Supply Chain Management Software & ERP Solution?>>>

To protect your interests, you must review the standard contract terms, including customer and supplier terms. Here are a few points to include in your supplier terms:

1. The contract must explicitly mention that the supplier will provide products and services to you at the exact cost it offers to other customers under the same commercial circumstances. 
2. Read the force majeure clause and check under what conditions the supplier can terminate its services. This way, you can plan accordingly, especially for unforeseen circumstances like a pandemic.
3. Go through the sub-contracting clause to understand to what degree the supplier is responsible for sub-contractors’ actions.
4. Check the jurisdiction area where the cases will be resolved if there is a clash of interest between you and your supplier.
5. Read all the audit and information rights carefully to understand your supplier better.

Diversify your supply chain

You may consider diversifying your supply chain network if it’s restricted to a particular geographical location or only to a few suppliers. However, diversification may be risky and involve a substantial investment. So, here are a few points you should remember while diversification:

1. Invest in building numerous warehouses to keep the supply, storage, and production functions running smoothly in case of emergencies.
2. Build robust relations with local suppliers spread across multiple regions to avoid transportation delays.
3. Identify vendors with significant logistics capacity to minimize transportation costs during periods of high demand.

<<<Also Read: Top trends that will dominate the supply chain in 2021>>>

Disaster recovery plans

A disaster recovery protocol is an essential part of a supply contingency plan as it ensures business stakeholders understand their responsibilities at the time of crisis. So, you should conduct test runs of the plan to analyze its merits and disadvantages. 

Moreover, an effective communication strategy allows all business stakeholders to liaise effectively and find solutions to complex challenges at a moment’s notice. You can also get a 360-degree overview of the ground realities and take immediate action.