Develop a Supplier Contingency Plan

Computerworld - Nobody wants a supplier to go out of business, lose key people or get acquired. But sometimes it happens. Who would have imagined that WorldCom or Arthur Andersen could disintegrate? In today's market, you need to prepare for the unforeseeable. Develop a supplier contingency plan to anticipate potential disasters and develop alternative courses of action.
It isn't cost-effective to build a contingency plan for every supplier. Build a plan for your most critical suppliers - the ones whose failures could cripple your ability to operate in the short term. If you have already segmented your suppliers [see "Divide, Conquer, Save," QuickLink 31953], you've got a good start. Otherwise, do a quick inventory to determine which supplier failures would leave you most vulnerable.
Develop a supplier contingency plan for each critical supplier, excluding extremely financially sound companies such as IBM or Microsoft. Periodically, you should do the following:
• Estimate the probability of failure. Obtain financial data (such as an annual report or 10-K and 10-Q filings) and study opinions from rating agencies, analysts and the trade press. Talk to the supplier's subcontractors, alliance partners and major customers. Look for informal warning signs - more than one layoff, high turnover and water-cooler gossip.
• Assess the impact of a potential failure. Could you continue operating in a reduced capacity? Determine how long you could operate after the supplier disappears. A failure of an ASP might result in chaos within minutes, while a hardware vendor failure might not cause serious trouble for months.
• Evaluate your current treatment of the supplier. Are you doing anything that might contribute to it going under? Are there any preemptive actions you should take immediately?
• Protect yourself contractually. Are products, services and costs accurately reflected in the contract terms? Clearly define your rights in the event of a bankruptcy or change of control -- under what terms are penalties imposed, and at what point can you back out of the contract? Obtain the right to hire the supplier's people (directly or indirectly) upon change of control. Escrow source code for software companies at risk.
• Monitor the supplier regularly. Keep tabs on financial performance and analyze performance against cost and service provisions. Require shaky suppliers to update you on a regular basis. Decide when a predetermined contingency plan needs to go into effect. Establish clear procedures for operating in contingency mode as well as criteria for returning to normal.
In addition to developing a contingency plan, consider contracting with backup suppliers. You will need to