How To Prepare Your Business For A Catastrophe
Business is risky. Life is a series of failures and wins.
You plan, prepare for obstacles, and execute.
Natural disasters are difficult to predict. Experts scream at the top of their lungs that a catastrophe is looming, yet, we keep pushing along, business as usual.
The recency bias plays its part. We forget history tends to repeat itself.
World manufacturers trusted in the Chinese system. Some corporations invested all their manufacturing capabilities within China.
Some retailers get one hundred percent of their inventory, from China.
Apple felt unsteady waters, mostly due to President Trump, and was beginning to shift its hardware production out of China,
“Apple is exploring moving between 15 and 30 percent of its hardware production out of China, according to a new report by Nikkei. The company reportedly has a growing team looking into moving production, and has asked key manufacturing partners like Foxconn, Pegatron, and Wistron to evaluate the available options.”
Trusting or not trusting the Chinese system isn’t the point. There’s a potential risk in every scenario.
If you rely too much on domestic sales, without preparing for a recession, when the economy tanks, you’re likely to go out of business.
If you have one client, or vendor, who takes more than 30% of your sales or distribution, beware. If they fail, you fail.
Business is a world in which contingency planning is critical.
A simple exercise to help you prepare for contingencies.
When I oversaw the acquisitions for Skylink, I made it a strategic policy to always have a contingency in place, in case my strategic procurements fell through.
I did this, so I didn’t fail my projects. If I had contingencies in place, I could make better decisions.
I practice the same methodology in sales, finance, and people operations.
The most important starting place is setting time aside to think. Contingency planning is all about thinking, initially.
The question that fuels this thinking time varies depending on the situation, but here are a few from the book, The Road Less Stupid.
- If I am truly serious about building a first-class defense and creating sustainable financial success, what are the Top 10 highest-probability risks I am facing right now?
- How controllable, manageable, or uncontrollable is each risk?
- What assumptions have I made about these risks that are wishful thinking and simply untrue? How strong is our defense and what can I do to improve our odds?
- What are the 2nd- and 3rd-order consequences of my current plans and initiatives?
These questions will get you started.
When creating contingency plans, make sure you factor in this.
All potential problems aren’t created equally. Each has its degree of risk.
Problems occur for two reasons:
Something happened that wasn’t supposed to.
Something that was predicted to happen didn’t.
When you think about what could go wrong, you dramatically increase the odds of creating something that will go right. - Keith Cunningham
Every risk has moving parts. Once you determine what your risk is, you can begin to mitigate its impact.
The three areas to think about as it pertains to risk are:
What’s the probability of the risk to occur?
What’s the cost if it does happen?
What’s the ability to control the risk?
Let’s take a look at the risk of a significant disruption to the world supply chain as an example.
What’s the probability of the risk to occur?
Today, we know this a reality, so the risk level is high, but last year, we had no idea.
The risk is still medium to high.
There are regulations, exchange rates, political confrontation, and hundreds of other ways an international supply chain gets disrupted.
What’s the cost if it does occur?
The cost is high. A disruption to an international supply chain will cause delays, lost sales, decreased future demand, among others.
What’s our ability to control the risk?
The ability to control a significant international supply disruption is low, next to impossible.
With this exercise, you’ve been able to think through your risk and determine how big of an impact it will cause.
Once you have this, you can begin to mitigate your risk.
This is where contingency planning becomes useful. Ask yourself these questions:
How can you reduce the probability of this risk occurring?
How can you mitigate the cost of the risk if it does happen?
How can you manage the occurrence of this risk?
As you answer these questions, you’re building a contingency plan.
Planning for future problems is stressful, and you may not see the point, but as you sit back reading this today, I’m sure it’ll give you the sense of how important it truly is…to think through future problems.