Six months of inventory still needs a business continuity plan

"We have six months of inventory."

Six months of which products, held where, and usable under which disruption? Covering what demand? And what supply will arrive before that stock runs out?

Those answers tie the buffer to a defined failure and to a credible recovery path. Until they are given, nobody can say what the six months protects.

Start with the recovery problem

David Simchi-Levi's research at MIT frames resilience with two measures: Time to Survive and Time to Recover.

Time to Survive (TTS) asks how long the remaining supply chain can continue meeting required demand after a disruption.

Time to Recover (TTR) is the time a particular node (a supplier, a plant, a tool) needs to return to full function.

When a supplier restarts a machine, usable material has yet to reach your operation. Production, release, transport, qualification or ramp-up may still stand in between.

For management, the question is whether the remaining network can meet required demand for the whole of the recovery.

Six months can still be too little

Take a simplified example. Its numbers are illustrative and do not come from a client case.

A business holds 60,000 units of released finished goods and demand is 10,000 units per month.

Its sole-source supplier suffers a major outage.

Production restarts in month five, but usable deliveries only resume in month seven, at 6,000 units. From month eight they are back at 10,000 units per month.

This monthly model assumes receipts are usable before that month's demand is due. It excludes expiry, yield losses and backlog recovery; actual plans need a more detailed delivery timeline.

The protection missing in this scenario comes to 4,000 units, and closing that gap does not automatically mean adding another six months of stock.

Inventory is only one way to close the gap

The same exposure can be managed through:

• additional strategic inventory;
• partial backup capacity;
• an independently qualified second source;
• duplicate tooling;
• a faster recovery route;
• or some combination of these.

Which one fits depends on cost, shelf life, qualification, capacity availability and whether the backup is exposed to the same disruption.

A company-wide rule such as "critical items require six months of inventory" is too crude to make that choice.

Stock and alternative routes may be enough to ride out a transport disruption.

If a tool is destroyed, the answer may be duplicate tooling.

Losing a quality approval may call for qualified alternative supply.

For a capacity risk, reserved capacity may be what is needed.

Inventory buys the time in which someone qualifies a second source or replaces a lost capability.

Test the assumption that can break the plan

Now delay the recovery in our example by one month.

There are no usable receipts in month seven. Only 6,000 units arrive in month eight, and full supply returns in month nine.

The cumulative uncovered demand rises to 14,000 units: 10,000 in month seven and 4,000 in month eight. Returning to 10,000 units a month covers current demand and leaves any backlog uncleared.

That is why a continuity plan should not rely on a single optimistic recovery date.

Test it on the expected path and on credible adverse scenarios:

• slower recovery;
• lower initial output;
• delayed release;
• transport disruption;
• higher protected demand;
• delayed activation of the backup.

Predicting every failure is impossible, so the testing looks for the assumption the continuity plan depends on, and for what happens if it is wrong.

Give the recovery plan an owner

Naming a backup supplier on a PowerPoint slide does not make a continuity plan.

For each critical dependency, management should know:

• the disruption being protected against;
• the usable inventory available;
• the expected recovery profile;
• the mitigation selected;
• who can activate it;
• the latest activation date;
• and when the arrangement was last validated.

Delays in detection and decision count as well, because inventory is being consumed while the organisation is still deciding what to do.

The next time somebody says "We have six months", ask to see the supply-and-demand timeline and the actions that make it credible.

Dov Amar · Opyflow