What is Contingency Plan?

We all have tendency to have some backup which can be utilized in emergency like keeping currency at home (although it backfired at recent demonetization in India!), doing investment in property (Flat or Plot) for old age or marrying kids, Power Bank for mobiles, additional gas cylinder at home, and many more things. We also have some inbuilt safety back up like additional Tyre in Car/Scooter, 2 SIM mobile phone. 

Same is true with businesses where Contingency planning is immensely important. As per the Cambridge dictionary, the meaning of Contingency is

“An arrangement for dealing with something that might possibly happen or cause a problem in the future”

In many ISO Standards (9001, 14001, 45001, 22000), contingency has been referred by different names like Risk identification & related actions, Emergency preparedness, Hazard Identification & Risk Assessment (HIRA), Environment Management Program (EMP), etc.

There are 2 specific Standards who are dealing with contingency Planning (ISO 22301-Business Continuity Management and ISO 31000-Risk Management).

Before understanding about Contingency planning, it is important to understand the definition of Risk. As per ISO 9000: 2015 (Clause 3.7.9), it is

Risk: effect of uncertainty

Note 1: An effect is a deviation from the expected — positive or negative.

Note 2: Uncertainty is the state, even partial, of deficiency of information related to, understanding or knowledge of, an event, its consequence, or likelihood.

Note 3: The word “Risk” is sometimes used when there is the possibility of only negative consequences.

As per the above definition, it is very clear that the effect of uncertainty can be negative or POSITIVE too. Although, in general, we always relate Risk with Negative and contingency planning is primarily for something bad which may occur. It is also true that contingency can not be planned for everything but if systematically followed, at-least top management can become aware of the risks in a structured form.   

Contingency has been refereed in 3 different clauses of IATF 16949 (6.1.2.3, 8.2.1-Customer communication, 8.4.1.2-Supplier selection). It is also important to refer to Sanctioned Interpretation (SI) of IATF for more understanding.

Each and every word of the Contingency clause (6.1.2.3) is important to understand. As per IATF 16949: 2016,

The organization shall:

a) identify and evaluate internal and external risks to all manufacturing processes and infrastructure equipment essential to maintain production output and to ensure that customer requirements are met;

b) define contingency plans according to risk and impact to the customer;

c) prepare contingency plans for continuity of supply in the event of any of the following: key equipment failures (also see Section 8.5.6.1.1); interruption from externally provided products, processes, and services; recurring natural disasters; fire: utility interruptions; labour shortages; or infrastructure disruptions;

d) include, as a supplement to the contingency plans, a notification process to the customer and other interested parties for the extent and duration of any situation impacting customer operations;

e) periodically test the contingency plans for effectiveness (e.g. simulations, as appropriate);

f) conduct contingency plan reviews (at a minimum annually) using a multidisciplinary team including top management. and update as required:

g) document the contingency plans and retain documented information describing any revision(s), including the person(s) who authorized the change(s).

The contingency plans shall include provisions to validate that the manufactured product continues to meet customer specifications after the re-start of production following an emergency in which production was stopped and if the regular shutdown processes were not followed.

Interpretation:

a.    Identify and Evaluate: It is important to first identify all the possible risks and then evaluate whether all these risks are relevant or not. So that only the relevant risk can be considered for evaluation.

b.    Internal and External risks: Risk can be Internal (inside the organization like competence, old machinery, no safety arrangement, high Cost etc.) or External (Suppliers, Statutory & Regulatory compliance, workers, Electricity board, etc.).

c.    All Manufacturing Processes: It includes production facility, laboratories, tool room, maintenance process, etc.   

d.    Infrastructure Equipment: It includes utilities like Compressor, Generator, Cooling tower, ETP (Effluent Treatment Plant), Forklift, overhead cranes, employee transportation, etc.

e.    Production output: How to achieve customer delivery schedule, which has been planned by PPC (production planning) to achieve the desired efficiency of the processes & profitability of the organization.

f.      Customer Requirements: It is related to 3R (Right cost, Right delivery, Right quality), as per customer requirements.

g.    Contingency Plans: Prepare back up plan to meet customer and organization requirements.

h.    Risk: It can be positive or negative. We need to identify all possible risk related to the context of its business.

i.      Impact to the customer: Contingency plan should be in line with impact to the customer for any risk like inventory. It is like FMEA for every failure and what will be the severity to the customer.

j.      Continuity of supply: For the customer, the single most important thing is that their production line should not stop and desired quality of product or services can be delivered on time.

k.    Key Equipment Failure: Any equipment for which organization does not have backup or it stops the production of further processes or its repair time is high or which impacts quality and delivery to customer or cost of production goes high or OEE goes down.

l.      Interruption from externally provided products: Failure to purchase raw material & Bought-Out Parts (BOP), Power Supply disruption, etc.

m.   Recurring natural disasters: It is a new addition and very relevant like floods or cyclone in many areas every year, the impact of Kanwar yatra (although not a disaster but impacts businesses every year) in North part of India every year, etc.

n.    Fire: Very common phenomenon which impacts businesses.

o.    Utility interruptions: Failure of Generators, Compressors, Cooling tower, etc.

p.    labour shortages: During harvesting season, festivals, labour unrest.

q.    Infrastructure disruptions: Very important these days like Internet connectivity, Power supply failure, Transporter strike, etc.

r.     Notification process to the customer and other interested parties: In-case of any contingency, there should be a process to communicate to Customer and other interested parties like Suppliers, pollution board, etc., if it can impact their processes and for how long like labour unrest.

s.    Periodically test: Just like a mock drill to verify the effectiveness of fire safety norms or terrorist attack, there should be a process to simulate the condition of contingency and check whether proposed plan will work and effective. Difficult and expensive requirement but quite relevant!

t.      Reviews (annually), multidisciplinary team, top management: There is a requirement to review the effectiveness of contingency planning by CFT (Cross-Functional Team) at least annually which also includes top management as ultimately, they are answerable to the customers and Board.

u.    Document, revision information, person(s) authorized: It is a requirement to document contingency planning (not the requirement in earlier Standard) along with its revision status. The organization has to nominate an authorized person who can make changes. The objective is to ensure that the sanctity of the plan is ensured.

v.    Validate, re-start of production, regular shutdown processes: It is a new requirement to validate the manufacturing process once contingency is over and we start routine production including such cases where routine shutdown process is not followed (many companies have the process annual shut down but in case shut down happens due to labour unrest, Fire, pollution issue, etc.).

 How Risk and related Contingency can be Positive:

a.    During Euro IV implementation, many OEM’s were not ready, the competitors had taken the benefit and their Share of the Business (SOB) improved.

b.    During upcoming Euro VI implementation (1st April 2020), many OEM’s and Tier 1 can see the above possibility!

c.    During Euro VI implementation, many non-design competent organization (Engine, Exhaust systems, etc.) will NOT get new business. It will create a new possibility for other Design competent organization to expand their capacity if they had anticipated this earlier in their contingency.

d.    Many cash strapped organizations (Jet Airways) are not able to sustain their businesses. This is leading new opportunity to cash-rich and ethical companies to take-over their businesses if they had adequate contingency planning.

e.    During vehicle recall in recent times (like Air Bags), the loss of one company became the benefit of another if they had the contingency plan to expand their capacity.

 Benefit of effective Contingency Planning:

1.    Maintain Customer Satisfaction

2.    Gaining customer confidence for long term relationship

3.    Can reap benefits by minimizing the losses

4.    Ensure Efficiency of Manufacturing processes

5.    Minimize risk

6.    Keeping all stakeholders satisfied

Some question to ponder

·      Do an organization prepare contingency plan using CFT or it's still made by someone in the Maintenance Department!

·      If the contingency plan is made for the organization or external bodies?

·      In how many organizations, the contingency plan is reviewed by top management?

·      In how many organizations, the existing contingency plan is implementable?

·      How many organizations believe in contingency planning?

This is the 15th article of this Automotive series. Every weekend, you will find useful information which will make your Management System journey Productive.

I am extremely valuing your genuine feedback and response. Please continue sharing it and suggest topics for the coming weeks.