Why Every Business Needs a 'Plan V'

Nine months ago when my wife, son, and I went hiking on the glacier covering Eyjafjallajokull, the Icelandic volcano that recently blew its top—shutting down transatlantic and European airline travel—little did we imagine. And that's the problem: Little did anyone imagine.

When transoceanic travel was limited to the high seas, the eruption of Eyjafjallajokull didn't matter. Today it does. As a result of the volcano, more than 100,000 airline flights were canceled over the course of a week, costing the financially hurting airline industry more than $1.7 billion, according to reports. As of this writing, some airports in the U.K. and Ireland are closed due to the latest ash cloud.

The ripple effects were significant as well. Almost a million air travelers were left wilting at airports, as were millions of dollars worth of fresh produce bound for Europe and the U.S. In Kenya alone, according to news reports, some 10 million flowers, mostly roses, had to be discarded.

And what if the volcano, after a brief respite, cranks up the ash again? This is not an unprecedented event. When it last erupted, in 1821, it continued to rumble for another two years. And a neighboring, much bigger volcano—Katla—has historically erupted soon after Eyjafjallajokull. As Olafur Ragnar Grimsson, Iceland's president, put it last month: "What we have seen now is a small rehearsal of what would happen—I don't say if but I say when—Katla will erupt."

Continuity Planning

The Pentagon and its equivalent in other countries have made contingency plans for almost any scenario or combination of scenarios imaginable (especially during the Cold War). Businesses typically have a Plan B.

But this is no longer adequate. As the 2001 terrorist attacks, the 2004 tsunami, the 2008-2009 Great Recession, and the recent volcanic eruption all make clear, business continuity planning needs to extend all the way to Plan V—be that for volcano or victory—in the interconnected global economy.

We may or may not see more such disruptions; who knows? What we do know is that any disruption that does occur will have far more serious ripple effects than anything seen in the past. That's what happens when companies from everywhere are competing for everything with companies from everyplace else.

What if the next big "event"—manmade or act of nature—destroys some substantial portion of China's manufacturing infrastructure or cripples Los Angeles' harbor? What if there's a global flu pandemic? What if Iran goes berserk? What if a computer virus—like the feared Y2K gremlin that never came—disrupts worldwide communication and navigation? What if we fall back into recession and Greece and several other European countries are declared insolvent? What if several such things happen simultaneously?

Consider the extraordinary events of 9/11. Within minutes of the terrorist attacks on Washington and the World Trade Center towers, U.S. airspace was closed, grounding all planes in the U.S. as well as those coming into the U.S. It was unprecedented.

Obviously, that was the right choice, but nobody knew what to do next. As a general rule, planes were ordered to land as quickly as possible at the nearest available airport, regardless of their planned destination. The resulting random and chaotic organization of the airlines' respective fleets bore no resemblance to the usual dispersal of aircraft, with early-morning flights typically "overnighting" at their departure airports so they're ready to go in the morning. Other issues aside, the airlines faced a monumental management challenge: restarting a system that had never before been totally shut down.

How do you plan for such scenarios?

As the world gets more interconnected with global communications networks and global supply chains moving information and goods to customers everywhere, business as usual won't do. Too many things can go wrong and problems half a world away can cause chaos at home.

Elements of Plan V

So what should companies do? What should Plan V look like?

First, manufacturing firms with a Plan V should have multiple manufacturing locations, each with the capability to produce a wide range of the company's products. There are good reasons for doing so anyway, such as proximity to customers and the ability to customize products for local and regional consumers. Add to that: the possibility of crippling supply-chain disruptions, as Africa's flower growers now realize and as we saw several years ago when there was gridlock at America's primary West Coast port just before the Christmas holiday, preventing Asian imports from reaching retailers' shelves. The key here is flexibility.

Second, and as a corollary to this, manufacturers and retailers should maintain strategic inventories of their most popular and/or profitable products close to their best customers: the ones they "have to" supply to keep their factories going so that their competitors don't gain market share in a crisis. This is like America's Strategic Petroleum Reserve, an emergency supply of crude oil stored in underground caverns: You have it there just in case.

Third, companies should develop alternative distribution networks. If you can't air-ship your flowers to London or Frankfurt and from there to Chicago or New York, you should have plans in place to ship them to Johannesburg and from there to Miami. The rules are simple: When perishable products meet delay, the products perish. Always have alternatives available to quickly salvage their value.

Fourth, think of your key people as international troubleshooters—and make sure they understand this additional duty. In an emergency, they may need to be dispatched to another location on very short notice. Prepare them for this in advance. They should know where they will go under what circumstances and what their duties will be when they get there.

Remember, you don't have to be perfect; you just have to be better than your competitors. Customer satisfaction is everything. Customers don't want excuses. The purpose of Plan V is to keep them happy—so they can keep their customers happy. And everyone in the chain can keep their shareholders happy.

Every company should have backup plans, contingency plans, worst-case-scenario plans; call it what you want. To paraphrase the late actor Karl Malden: In our global economy, "don't be caught without it."

Harold L. Sirkin is a Chicago-based senior partner of The Boston Consulting Group and author, with James W. Hemerling and Arindam K. Bhattacharya, of GLOBALITY: Competing with Everyone from Everywhere for Everything (Business Plus, June, 2008).
- BusinessWeek, May 7, 2010