Posts Tagged contingency
Developing your own FMEA
Posted by Steve in Leadership, Plan on September 2, 2009
Yesterday I wrote about developing a more comprehensive plan for risk and contingency using the FMEA program. The challenge is that FMEA was developed for the Ford Company. How would you apply this in your company when maybe the cost of life, and the other categories do not apply?
Come up with your own three categories, but apply the same logic.
One category addresses how often the problem may occur. Create a scale of 1 to 10, with 10 happening very frequently (every day), and 1 happening once in the lifetime of the project.
The second category addresses how easy it is to detect. Detectability is important to use because something that is very dangerous and impossible to detect (and occurs frequently) could destroy not only your product, but also your company (not to mention harm lives). Once again, create a scale from 1 to 10 that shows at each point what that detectability might mean. 1 might mean that it will be detected as soon as the problem occurs. 10 might mean that it would only be detected much later after the part breaks in the effect the breakage creates on other parts or other elements of the business.
The third category is typically the cost. If your part does not affect lives, then look at it as cost in replacement, or cost in lost sales, or cost in repairs. Once again, create your own scale to represent 1 being a very low cost and 10 having significant impact to your company (possible shutting the company or product line down permanently). Of course, if it does affect human life, 10 means death, and 9 means serious injury.
This approach is relatively simple and lends itself to directing the efforts and resources of the company. Furthermore, it creates a quantitative list that shows that you are thinking about how to manage your resources carefully. It shows a level of management skill that investors hope you have. Finally, this tool allows you to communicate that you are being proactive and are developing systems to manage the company through rough times (which WILL happen).
Plan for the Up and Down Cycles
Fareed Zakaria writes in the June 22, 2008 issue of Newsweek (“Greed is Good“) about how the economics of capitalism have changed. He brings up two points. The first is that the cycles of prosperity and recession are coming at an ever faster rate. The second is that the reason for these problems is that people are no longer doing the right thing.
The cycles of growth and contraction are a fact of life. The 20th century saw the Great Depression and then post WW-II boom as the very extreme versions of these cycles. Zakaria points out that the cycles are getting shorter. We had a boom in the late 90s followed by a crash in 2001. The next boom was in 2004 followed by the crash in 2008 and 2009 of first derivatives and then housing. The cycles of growth and decline will continue. Companies will succeed and fail. The cycles are getting as short if not shorter than five years.
If five years is the typical projection for a business, then should not a business plan with these cycles in mind? It is difficult to forecast these cycles, and if one could predict them then they could take advantage of them. Instead, you can plan for the contingency. What if things go horribly wrong? What if things go horribly right? The reality is that if things go horribly right you usually continue to do what works, but if things go horribly wrong, then you have a problem: what do you do next? Contingencies need to be planned and expected. Diversification in product and service offerings, capabilities and in execution should be examined before it happens.
My prediction is that contingencies will become more important in business plans in the future. What else could this company do? What do they do when in three years their primary product is no longer successful?
Address it and you can ride the cycles up and down.