How NOT to respond to a business crisis

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A friend of mine runs a company that manufactures a complex product. Not long ago he unexpectedly lost a key supplier. His supplier went out of business and he faced a critical shortage of key components.

And he overreacted, changing his entire approach to lean manufacturing, just-in-time inventory, WIP levels, and outsourcing. As a result his expenses skyrocketed.

When your business faces a supply or service crisis, here's what not to do:

Substantially increase inventory. Running out of supplies, materials, and finished goods can absolutely cripple your business, but so can the carrying costs of maintaining excess inventory. Set inventory levels based on reasonably likely risks, like demand spikes, delayed deliveries, or quality problems.

Dramatically increase suppliers. Don't create multiple redundancies in your supply chain; that only adds administrative costs, creates additional complexity in your purchasing systems, and requires you to pay higher prices for certain supplies based on placing smaller quantity orders. If you are largely dependent on one supplier for a key supply, definitely establish other sources, but one or two "extras" is plenty.

Put manufacturing on steroids. Adding buffers, WIP, redundant capacity, and additional crewing typically decreases productivity and increases costs. Lean manufacturing doesn't increase your risk of running short; lean manufacturing keeps processes simple and straightforward and reduces risk.

Bring work in-house. Working with freelancers and outsourcing partners does create service interruption risks, but bringing those functions in-house can create higher costs. Instead of bringing work in-house, think of outsourcing as another component in your supply chain. Create backup sources, and establish relationships so you can make a call in an emergency. Any job that made sense to outsource before a crisis hits still makes sense to outsource; just find a different, better way.

Change for the sake of change. Successful business owners are great at adapting. Successful business owners are quick to embrace change. But only change your business model based on logic and foresight. Don't react just because you think you need to do something. Sometimes the best response to a crisis is actually no response, other than taking steps to overcome the short-term problem.

What should you do after a business crisis? Take a hard look at your inventory levels and the strength of your supply chain. Try to find potential weaknesses in your manufacturing, shipping, and sales processes. Evaluate how you manage outsourced functions. Your goal is to look for glaring weaknesses, not to create new plans and systems that will mitigate every potential risk you could conceivably face.

Take a step back and make smart changes where necessary; otherwise stay focused on what made your business successful in the first place.

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    Jeff Haden learned much of what he knows about business from managing a 250-employee book manufacturing plant. Everything else he picked up from ghostwriting books for some of the smartest CEOs and leaders in business. He has written more than 30 non-fiction books, including four Business and Investing titles that reached #1 on Amazon's bestseller list. Follow him on Twitter at @Jeff_Haden.