After the fire; Catastrophic loss and the value of good contingency planning: one EMS provider's story.

On Dec. 22, 2005, at 4:50 a.m., the phone rang. On the other end came one of the worst messages a manufacturing executive could receive: "The factory is burning."

Two hours later, Fawn Electronics' facility in Elm City, North Carolina was a total loss.

Why further publicize this type of potentially negative story? Because no business is invulnerable to the risk of catastrophic loss. Fire is one potential calamity, but hurricanes, tornados, earthquakes or floods can impact entire regions.

[ILLUSTRATION OMITTED]

Good contingency planning helped Fawn return to production in under a month, but no company successfully addresses every issue that arises when a facility is lost. This look back discusses what was covered in the contingency plan and the lessons learned during the recovery. Local officials, suppliers, employees, customers and even competitors helped Fawn in its recovery. By sharing these reflections, hopefully other companies will benefit in their business continuity planning.

Fawn's business continuity plan was grouped into multiple categories based on length of business interruption:

* Category 1: operation shut down less than five working days.

* Category 2: operation shut down between five and 20 working days.

* Category 3: operation shut down greater than 20 working days.

The factory was a Category 3 disaster. Fire spread through the building quickly and the roof collapsed, resulting in a total structural loss. On a positive note, no employees were working when the fire broke out and there were no injuries or deaths. The fire occurred right before a planned holiday shutdown, which actually provided some extra recovery lead time. The facility was insured and while a final report identifying the exact cause has not been issued by fire department investigators, the blaze was determined to be accidental. A final positive element was that Fawn has multiple facilities. While this was the only electronics production facility, data backup of MRP and company records resided in the company's corporate headquarters in Timonium, MD.A continuing mantra has been, "We didn't lose a company, we lost a manufacturing site."

[ILLUSTRATION OMITTED]

The morning after: Damage assessment. The day of the fire, the disaster response team went into immediate action. All Fawn associates were notified of the situation. It was the last payday prior to the holiday break and paychecks were issued, as payroll had been saved from the fire. Procurement personnel at the corporate offices contacted suppliers and put incoming material on hold pending identification of a new shipping point. Insurance companies were alerted. Management called all customers to notify them of the fire and that disaster recovery was in progress. Several temporary factory sites were visited and by the end of the first day a location in the nearby city of Wilson with up to 100,000 sq. ft. had been identified.

The team was also dealing with fire and rescue crews, and the media. Because this was one of the largest facilities in the area, fire crews from all over the region responded. Several local crews had conducted mock drills at the facility within the previous year and were familiar with the facility location, access points and fire protection systems. On the downside, the building lacked a sprinkler system because the local water pressure was not sufficient to support one. The issue is significant to note because regional infrastructure issues drive similar situations in many rural factory locations both in the U.S. and offshore. Fawn Electronics' parent company, Fawn Industries, constructed the building in 1982, originally to house a tool shop supporting its plastics injection molding facilities. The county had plans to add a water line capable of supporting a sprinkler system. Fawn Electronics was relocated to the facility in late 1982. While the county did make improvements over time including adding a sewer system to support the planned water line addition, the water line remained in the planning phase. A sprinkler fire suppression system is a key priority in site selection considerations at Fawn.

[ILLUSTRATION OMITTED]

Day two: Procurement. On the second day, procurement readjusted the MRP system (which was fully backed up) and began expediting the supply pipeline now that a temporary facility had been located.

Day four: Recovery underway. Day Four a construction trailer had been moved to the old facility to serve as a command center for recovery efforts. Offices in a Fawn Plastics facility, about 25 miles away, with computer system access were also being utilized. The initial focus within the factory was on assessing damage, working with insurance adjusters and identifying equipment that could be salvaged and repaired. By the end of the first week, equipment suppliers began bringing in benchtop demo units to support semi-automated production in the temporary facility. Larger capital equipment for automated production was on order. Infrastructure improvements were being made to the temporary facility and by Day 10 salvageable equipment and material were relocated there for sorting and handling.

Week three: Shipping product. Week Three, the initial sorting process was completed at the new facility and associates there were shipping product that involved assembly operations requiring minimal automation.

The business continuity plan included assumptions for outsourcing of work to other businesses, yet it had not made the level of capacity assumptions that the total loss of the facility was driving. Consequently, additional sources of temporary supply needed to be identified. In a unique twist, a local Tier 1 EMS company agreed to subcontract production space and excess capacity on SMT/PTH assembly lines, while allowing Fawn personnel to actually perform many of the production operations to ensure consistency in production practices. The business continuity plan included assumptions on the suitability of possible production partners. (Fawn assumed that a competitor in the same tier would be an inappropriate source of supply because of limited capacity and the potential for longer-term competition for the same programs.) Nondisclosure agreements were executed and the work was governed by contractual agreements. Week Four Fawn was shipping automated process product from its subcontracted facility.

Another challenge was hard copy documentation for custom test equipment. Fawn used fireproof cabinets to store paper documentation. The file cabinets were stored under the section of the roof that collapsed. While there was high probability that the heat of the fire destroyed the contents, it was weeks before the damage could be assessed because that area of the building remained inaccessible. Equally challenging was replacing pieces of older, unique special purpose test equipment. The equipment was refurbished when possible. In some cases equipment was simply restored to a pre-fire damage point where it could be more easily replicated. Much of the lost equipment had to be completely rebuilt. Also challenging was the replacement of tools, jigs and fixtures that had been created over a number of years.

[ILLUSTRATION OMITTED]

Positive developments. A key positive development that came out of the fire was an opportunity for Fawn Electronics to create a greenfield operation with an existing customer base. Like many companies, Fawn had grown over time and made equipment choices based on available technology, budget considerations and customer needs at the time. In recovering from the fire, management chose to make plant layout, facility requirement definition and equipment acquisition choices based on a vision for an enhanced business model vs. simply replicating the choices that had been made over a number of years. The new choices put strong emphasis on enhancing process flexibility, reducing changeover time and increasing placement capability. While the company had already initiated RoHS-compliant production, a change in cleaning requirements was considered. The old facility was largely no-clean while the new facility includes in-line cleaning to support RoHS production.

The relationships built through jointly facing adversity were another positive outcome. The lowest cost option for Fawn would have been to lay off associates without pay the day of the fire, which would have been a fairly callous choice given that the fire was three days before Christmas. Instead the company paid all associates for three additional weeks. It also paid planned 2005 performance bonuses. Many associates were called back to work prior to the end of the three weeks and therefore saw no interruption in pay. About 50% of the workforce remained on furlough for up to three additional weeks. Today, all associates have been called back and additional workers have been hired. Six or seven employees chose not to return and the new hires exceed that attrition. The location of the temporary facility, outsourced support options and the location of a new facility all consider the commute preferences of the existing workforce.

Similar win-win situations have occurred in customer and supplier relationships with both sides working to reach resolutions that made sense for good business continuity. While the schedule has been impacted, all parties recognize that by working together the total impact is far less than would have occurred in a more contentious environment. And while existing business schedule requirements are the priority, Fawn has also won new business from two new customers that should ramp in subsequent quarters. Equipment acquisition planning has considered the likely capacity needs of a growing company.

Just one quarter after the fire, Fawn is back in production with nearly all new equipment installed and running in its temporary location. A new facility is being planned and built with move-in scheduled for first quarter 2007. While this is a situation that no company wants to go through, the combined efforts of Fawn's ownership, management, associates, customers and suppliers have enabled the company to move steadily forward in meeting its greatest challenge.

Art Rutledge is president and Kim Boykin is vice president, operations at Fawn Electronics (fawn-ind.com/electronics); [e-mail].

RELATED ARTICLE: When Things Go Drastically Wrong

Disasters caused by fires, hurricances or tornados can wreak havoc on businesses. The smart company will design a robust business contigency plan to alleviate the aftermath. Key issues to consider:

1. The first-pass contact list will generally lack the detail for actual use and data may change over time. Employers should have multiple contact methods for each employee and update them at least annually. Basic emergency contact data should include not only local fire, police, rescue and media contacts, but also contacts needed for immediate support in relocation and new facility infrastructure improvements.

2. Production support options should include a list of facilities capable of absorbing a total loss of facility capacity. It is not necessary to negotiate a support agreement in contingency planning, but a good understanding of options should be included.

3. Insurance coverage should be reviewed at least annually and replacement costs should be carefully analyzed. Be sensitive to cost increases driven by fluctuations in construction costs or costs of raw materials. Also, consider the total impact of lower value office equipment and fixtures. Individually, much of this equipment represents minimal book value, particularly if fully depreciated. Collectively it adds up it if must be replaced on a large scale.

4. Customers' consigned materials and equipment insurance coverage should also be reviewed both at project launch and periodically for interoperability with your own insurance coverage.

5. Business continuity planning should consider that structural damage, insurance claim adjuster lead-time issues or negotiations between insurance companies may delay access to parts of a facility or to specific equipment. Backup strategies should include provisions for hard copy documentation and designs/programming for unique pieces of custom equipment, including older equipment.

6. Contingency planning should also consider design data along with internal and supplier lead-time issues for tools, jigs and fixtures, particularly those that are older and therefore harder to reconstruct. The biggest challenge in a catastrophic loss is not necessarily the cost of replacing these items, but the lead-time associated with the replacement process.

7. While larger companies generally have a well-defined crisis communication plan for the media, smaller firms may do very little regular communication with local press. In the event of a disaster, this will change. Have a basic crisis communication plan and a means of communicating with all local media organizations. Make sure employees know your internal policies regarding communication with the media.

8. Develop a spreadsheet to assess recovery activity status. This living document should be easily shared with recovery team members and should list activities by focus segment, person(s) responsible, date open, date due and date closed. Open items and new additions should be reviewed by relevant team members daily initially and at least weekly later in the recovery process.