Preventing and Managing Supply Chain Disruptions

Prepared and Presented by:

Thomas L. Tanel, C.P.M., CTL, CISCM, CCACATTAN Services Group, Inc.

“The three areas where companies find that risk has increased mostare macro-economic uncertainty, commodity price volatility, and currency risk.”—Kairos Commodities Risk Management Survey

Agenda Outline

I. Supply Chain Risk Concerns in A VUCA WorldII. Risk, Drivers, Generators, and AmplifiersIII. Preventing Supply Chain DisruptionIV. SCRM Process ModelV. Risk Identification and AnalysisVI. Risk Threat Assessment and CriteriaVII.Risk Mitigation Methodology & PlanningVIII.SCCP and Due Diligence

I. Supply Chain Risk Concerns in A VUCA World

Supply Chain Risk Management—Strategic Imperative

5

"Risk management is a strategic imperative for any large company with a global

supply chain," says Scott Singer, director of global supply management at

United Technologies Corp.

6

What Is A VUCA World?

Supply Chain Executives Face Increasing Concerns about Mitigating Logistics Risk

• The World Economic Forum Report Global Risks 2012

• According to ChainLink’s research for 2012, companies will increasingly turn to risk-reduction approaches.

• The New Supply Chain Advantage—Factory Mutual Global report says “supply chains have been stretched farther than they have ever been stretched in the past.”

II. Risk, Drivers, Generators, and Amplifiers

“It ain’t what you do know that gets you into trouble. It’s what you know for sure that just ain’t so.”—Mark

Twain

9

Most Common Supply Chain Risks I• Financial instability, bankruptcy, or financial failure of a supplier• Fire, chemical spill, etc. at the supplier firm • Problems in electronically sharing information with suppliers• Suppliers incorrectly interpreting our requirements• Natural disasters or “acts of God” affecting suppliers’ operations• Political instability, terrorism, civil strife, or war affecting

suppliers’ operations• Reduced accuracy of forecasts and plans• Long physical distances between buyer and suppliers• Inability to influence /manage suppliers• Lack of alternative sources of supply• Labor availability, slowdowns, strikes, and quality of workforce• Health issues, disease, quarantines, and pandemics• Inadequate production capacity and poor logistics and

transportation infrastructure• Unanticipated spikes in demand• IT and communications network shortfalls • Political graft, bribery, and corruption• In-transit water damage, spoilage, and contamination

Source: CATTAN Services Group, Inc. Research

10

Most Common Supply Chain Risks II• Inability of supplier to meet increases or seasonality in required volumes• Product or service quality issues• New or unproven product/process technology being used by suppliers• Transportation disruptions or terrorism infiltration with inbound supply

channels• Variability in transportation times with inbound supply channels• Port congestion gridlock and customs delays• Theft, piracy, pilferage, and hijacking• Possibility of suppliers putting your firm on allocation• Incoming product quality problems• Labor/management problems at suppliers• Currency rate and foreign exchange rate fluctuations• Material price fluctuation swings• Volatile fuel prices, extra surcharges, and energy shortages• Longer cycle times and increased inventory• Extra administration and additional costs for expediting, follow-up, and

premium freight• Unit of measure accounting and inventory discrepancies• Meeting SOX requirements and compliance costs• Government, trade, and regulatory actions• Power and electric grid disruptions, failures, brownouts, and blackouts

Source: CATTAN Services Group, Inc. Research

11

Supply Chain Risk Driver Generators

Supply chain risk is about any threat of interruption to the workings of the supply chain. Risk may be generated as a result of risk 'drivers' that are either internal or external to the organization’s supply chain.

Environmental

Demand

Process

OrganizationalControl

Supply

InternalDrivers

External Drivers

Source: CATTAN Services Group, Inc.

Examples:•S–Fire, chemical spill, etc. at the supplier firm •D–Unanticipated spikes in demand •E–Health issues, disease and pandemics•O–Longer cycle times and increased inventory•P–Product or service quality issue

12

Supply Chain Disruption Amplifiers

The impact of supply chain disruptions increases when any of the following product/process complexity parameters increase in a given supply chain:

• Product complexity (number of parts, levels in bill of material, difficulty in meeting specifications)

• Proprietary technology• Value of product• Quality requirements• Supplier manufacturing capacity• Uniqueness of parts• Part size

Source: Supply Chain Research Consortium at North Carolina State University

13

Supply Chain Disruption AmplifiedIn their 2005 study of the financial effect of supply chain disruptions, Kevin

Hendricks, formerly of the University of Western Ontario, and Vinod Singhal, of the Georgia Institute of Technology, revealed a significant financial impact on performance, as operating income dropped by 107%, return on sales by 115% and return on assets by 92%

Supply Chain Disruption Further Amplified

Stock Market Response to Global Events

How to Handle Disruptions in the Supply Chain—Two Perspectives

Pre-Disruption

View

SC Risk Management

Prevention or

Proactive

Post-Disruption

View

SC Disruption Management

Response or

Reactive

TimeDisruptive Event HappensTime

17

Risk Management in a Global Economy

—Survey Findings • In one industry after another, supply chains have

been stretched farther than they have ever been stretched in the past.

• Few have much experience managing supply chain risk across oceans and continents.

• As organizations outsource or best cost country source to developing countries, they unknowingly take on greater exposure.

• While some of the best supply chain strategies can help minimize costs and free you to focus on core competencies, these same strategies also may stretch your supply chain to the breaking point and leave your organization vulnerable.

Source: The New Supply Chain Advantage—Factory Mutual Global

III. Preventing Supply Chain Disruption

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"As firms move to leaner operating models and leverage global sourcing models, uncertainty in both supply and demand is growing along with supply chain complexity," said Mark Hillman, research director, AMR Research. "As a result, the need to manage risk, specifically in supply chain, is on the rise."

"As firms move to leaner operating models and leverage global sourcing models, uncertainty in both supply and demand is growing along with supply chain complexity," said Mark Hillman, research director, AMR Research. "As a result, the need to manage risk, specifically in supply chain, is on the rise."

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SCRM Strategy & Objectives

SCRMAssessment

of Data Sources

SCCP Risk Management

Tools

SCRMMitigation & SCCP Risk Avoidance

Risk Management Process

SCMR—Supply Chain Risk ManagementSCCP—Supply Chain Continuity PlanningSource: CATTAN Services Group, Inc.

21

IdentifyThreat

Identify Materialor Service• Supply Chain• Critical Logistics Components

ThreatExpertise

Risk Identification Risk Assessment

Quantify Severity Of Threat

Material/Service Assessment

Quantify CriticalityOf Material/Service• Alternate Sources• Alternate Material• Ease of Manufacture or Service• Multiplicity of Threats

Threat Assessment

Internal Customer Assessment

Process Assessment

Assess Sourcing Process• Sources of Supply• Policy & Procedures• Supplier Base Information• Market Intelligence

Quantify Internal Customer Risk• Proprietary Infringement• Theft and Hijacking Security• Sole Source/Lack of Alternate• Inbound Pipeline Visibility• Incoming Quality Implications• Forecast Demand Capacity• Reverse Logistics

Risk TooHigh?

IdentifyChanges

Plan forChange

ImplementChange

MeasureResults

RiskDatabase

RiskMetrics

BusinessCase

Risk Mitigation

NewTools

Yes

No

Risk Management Flowchart—Example

Source: CATTAN Services Group, Inc. adapted in part from the Risk Management Guide for DOD Acquisition.

IV. SCRM Process Model

23

Supply Chain Risk Management (SCRM) Process Model

Source: CATTAN Services Group, Inc.

Results Risk Tracking and Supply Chain Continuity Plan

Supply Chain

Risk Assessment and Mitigation

Supply Chain

Risk Identification

and Risk Analysis

Strategic Supply

Chain Strategy and Objectives

1. Risk Mitigation Assessment

2. Risk Mitigation Planning

3. Risk Mitigation Plan

Implementation

24

Strategic Supply Chain Objectives—Example

Objective Action Step DateA. Cultivate

long-term relationships

A.1. Conduct a “Customer Rating by Supplier Base” Survey.

01/

A.2. Implement a “Welcome Booklet” Supplier Guide for use in the Purchasing Department and establish a Supplier Advisory Council (SAC).

05/

A.3. Communicate to our suppliers both our mission and the products/services/technology they provide; include their successes and results in supporting our long-term business needs and the inherent risk.

01/ and ongoin

g

A.4. Continue to hold quarterly “Supplier Sourcing Group Day” meetings with our suppliers.

ContinueSource: CATTAN Services Group, Inc.

25

“There needs to be a fundamental rethink of management approaches. The still widespread practice of focusing risk management systems on observation and control of suppliers, and passing on risks to upstream partners in the value-added chain, has no future,” says Sven Marlinghaus, a partner at BrainNet, and co-author of the study Risk Management Reloaded — A Procurement Perspective. “Nowadays, businesses that want to survive must integrate their suppliers in a working partnership and take an unobstructed view of the diversity and interdependencies of risk factors that could endanger security of supply.”

“There needs to be a fundamental rethink of management approaches. The still widespread practice of focusing risk management systems on observation and control of suppliers, and passing on risks to upstream partners in the value-added chain, has no future,” says Sven Marlinghaus, a partner at BrainNet, and co-author of the study Risk Management Reloaded — A Procurement Perspective. “Nowadays, businesses that want to survive must integrate their suppliers in a working partnership and take an unobstructed view of the diversity and interdependencies of risk factors that could endanger security of supply.”

26

Supply Chain Strategic and Tactical Risk Planning

Supply Chain Scenario Planning

1. Focal Issue2. Key Factors and Driving Forces 3. Critical Uncertainties4. Scenario Logics5. Scenario Experiences6. Implications7. Leading Indicators

Benefits of Supply Chain Scenario Planning• Encourage people to break their standard world views

• Forced to consider possibilities may not have had any experience

• Better able to understand the source of disagreements

• Brings together the views of different departments

• May serve as signposts that the scenario is unfolding

• Helps in proactively assessing consequences

• Can help develop early warning systems

SCRM Scenario Planning Vision

V. Risk Identification and Analysis

31

Risk Identification• The intent of risk identification is to answer the question

“what can go wrong?”– Reviewing potential shortfalls against expectations, metrics, KPIs , and

KRAs and– Analyzing negative trends

• Identify associated root causes, begin their documentation, and set the stage for their successful management.

• The level of likelihood of each root cause is established utilizing specified criteria.

32

SCM Is Managing Uncertainty

1. Natural Disasters, Weather, & Epidemics2. Energy and Fuel Price Swings3. Supply Chain Compression & Reliability4. Economic & Monetary Disruptions5. Financial Viability of 3PLs & Carriers6. Global Market Changes & Demand Shifts7. Supply Chain Talent Brain Drain8. Information & Communication Technology Change9. Regulatory & Trade Environment10. Panama Canal Expansion

Unknown-Unknown

Known-Known

Uncontrollable

Controllable

Unknown/Known

33

Risk Analysis

• Risk has two critical elements: likelihood of occurrence (probability) and severity of impact or consequence (magnitude).

• The level and type of consequences of each risk are established utilizing criteria such as those described in the following slides.

34

Levels of Likelihood Criteria—Example I

Level Descriptor Description

A AlmostCertain

The event is expected to occur in most circumstances

B Likely The event will probably occur in most circumstances

C Possible The event should occur at some time

D Low The event may occur only in exceptional circumstances

35

Levels of Likelihood Criteria—Example II

Descriptor

Probability

Rank Value

Highly Probable

>75% High 5

Probable >50%--<75% MediumHigh

4

Occasional >25%--<50% Medium 3

Remote >10%--<25% Medium Low

2

Improbable <10% Low 1

36

Levels of Likelihood Criteria—Example III

Level Likelihood Approximate Probability

of Occurrence

1 Not Likely ~10%

2 Low Likelihood ~30%

3 Likely ~50%

4 Highly Likely ~70%

5 Near Certainty ~90%

37

Cranfield University’s Cranfield Management Research Institute

Centre for Logistics and Supply Chain Management defines supply chain

vulnerability as “an exposure to serious disturbance, arising from risks within the supply chain as well as risks

external to the supply chain.”

Cranfield University’s Cranfield Management Research Institute

Centre for Logistics and Supply Chain Management defines supply chain

vulnerability as “an exposure to serious disturbance, arising from risks within the supply chain as well as risks

external to the supply chain.”

38

Recent Trends of Global Supply Chains Expose Organizations to Increased Supply Risk

Source: World Economic Forum and Accenture Research

39

Severity of Consequence Criteria—Example I

Level Descriptor

Description

4 Critical General failure in meeting strategic supply chain objectives

3 Major Significant shortfall in meeting strategic supply chain objectives

2 Moderate Does not meet more than one strategic supply chain objectives

1 Minor Does not meet a strategic supply chain objectives

40

Severity of Impact Criteria—Example II

Descriptor Rank Value

Catastrophic High 5

Critical MediumHigh

4

Serious Medium 3

Marginal Medium Low 2

Negligible Low 1

VI. Risk Threat Assessment and Criteria

42

Risk Threat Assessment Guidelines

• To what degree is the threat information CREDIBLE ?

• To what degree is the threat information CORROBORATED ?

• To what degree is the threat SPECIFIC or IMMINENT ?

• HOW GRAVE are the potential consequences of the threat?

Source: CATTAN Services Group, Inc.

43

Risk Quadrant Continuum

L O i ck ce ul o ri f rh eo no cd e

Severity of Consequence or ImpactLOW

HIGH

HIGH

2High

LikelihoodLow Severity

4High

LikelihoodHigh Severity

1Low

Likelihood Low Severity

3Low

LikelihoodHigh Severity

Source: CATTAN Services Group, Inc.

44

Risk Mitigation Assessment Methodology

• Risk identification and valuation.• Risk analysis, threat assessment, and vulnerability

assessment.• Risk quantification of the likelihood of event

occurrence and the severity of impact or consequence.

• Risk quantification ranking and priorities.• Risk countermeasures and expected risk reduction.

Source: CATTAN Services Group, Inc.

45

Levels of Likelihood Criteria—Example II

Descriptor

Probability

Rank Value

Highly Probable

>75% High 5

Probable >50%--<75% MediumHigh

4

Occasional >25%--<50% Medium 3

Remote >10%--<25% Medium Low

2

Improbable <10% Low 1

46

Severity of Impact Criteria—Example II

Descriptor Rank Value

Catastrophic High 5

Critical MediumHigh

4

Serious Medium 3

Marginal Medium Low 2

Negligible Low 1

47

Risk Identification to Risk Analysis

Risk Analysis Likelihood and Impact Framework

Source: Westec Advanced Productivity Exposition by Quality Plus Engineering

48

Risk Analysis to Risk Mitigation

Risk Analysis Likelihood and Impact Framework

Source: Westec Advanced Productivity Exposition by Quality Plus Engineering

Risk Analysis Assessment • Risk assessment

for all the suppliers uses a red, yellow, green chart.

• Risks in the red receive a higher level of management attention than risks in the yellow or green zones.

VII. Risk Mitigation Methodology & Planning

51

Risk Mitigation

• Having assessed all the risks and identified those that require action, plans need to be drawn up and responsibilities assigned to control and mitigate these risks.

• Risks should be allocated to an owner, who is responsible for managing them, possibly with the help of other supply chain team members.

52

Risk Mitigation (Con’t)

• The allocation of risk should be dependent on the assessment of the likelihood and consequence of the risk and then the identification of who is best able to control or manage the risk.

• This is the most important aspect of any significant purchase and something that we should be involved in.

53

Risk Mitigation Planning• The intent of risk mitigation planning is to

answer the question “what is our approach for addressing this potential unfavorable consequence?”– Avoiding risk by eliminating the root cause

and/or consequence– Controlling the cause or consequence– Transferring the risk, and/or– Assuming the level of risk and continuing on

the SC plan

“There is nothing more deceptive than an obvious fact”Sherlock Holmes

Five Logistics Risk Management Response Options

1. Infer logistical differences in a country’s economic capability

2. Understand the bullwhip effect3. Invest in redundancy4. Increase velocity in sensing and responding5. Create an adaptive supply chain community

Risk Management Response—Logistical Dangers

Country Type Economic Capability Differences that Impact Logistic Risks

Risk Management Response—Bullwhip Effect

ManufacturerWholesale

Distributors ConsumersMulti-tierSuppliers Retailers

Time

Sale

s

Sale

s

Time

Sale

s

Time

Sale

s

Time

Bullwhip Effect—Supply Chain Management and Uncertainty

Risk Management Response—Redundancy

• Respond to unforeseen events

• Careful analysis of supply chain trade-offs

• Example

Risk Management Response—Sensing and Responding

• Speed in sensing and responding can help the firm overcome unexpected supply problems.

• Failure to sense could lead to…

• Example

Risk Management Response—Adaptability

• The most difficult risk management method to implement effectively.

• Requires all supply chain elements to share the same culture, work towards the same objectives and benefit from financial gains.

• Example

Five Global Logistics Risk Management Response Strategies

• Speculative Strategy

• Hedge Strategy

• Flexible Strategy

Five Global Logistics Risk Management Response Strategies

• Avoidance Strategy

• Postponement Strategy

62

Risk Mitigation Plan Implementation

• The intent of risk mitigation plan execution is to ensure successful risk mitigation occurs.

• This provides a coordination platform with senior management and all supply chain stakeholders.

• It directs the SCRM team to execute the defined risk mitigation plan and to provide a reporting mechanism for on-going monitoring.

VIII. SCCP and Due Diligence

64

Supply Chain Continuity Plan (SCCP)

• Increasing globalization is forcing organizations to get a better handle on the risks and interdependencies in the supply chain.

• As the supply chains get leaner, there is less ability for the supply chain to absorb or “soak up” the shocks that occur.

• Increasing velocity and length of global supply chains has left many with more questions than answers.

65

Supply Chain Continuity Plan (Con’t)

• Does your organization have the wherewithal to implement a robust Supply Chain Risk Management (SCRM) strategy?

• If not, do you feel that your organization is flirting with disaster by not exploring and investing in SCRM measures?

• SCMR is becoming an increasingly visible multifaceted phenomenon! What are you doing to mitigate it?

66

Thinking Through Supply Chain Risk—Due Diligence

• Effective risk management includes activities for risk identification, risk analysis, risk handling, and risk monitoring.

• The unique nature of SCRM lies in the fact that stakeholders and risks are distributed across multiple, highly independent organizations.

• Proactive discovery and visibility of risks is the key to effective risk management.

Source: Manage Your Supply Chain Risk-Society of Manufacturing Engineers

67

Thinking Through Supply Chain Risk—Due Diligence (Con’t)

• Project managers will often observe that common risks were effectively managed; it was the unexpected risks that caused the biggest problems.

• In practical terms, the most effective approach for addressing supply chain risk is for stakeholders throughout the supply chain to work together to identify potential risks and propose creative solutions.

Source: Manage Your Supply Chain Risk-Society of Manufacturing Engineers

68

“But the sum and substance of risk management is in the recognition of variety. Surprise pursues us relentlessly because we can never have all the information we need for a correct forecast every time. But life is even harsher than that, for the incomplete information we do have is overwhelming, and getting more so all the time.” says Peter Bernstein of the Risk Analysis Center.

The Three Rules of Risk

1. Never risk more than you can afford to lose.

2. Don't risk a lot to get a little.

3. The odds matter.

70

Questions and Answers

71

THANKS for Taking The Risk