SAS Supply Risk Management Workshop 2007

Rob Handfield, PhD Bank of America University Distinguished Professor of Supply Chain Management North Carolina State University Director, Supply Chain Resource Consortium Consulting Editor, Journal of Operations Management

Robert_Handfield@ncsu.edu

Who we are.
Rob Handfield, PhD Bank of America University Distinguished Professor of Supply Chain Management, NC State University Director, Supply Chain Resource Cooperative top 3 MBA SCM programs in the US Adjunct Professor, Manchester Business School
Kevin McCormack, DBA CEO, DRK Research Adjunct Professor, NC

State University

Research and consulting supply risk projects with multiple companies incl:
Baxter BioScience Bechtel Boston Scientific BP Chevron ConocoPhillips Freightliner General Motors Guidant Home Depot Halliburton Lyondell Hess Shell Lubricants

Supply Chain Resource Cooperative (http://scrc.ncsu.edu)

Thursday April 26
8:00-8:30 8:30-8:45 8:45-9:00 9:00-10:00 10:00-10:30 10:30-11:30 Registration and Breakfast Welcome / Introductions SCRC Update Rob Handfield Sustaining the Global Supply Channel Rob Handfield Networking Break Student Project Presentations-Module I MBA Relationships (order may change) Bank of America Card Travel Benefits Analysis Chevron Insource/Outsource Travel British Petroleum Digital Media Lunch Marine Transportation in the Global Supply Chain Network Richard Lolich, Maritime Administration, U.S. DOT Student Project Presentations-Module II MBA SCM Practicum (order may change) IBM Supplier Information Sharing IBM Hardware Contract Manufacturing CAT Lead Time Process Analysis Panel Discussion: Designing the Global Supply Chain Rob Handfield, Moderator Rick Monical, Chevron Corporation Britt Dayton, Lowes Corporation Jeff Townley, Nortel Networks Richard Lolich, Maritime Administration, U.S. DOT Networking Break Business Made Simple Jeff Townley, Nortel Networks Reception ArtSource Gallery, Raleigh, NC Dinner Bloomsbury Bistro, Raleigh, NC

11:30-12:30 12:30-1:30

1:30-2:30

2:30-3:30

3:30-4:00 4:00-5:00 5:30-6:30 6:30-8:30

Agenda
What is the true impact of supply risk and the implications for the field of supply management? What are the core elements associated with managing supply chain disruptions?

Impact of Major Supply Chain Disruption on Stock Price

Trading day relative to announcement date

Average shareholder returns (%)

-61 0 -5 -10 -15 -20 -25

-49

-37

-25

-13

-1

11

23

35

47

59

Hendricks and Singhal, 2005

Number of firms (%)

Pa rt
10 15 20 25 30 0 5

S ho rta ge s

C ha ng e

22.54

s by C us to m er s

13.48

Reasons for glitches

Pr od uc tio n R am p/ ro l ls ou tp ro bl em s P pr ob le m

10.21

9.24

Q ua li t y

D ev el op m

ro bl em s en tp ro bl em s N on e P

6.93 4.43

ro vid ed

15.61

Fact: Vertical & Horizontal Disconnection of SC Organizations Customer Disconnection of External Market Intelligence

Manufacturing

SC Organization

Marketing & Sales

Disconnection of Internal Business Intelligence Supplier

-> Loss of Innovation and Efficiency Improvement Possibilities -> Connection of BI & MI has to be a Supply Chain Management Driven Approach: 8 CUSTOMER AND SUPPLY MARKET FACING

Companys Environment TRADITIONAL FOCUS IS HERE Customers Environment

Suppliers Environment

Suppliers

Supplier and Market Intelligence

Company

Customer and Market Intelligence

Customers

A GUESSING GAME

Business Intelligence

BI/MI is the convergence of all three information gathering, analysis, dissemination and response) activities.
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Supply Market Intelligence Enables Supply Chain Risk Mitigation

Three key elements of supply chain disruption management
Disruption Discovery
What type of detection and intelligence does a firm need to detect disruptions?

Disruption Recovery
Once the disruption is discovered, how does a firm effectively recover from a disruption?

Disruption Discovery Supply Chain Redesign

Supply Chain Redesign

How can a company strategically re-design its supply chain over time to become more resilient and avoid or easily mitigate future disruptions?

Disruption Recovery

Insights: Disruptions
General Characteristics of Severe Failures:
1. Consequences of the disruption captures the public eye 2. Disruption catches company by surprise no foresight 3. Disruption cause related to a single source/single location 4. Disruption affects availability of a hard to resource part

5. Be on the look out for choke points or bottlenecks:

Center of the hourglass
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Disruption Discovery and Recovery

Impact of Disruption ($, Customer Account, Market share) Impact (B)

The key is prediction. This could eliminate the possible disruption or allow planning that minimizes discovery and recovery time.
Disruption Discovery and Recovery time (B)

Disruption Amplifiers (Globalization and Complexity)

Disruption Discovery and Recovery time (A)

Excess Resources
Impact(A)

Visibility Systems
Discovery(A) Recovery (A) Discovery(B) Recovery (B)

Time

Risk Management Framework

Global Sourcing Leadership Team (Governance) Key Risk Indicators (Drivers)
Supply Risk
Relationship Financial Status HR Status Capacity Supply Chain Risk

Supplier Performance
Delivery Performance Quality Performance Audit Report

Macro-Econ. Trends
Commodity prices Commodity trends Currency Government stability

Technology Trends
Material changes Process changes

Public Policy
Medical device liabilities Quality requirements

Risk Mitigation Strategies (Capabilities)

Known Risks High
End 70%

Contingency Planning/Risk Decisions

Impact(1)

Mitigate with Supplier

Supplier Quality Assurance Low

Re-Source / Re-Design
Decision

Scenario A1 50% Value: Scenario A 60% Value: Scenario A2 20% Value: Scenario A3 30% Value: Scenario B1 10% Value: Scenario B2 90% Value:

Scenario A3 30% Value: Scenario A4 25% Value: Scenario A5 75% Value: Scenario B3 30% Value: Scenario B4 70% Value: Scenario B5 50% Value: End 50%

Mitigation Strategies / Real Options

Monitor Performance High

Scenario B 40% Value:

Low

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(1)Revenue (2)As

Frequency of Occurence(2)

implications measured by Key Risk Indicators

Structuring Supply Chain Risk

CAUSES (Categories of Predictive Measures)
Relationship

Disruption EVENTS
Misalignment of Interests Quality, Delivery, Service Problems

CONSEQUENCES (Impacts)
Sudden Loss of Supplier
Finished Goods Shipments Stopped

Performance Supplier Attributes

Recall for Quality Issues Locate and Ramp Up Back up Supplier Emergency Buy and Shipments Emergency Rework and Rushed FG Shipments Reputation Market Share Loss

Human Resources

Supplier Union Strike, Ownership Change, Workforce Disruption Supplier Locked Tier II Stoppage Supplier Bankruptcy (or financial distress) Disasters (Weather, Earthquake, Terrorists)

EFFECTS Revenue Losses and Recovery Expenses

Supply Chain Disruption

Financial Health
Situational Factors

Environmental

OTHER IMPACTS Forgone Income

Copyright 2006 Supply Chain Redesign, LLC

Lessons Learned
Need to focus on the critical few the key areas of the supply chain that are most exposed and vulnerable, and focus your efforts on these areas. Metrics should drive action they are only useful in that they direct attention to a problem, and drive mitigation and/or contingency planning that either reduces the risk, or buffers it. Risk can only be minimized through direct human intervention. Sitting down with suppliers to discuss the risk, its nature, and how it is handled is the preferential method.

Risk CANNOT be eliminated through stronger contractual language.if bad things happen, will the total cost of disruption equal the reparations recovered through litigation?

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Questions Senior Executives Want Answers to:

What are my biggest risks? What measures can I can use if I need answers quickly? What are the potential impacts? What are contingency plans? If no plans exist, what actions do I need to approve and how much will it cost? What elements in the contract can help to drive mitigation planning? Why are you bothering me is this important?
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Caveats
We cannot ELIMINATE risk but we can predict where we are most vulnerable if we establish a process to engage key stakeholders and our supply chain partners engage in discussions and information collection (compliance is assumed) There are limited resources available to address supply chain risk we can completely eliminate risk, but at a very high cost (tolerance level defined) Risk cannot be eliminated through stronger contractual language but risk CAN be reduced through improved planning and coordination around mitigation planning included in contract management!

Therefore, senior executives must be able to allocate resources to those areas of the chain that are predicted to be the most vulnerable, based on a distribution of risk with contractual elements associated with prevention of disruptions from occurring!

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When Faced with a Significant Risk, What Actions Are Available?

Excess Resources Excess inventory (material planner level decision) Invest in extra capacity (Materials management or service level manager decision) Dual source (Director-level decision)

Visibility On-line inventory visibility (requires investment by SCM Directors and VP, with significant investment in IT resources) Increased quality audits, dedicated supplier development engineers, working in the field, daily communications (requires SCM Director) Relationship manager at site-level, requiring formal weekly or biweekly communication Product or supply chain redesign to minimize risk amplifiers Consider length of supply chain Consider sourcing and distribution network design and associated contractual requirements around leadtime and response. 18 Reconsider Low Cost Country sourcing???

$$$

$$$$$

Risk Escalation Process

HIGH REV IMPACT, HIGH P(RISK)
CODE BLUE Engage senior management in bi-weekly review meeting or ASAP if required, establish strategic action plans to lower risk score if possible.

LOW REV IMPACT, HIGH P(RISK)

HIGH REV IMPACT, LOW P(RISK)

CONTINGENCY PLAN REQUIRED Buyer-Planner team visits supplier, validates risk level, and discusses contingency plan with Supplier and Manager, and escalates to next level if required

LOW REV IMPACT, LOW P(RISK)

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Annual or quarterly Update using Risk Survey Tool

Figure 4 Supply Chain Risk Management Process 3a. Excess Resources

1. Measure the Risk of Critical Nodes in the Supply Chain Network

2. Identify Risk 3b. Supply Reduction Chain Mechanisms for Contracting & High-Risk Joint Planning Nodes
3c. Invest in Visibility systems

GOAL: Resilient Supply Chain With On-going Knowledge and Risk Mitigation
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Impact of Executive Decisions on Code Blue Supply Situations

SRIM

No Impact - Uncontrollable Factors (without major product redesign)

Long-term Solution Significant Investment Required (if enough of these occur, worth looking at the investment)

Immediate Impact Quick Fix (deploy resources immediately)

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Today 1 2 3 4 5 6 7 8 9 10 11 12 > 1 year

Examples
Quick Fix (<$100K corrective action, 2 months) Alternate source can be identified and quickly brought online Send engineering team to supply to identify source of problem and work with them to develop a remedy Long-term Solution (>$100K corrective action, > 1 year) May require a major process redesign at suppliers location Persistent quality problem with no quick solutions in sight requires indepth FEMA study, with inspection of all units coming off the line in the mean-time Uncontrollable Factors (no solution) Sole source supplier is not willing to respond to changes or work with BS, as they are a small part of their business.

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Expected Outcome and Benefits of Risk Assessment and Implementation

1. Supplier porfolio is defined in terms of risk probablity and impact on revenue providing an opportunity to shift production from high-risk suppliers to suppliers with lower risks 2. Roadmaps to manage risks for strategically important suppliers are defined and implemented 3. Depending on supplier, management of implementation at supplier sites can result into: Improved parts quality Reduced Shortages Improved on-time Delivery Lead Time Reduction Reduced Inventory Levels Reduced Invoice Discrepancies Reduced Time to Connect a New Supplier Reduced Transportation Costs 4. Progress of supplier risk management is measured and corrective actions are defined 5. Lessons Learned are captured providing input for expansion of approach to remaining suppliers 6. Risk assessment can be reused during evaluation and integration/development of new suppliers
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