1

Supplier Reliability Track

October 3-4, 2007

Review with the Supply Chain Risk Leadership Council

2

Agenda

Membership

Track deliverables/scope

Risk matrix

Survey

Capability key elements

Summary

Next steps

3

MembershipTony Aloise Procter & Gamble Global Material Supplier Mgr

Purchases BCP Coordinator

SS Fu TSMC Deputy Director, Procu-2, Material Management Div

Glen Peng TSMC Material, Facility, Commodities Procurement Dept

Paul (BC) Chen TSMC Senior Manager of Corporate Risk Management Division

Eddy Liu TSMC Manager, Risk Management Department

Hau Lee Stanford Thoma Professor of Operations, Info and Technology, Co-director, Stanford Global SC Mgt Forum

Erik Stewart Cisco SC Risk Management

Eric Prause Jabil Director of Supplier Development

4

Track Deliverables

Risk matrix as framework

Identify best-in-class work for key work process gaps

Develop the next level key element assessment for the identified capabilities (with scoring capability)

5

Track Scope Supplier-related risk…inbound materials and services

to our company

Enterprise-LevelSocial Responsibility (Brand Risk), Hedging Strategies (Cost Risk), Revenue Management

(Demand Risk), Intellectual Property Management (IP Risk)

Supply Chain-Level and CategorySupply Network Design (supplier concentration, extent of cross-bordersourcing, extent of port use), Inventory pressure, Sales and Operations

Planning (initiative strategy)

Mfg Plant 1 Mfg Plant 2 Mfg Plant 3

Others

External Business

Partners

Inbound Raw,Packing Materials

& ServicesMaterial Suppliers,

Distributors, Customs,Carriers

Contract Management(Compliance Risk),Supplier Capability

(Capacity Risk)

External Business

Partners

Support forManufacturingContractors, Facility

Services

External Business

Partners

SupportingFinished Product

and CustomerServiceCarriers

InternalBusiness

Partners

6

Risk Matrix- Analysis Structure

Matrix

As framework, team developed a risk matrix…

Score of Linkagebetween Risk Areas and Capabilities

Capabilities

Score of Capabilities

Cau

se

Exa

mp

le

Fit

wit

h F

ram

ewo

rk

Sco

re o

f Im

po

rtan

ceRisk Areas

Score of Linkagebetween Risk Areas and CapabilitiesC

ause

Exa

mp

le

Fit

wit

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ram

ewo

rk

Sco

re o

f Im

po

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ce

Enter Risk Importance in the aqua-shaded cells (scale = 3, 2, 1) i.e. which risk are you most concerned about?

5 = demonstrated good results, experienced4 = system is ready/tested, people are trained3 = plan in place2 = initial consideration given1 = not in place0

Enter a 0 (low linkage), 1 (medium linkage) or 2 (high linkage) for each of the empty white cells..

7

Risk Matrix

Matrix

Came up with the result from Boeing, Cisco, P&G, Jabil, TSMC

Risk Area(causes not symptoms)

Fit withFramework <

< Im

po

rtan

ce

(

3 =

Hig

h, 2 =

Med

ium

, 1 =

Lo

w)

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ustr

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PS

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up

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3.4 3.6 3.8 3.4 3.4 3.6 3.6 4.0 4.8 2.8 2.8 4.2 3.8 1.8 4.0 3.8 2.6Supply Chain-Level

Complexity Physical 2.4 0.5 0.6 0.3 0.3 0.3 0.5 0.3 0.3 0.4 0.7 0.3 0.3 0.7 0.5Concentration Physical 1.4 0.4 0.4 0.4 0.3 0.4 0.6 0.6 0.3 0.4 0.5Dynamic demand Process 1.4 0.5 0.3 0.5 0.5 0.3 0.4 0.4 0.3 0.3Merger/acquisition Institutional 1.0 0.3 0.3 0.3 0.4 0.3 0.3 0.3 0.3 0.3Supplier-Level

Natural disasters Physical 2.0 0.6 0.5 0.3 0.5 0.4 0.3 0.5 0.8 0.5 0.5Accidents Physical 2.0 0.6 0.5 0.3 0.5 0.4 0.3 0.5 0.8 0.5 0.5Supplier capability Institutional

2.4 0.5 0.3 0.5 0.3 0.4 0.3 0.7 0.3 0.6

Supplier policies Institutional 1.4 0.4 0.3 0.5 0.3 0.4 0.3Supplier capacity Process 2.0 0.5 0.6 0.5 0.4 0.6 0.3 0.4 0.3 0.4Supplier financials Process 1.2 0.5 0.4Intentional Institutional 1.6 0.6 0.3 0.3 0.3 0.5 0.4 0.3 0.4 0.6 0.3 0.5 0.5Regulatory Institutional 1.2 0.3 0.5 0.3Material sourcing policies Institutional 2.2 0.5 0.3 0.5 0.5 0.3 0.3 0.3 0.3 0.3 0.4Outsourcing/contracting Institutional 2.0 0.3 0.3 0.3 0.4 0.5 0.3 0.5

Transportation capacity Process 1.6 0.3 0.3 0.5 0.4 0.3 0.6 0.3 0.4Cross-border logistics Process

1.6 0.5 0.3 0.4 0.7 0.4 0.4 0.4 0.3 0.4

Internal Policies Institutional1.8 0.3 0.4 0.4 0.3 0.4 0.4 0.3 0.3 0.4

Network connectivity, data network Physical 1.8 0.5 0.3 0.3Custom equipment requirements Physical 1.4Recovery capability Institutional

2.4 0.6 0.5 0.4 0.3 0.3 0.3 0.5 0.4 0.3 0.4 0.3

linkage score at 2 linkage score below 2 and above 1.2 (total score 2)

Work Processes/Capabilities

8

Risk Matrix (Risk Areas)

Cau

se

Exa

mp

le

Risk Areas

Supply Chain-Level Cumulative risk across suppliers

Complexity # suppliers, # materials, (product design, maturity)

Concentration (over) abundance of suppliers within an area (country, city)

Dynamic demand Price changes, promotions, initiatives

Merger/acquisition disruption of corporate culture, work processes and systems

Supplier-Level

Natural disasters hurricane, flood, tsunami, earthquake, tornado

Accidents fire, explosion

Supplier capability Supplier quality management, significant quality incident, low reliability/efficiency,equipment maintenance, safety

Supplier policies poor leadership, hiring practices

Supplier capacity industry constraints

Supplier financials bankruptcy, out-of-business

Intentional terrorism, oil prices, sabotage, strike, political, nationalization

Regulatory supplier compliance to governmental regulations (FDA, OSHA)

Material sourcing policies contract terms, single sourcing

Outsourcing/contracting Use of 3rd party manufacturers

Transportation capacity NA truck drivers, energy pricesCross-border logistics longer supply chains, use of "low cost countries", capability and infrastructure gaps, political

instability, export license, regulation that makes it more difficult to move materials through ports

Internal Policies Sourcing, planning, order fulfillment, inventory pressure, initiative frequency, changemanagement, new processes and suppliers

Network connectivity, data network Data center failure, B2B lines between supplier/customer

Custom equipment requirements Clean rooms, refrigerated trucks

Recovery capability Time it takes to restore production or move production. Time it takes to qualify a newsupplier, factory or component if needed

9

Risk Matrix (Capabilities)Capabilities

Description

Capability DescriptionSupplier Business Continuity Plan

A Material Supplier's BCP contains proven emergency procedures the Supplier will deploy during a production interruption at its primary source to maintain supply of the material to the customer. These procedures will either restore the primary supply source, or shift production to an alternate source, within the Business Interruption Limit timing.

Internal Material Contingency Plan

An internal Critical Material Contingency Plan provides proven emergency procedures to shift to an alternate source in the event the primary Supplier suffers an interruption of production that will exceed the BIL timing.

Industry Analysis Part of the strategic sourcing process to broadly understand market conditions and the supplier industry as a whole.Sustainability, Regulatory(e.g. C-TPAT, GMP's)

Proactive work on the part of the customer to assure that the supplier follows legal requirements (e.g. child labor laws). Intent is to avoid bad publicity and loss of business. Work required to meet governmental regulations and policies.

Capacity Analysis The process of reviewing demand variability to set Capacity Utilization or Capacity-to-Demand targets. This is an RCCP input. Inventory Target Setting Typical inventory targets to be set include upper and lower (safety) inventory limits at both the cutomer and suppliers' locations.Strategic Material Planning/RCCP/Materials at Risk

RCCP (rough cut capacity planning) is the process of comparing demand with usage over a 12-24 month period. Strategic Material Planning looks out even further to consider needs in the 2-5 year time frame (mportant for supplier capacity expansions).

Mat'l Change Mgt Process Work process to manage material changes. Material changes include new materials, new suppliers and changes to supplier's manufacturing operation.

Initiative Mgt Process Work process to manage the startup and launch of new products.Lane Risk Assessment Each supply lane (supplier-to-customer) has inherent risk based on distance, geographical and logistics considerations. This

assessment is intended to be a "potential problem analysis" to allow for risk mitigation actions.Supply network visibility (alerts, GPS)

Use of information technology to provide supply chain visibility of demand, deliveries and inventories.

Supplier Capability Assessment

Process to assess supplier capability. Elements might include Commercial (financial health) and Operational (logistics and quality management). This assessment could be done with new or incumbent suppliers.

Internal Capability Assessment

Processes used to assess internal organizational capability of Purchases and Supply Chain Management resources, e.g. MRPII assessment.

Supplier Business Interruption Risk Insurance

Supplier Relationship/Partnership Crisis Management/Response

Organizations capability to respond to recovery requirements.

Risk analysis (data, modeling, measurement, etc)

Analytical tools to identify and assess risk.

10

Guidance on Use of Risk Matrix

SCRLC-level-create common framework to facilitate alignment

-identify benchmarks/best-in-class

-prioritize capability development

Company level-use risk matrix as an assessment tool

-identify areas for improvement from the risk matrix

11

Survey (Risk Priorities)

Supply Chain-LevelComplexity 3 3 2 3 1 2.4 0.89Concentration 1 2 1 2 1 1.4 0.55Dynamic demand 1 1 2 2 1 1.4 0.55Merger/acquisition 1 1 1 1 1 1.0 0.00Supplier-LevelNatural disasters 1 3 3 1 2 2.0 1.00Accidents 1 3 3 1 2 2.0 1.00Supplier capability 3 2 2 3 2 2.4 0.55Supplier policies 2 1 1 2 1 1.4 0.55Supplier capacity 3 1 2 2 2 2.0 0.71Supplier financials 1 1 1 2 1 1.2 0.45Intentional 3 2 1 1 1 1.6 0.89Regulatory 2 1 1 1 1 1.2 0.45Material sourcing policies 3 3 1 2 2 2.2 0.84Outsourcing/contracting 2 3 2 2 1 2.0 0.71Transportation capacity 2 1 1 3 1 1.6 0.89Cross-border logistics 3 1 2 1 1 1.6 0.89Internal Policies 3 1 1 2 2 1.8 0.84Network connectivity, data network 2 3 1 2 1 1.8 0.84Custom equipment requirements 1 3 1 1 1 1.4 0.89Recovery capability 2 3 2 2 3 2.4 0.55

Risk Area(causes not symptoms) A

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Top 3 risks have been identified

Cau

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Risk Areas

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12

Survey (Capability Effectiveness) 12 out of 17 capabilities have full capability score

Capabilities

DescriptionScore of Capabilities

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Ind

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vis

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S)

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pa

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ss

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sm

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Inte

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da

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tc)

TSMC 3 4 3 3 2 4 3 5 5 3 2 3 4 2 3 5 2

Boeing 2 3 5 5 4 4 5 5 5 2 2 5 4 1 4 4 2

Cisco 5 2 3 3 4 3 4 2 4 4 5 4 3 5 5

P&G 4 5 4 4 3 4 3 3 5 2 2 4 4 1 5 2 1

Jabil 3 4 4 2 4 3 3 5 5 3 3 5 4 3 4 3 3

Average 3.4 3.6 3.8 3.4 3.4 3.6 3.6 4.0 4.8 2.8 2.8 4.2 3.8 1.4 3.2 3.8 2.6

13

Survey (Linkage between Risk Area and Capability) 5 out of 17 capabilities are strongly linked with risks (> 5

items with high linkage)

Risk Area(causes not symptoms) S

up

plie

r B

us

ine

ss

Co

nti

nu

ity

Pla

n

Inte

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Ind

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Su

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eg

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Inv

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vis

ibili

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ale

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, GP

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Su

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Ca

pa

bili

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ss

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sm

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Inte

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Supply Chain-Level

Complexity 0.5 0.6 0.3 0.3 0.3 0.5 0.3 0.3 0.4 0.7 0.3 0.3 0.7 0.5Concentration 0.4 0.4 0.4 0.3 0.4 0.6 0.6 0.3 0.4 0.5Dynamic demand 0.5 0.3 0.5 0.5 0.3 0.4 0.4 0.3 0.3Merger/acquisition 0.3 0.3 0.3 0.4 0.3 0.3 0.3 0.3 0.3Supplier-Level

Natural disasters 0.6 0.5 0.3 0.5 0.4 0.3 0.5 0.8 0.5 0.5Accidents 0.6 0.5 0.3 0.5 0.4 0.3 0.5 0.8 0.5 0.5

Supplier capability 0.5 0.3 0.5 0.3 0.4 0.3 0.7 0.3 0.6Supplier policies 0.4 0.3 0.5 0.3 0.4 0.3Supplier capacity 0.5 0.6 0.5 0.4 0.6 0.3 0.4 0.3 0.4Supplier financials 0.5 0.4Intentional 0.6 0.3 0.3 0.3 0.5 0.4 0.3 0.4 0.6 0.3 0.5 0.5Regulatory 0.3 0.5 0.3Material sourcing policies 0.5 0.3 0.5 0.5 0.3 0.3 0.3 0.3 0.3 0.4Outsourcing/contracting 0.3 0.3 0.3 0.4 0.5 0.3 0.5

Transportation capacity 0.3 0.3 0.5 0.4 0.3 0.6 0.3 0.4Cross-border logistics 0.5 0.3 0.4 0.7 0.4 0.4 0.4 0.3 0.4Internal Policies 0.3 0.4 0.4 0.3 0.4 0.4 0.3 0.3 0.4Network connectivity, data network 0.5 0.3 0.3Custom equipment requirements

Recovery capability 0.6 0.5 0.4 0.3 0.3 0.3 0.5 0.4 0.3 0.4 0.3

linkage score at 2 linkage score below 2 and above 1.2 (total score 2)

Work Processes/Capabilities

Score of Linkage betweenRisk Areas and Capabilities

14

Su

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(*) Key Capability 3 2 0 1 0 0 1 0 0 0 2 0 0 2 0 0 2

TSMC 3 4 3 3 2 4 3 5 5 3 2 3 4 2 3 5 2

Boeing 2 3 5 5 4 4 5 5 5 2 2 5 4 1 4 4 2

Cisco 5 2 3 3 4 3 4 2 4 4 5 4 3 5 5

P&G 4 5 4 4 3 4 3 3 5 2 2 4 4 1 5 2 1

Jabil 3 4 4 2 4 3 3 5 5 3 3 5 4 3 4 3 3

Average 3.4 3.6 3.8 3.4 3.4 3.6 3.6 4.0 4.8 2.8 2.8 4.2 3.8 1.4 3.2 3.8 2.6

(*) Key capability = high-linkage capability counts related top 3 risks

Survey (What capability we shall focus on) Top 3 risks (supply chain complexity, supplier capability, recovery capability)

have high-linkage to 7 key capabilities, but no one has full capability score on “Supplier Business Interruption Risk Insurance”

15

Survey (Identify Priorities)

SCRLC level: top 3 weakness (average capability <3)– The track recommends Cisco to share “Supply network visibility”

and “Risk Analysis” because only Cisco has full capability score

– Consider developing “Supplier Business Interruption Risk Insurance” as no company has full capability score

Company level– Many spaces to be improved after we review individual company

16

Key Elements

Essential elements of a work process are those if in place could give us the confidence that the work process will meet objectives. These elements should be something that can be visibly checked.

17

Capability Key Elements (1/2)Capability Description Key ElementsSupplier Business Continuity Plan A Material Supplier's BCP contains proven emergency procedures the

Supplier will deploy during a production interruption at its primary sourceto maintain supply of the material to the customer. These procedureswill either restore the primary supply source, or shift production to analternate source, within the Business Interruption Limit timing.

-People have beeen trained-Critical materials have been identified-Suppliers have a documented plan-Supplier BCP has been tested

Internal Material Contingency Plan An internal Critical Material Contingency Plan provides provenemergency procedures to shift to an alternate source in the event theprimary Supplier suffers an interruption of production that will exceed theBIL timing.

-People have been trained-Critical materials have been identified-Company has a documented plan

Industry Analysis Part of the strategic sourcing process is to broadly understand marketconditions and the supplier industry as a whole.

-Analysis has been completed for targeted markets andaddresses cost structure, technology, competitiveness

Sustainability, Regulatory(e.g. C-TPAT, GMP's)

Proactive work on the part of the customer to assure that the supplierfollows legal requirements (e.g. child labor laws). Intent is to avoid badpublicity and loss of business. Work required to meet governmentalregulations and policies.

-Assessment tool developed, people are trained-High risk countries and critical materials have been identified-Assessments completed

Capacity Analysis The process of reviewing demand variability to set Capacity Utilization orCapacity-to-Demand targets. This is an RCCP input.

-Long-term volume (18 months+) is known and aggregatedacross using sites-Updated annually or with new initiatives-Capacity utilization targets have been set and are beingmonitored

Inventory Target Setting Typical inventory targets to be set include upper and lower (safety)inventory limits at both the cutomer and suppliers' locations.

-Statistical methods are used to set safety stocks and targetinventories-A documented policy exists outlining the operating strategyand frequency of updates-Gaps are understood

Strategic Material Planning/RCCP/Materials at Risk

RCCP (rough cut capacity planning) is the process of comparingdemand with usage over a 12-24 month period. Strategic MaterialPlanning looks out even further to consider needs in the 2-5 year timeframe (mportant for supplier capacity expansions).

-"What-if" analysis is conducted for various volume scenarios-Sourcing plans are in place for new requirements (18+months out)

18

Capability Key Elements (2/2)

Capability Description Key ElementsMat'l Change Mgt Process Work process to manage material changes. Material changes include

new materials, new suppliers and changes to supplier's manufacturingoperation.

-Change "registration" system is in place-Changes are tracked and results are measured vs. pre-defined "success criteria"

Initiative Mgt Process Work process to manage the startup and launch of new products. -Review process with specific "gates" or phase criteria hasbeen established

Lane Risk Assessment Each supply lane (supplier-to-customer) has inherent risk based ondistance, geographical and logistics considerations. This assessment isintended to be a "potential problem analysis" to allow for risk mitigationactions.

-Shipping lane complexity (number of hand-off's, lead time,difficult countries) is assessed with an intent to proactivelymitigate risks

Supply network visibility (alerts,GPS)

Use of information technology to provide supply chain visibility ofdemand, deliveries and inventories.

-Information technology is in place for "alerts" (so receivingplant is not surprised by late delivery)

Supplier Capability Assessment Process to assess supplier capability. Elements might includeCommercial (financial health) and Operational (logistics and qualitymanagement). This assessment could be done with new or incumbentsuppliers.

-Critical supplier capabilities have been defined-Assessment occurs when new sourcing decisions or updatesare needed, maybe annually

Internal Capability Assessment Processes used to assess internal organizational capability of Purchasesand Supply Chain Management resources, e.g. MRPII assessment.

-Critical internal capabilities have been defined-Assessments occur with new sourcing decisions and updatedas needed, maybe annually

Supplier Business InterruptionRisk Insurance

-A documented policy is in place outlining criteria for businessinterruption risk insurance

Supplier Relationship/Partnership -Top-level meetings occur between company and keysuppliers to manage expectations and to build trust

Crisis Management/Response Organizations capability to respond to recovery requirements. -A process exists for drills and testsRisk analysis (data, modeling,measurement, etc)

Analytical tools to identify and assess risk. -Quantitative methods are used to assess risk, e.g.identification of critical materials/suppliers, high risk lanes

19

Summary

Top 3 risks: – Supply chain complexity

– Supply capability

– Recover capability

7 key capabilities have strong linkage to top 3 risk– Supplier business contingency plan

– Internal material contingency plan

– Sustainability/regulatory

– Strategic material planning/RCCP/material at risk

– Supply network capability

– Supplier Business Interruption Risk Insurance

– Risk analysis

The bottom 3 capabilities of above are weaker areas for improvement

20

Next Steps

Determine whether to share “best-in-class” work processes

Determine whether to develop “Supplier Business Interruption Risk Insurance” capability