1. 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 [email_address]

2. 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

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

4.

5. 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?

6. Impact of Major Supply Chain Disruption on Stock Price Hendricks and Singhal, 2005

7. Reasons for glitches

8. Fact: Vertical & Horizontal Disconnection of SC Organizations Customer Supplier SC Organization Marketing & Sales Manufacturing Disconnection of Internal Business Intelligence Disconnection of External Market Intelligence -> Loss of Innovation and Efficiency Improvement Possibilities -> Connection of BI & MI has to be a Supply Chain Management Driven Approach: CUSTOMER AND SUPPLY MARKET FACING

9. Customers Suppliers Suppliers Environment Customers Environment Company Companys Environment Customer and Market Intelligence Supplier and Market Intelligence Business Intelligence BI/MI is the convergence of all three information gathering, analysis, dissemination and response) activities. TRADITIONAL FOCUS IS HERE A GUESSING GAME

10. Supply Market Intelligence Enables Supply Chain Risk Mitigation

• 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?

• 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?

Three key elements of supply chain disruption management Disruption Discovery Disruption Recovery Supply Chain Redesign

11. Insights: Disruptions

• General Characteristics of Severe Failures:

• Consequences of the disruption captures the public eye

• Disruption catches company by surprise no foresight

• Disruption cause related to a single source/single location

• Disruption affects availability of a hard to re-source part

• Be on the look out for choke points or bottlenecks:

• • Center of the hourglass

12. Disruption Discovery and Recovery Time Impact of Disruption ($, Customer Account, Market share) DISRUPTION Discovery(A) Recovery (A) Impact(A) Discovery(B) Recovery (B) Impact (B) Disruption Discovery and Recovery time (B) Disruption Discovery and Recovery time (A) Disruption Amplifiers (Globalization and Complexity) Visibility Systems Excess Resources The key is prediction. This could eliminate the possible disruption or allow planning that minimizes discovery and recovery time.

13. Risk Management Framework Global Sourcing Leadership Team (Governance) Macro-Econ. Trends Technology Trends Public Policy

• Commodity prices

• Commodity trends

• Currency

• Government stability

• Material changes

• Process changes

• Medical device liabilities

• Quality requirements

Key Risk Indicators (Drivers) Low Low High High Impact (1) Frequency of Occurence (2) Risk Mitigation Strategies (Capabilities) Known Risks Contingency Planning/Risk Decisions Mitigation Strategies / Real Options (1) Revenue implications (2) As measured by Key Risk Indicators Supplier Performance

• Delivery Performance

• Quality Performance

• Audit Report

Supply Risk

• Relationship

• Financial Status

• HR Status

• Capacity

• Supply Chain Risk

Mitigate with Supplier Re-Source / Re-Design Supplier Quality Assurance Monitor Performance

14. Structuring Supply Chain Risk Performance CAUSES (Categories of Predictive Measures) Disruption EVENTS CONSEQUENCES (Impacts) Human Resources Supply Chain Disruption Financial Health Environmental Relationship Quality, Delivery, Service Problems Supplier Union Strike, Ownership Change, Workforce Disruption Supplier Locked Tier II Stoppage Supplier Bankruptcy (or financial distress) Disasters (Weather, Earthquake, Terrorists) Misalignment of Interests Finished Goods Shipments Stopped Locate and Ramp Up Back up Supplier Emergency Buy and Shipments Reputation Market Share Loss EFFECTS Revenue Losses and Recovery Expenses OTHER IMPACTS Forgone Income Emergency Rework and Rushed FG Shipments Recall for Quality Issues Sudden Loss of Supplier Copyright 2006 Supply Chain Redesign, LLC Supplier Attributes Situational Factors

15. 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?

16. 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?

17. 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!

18. 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 bi-weekly 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.

• • Reconsider Low Cost Country sourcing???

$ $$$ $$$$$

19. Risk Escalation Process LOW 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 HIGH REV IMPACT, LOW P(RISK) Annual or quarterly Update using Risk Survey Tool LOW 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. HIGH REV IMPACT, HIGH P(RISK)

20. Figure 4 Supply Chain Risk Management Process

• Measure the Risk

• of Critical Nodes in

• the Supply Chain

• Network

2. Identify Risk Reduction Mechanisms for High-Risk Nodes GOAL: Resilient Supply Chain With On-going Knowledge and Risk Mitigation 3b. Supply Chain Contracting & Joint Planning 3c. Invest in Visibility systems 3a. Excess Resources

21. Impact of Executive Decisions on Code Blue Supply Situations Today 1 2 3 4 5 6 7 8 9 10 11 12 > 1 year SRIM No Impact - Uncontrollable Factors (without major product redesign) Immediate Impact Quick Fix (deploy resources immediately) Long-term Solution Significant Investment Required (if enough of these occur, worth looking at the investment)

22. Examples

• Quick Fix ($100K corrective action, > 1 year)

• • May require a major process redesign at suppliers location

• • Persistent quality problem with no quick solutions in sight requires in-depth 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.

23. Expected Outcome and Benefits of Risk Assessment and Implementation

• 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

• Roadmaps to manage risks for strategically important suppliers are defined and implemented

• 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

• Progress of supplier risk management is measured and corrective actions are defined

• Lessons Learned are captured providing input for expansion of approach to remaining suppliers

• Risk assessment can be reused during evaluation and integration/development of new suppliers