Preventing and Managing Supply Chain Disruptions

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Supply chains worldwide have been battling various risks and challenges for some time. Each challenge not only threatens to disrupt operations, but also may have a negative financial impact on business performance and prevent an organization from meeting the demands from stakeholders, customers, shareholders, and regulators.

Supply Chain Council members have reported that less than half of enterprises have established metrics and procedures for assessing and managing supply risks and organizations lack sufficient market intelligence, process, and information systems to effectively predict and mitigate supply chain risks. Does this sound like your organization?

f so, supply chain disruptions can be extremely costly. A disruption in your supply chain can cost millions of dollars in lost time, energy and resources. Their effects are both direct (e.g. halting production altogether) and indirect (e.g. on stock values). Taking steps to help reduce supply chain disruption is the only way to avoid these costs.

Proactive discovery and visibility of risks is the key to the prevention and management of supply chain disruptions.

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Preventing and Managing Supply Chain Disruptions

  1. 1. Preventing and Managing Supply Chain Disruptions Prepared and Presented by: Thomas L. Tanel, C.P.M., CTL, CISCM, CCA CATTAN Services Group, Inc.
  2. 2. “The three areas where companies find that risk has increased most are macro-economic uncertainty, commodity price volatility, and currency risk.”—Kairos Commodities Risk Management Survey
  3. 3. Agenda Outline I. Supply Chain Risk Concerns in A VUCA World II. Risk, Drivers, Generators, and Amplifiers III. Preventing Supply Chain Disruption IV. SCRM Process Model V. Risk Identification and Analysis VI. Risk Threat Assessment and Criteria VII.Risk Mitigation Methodology & Planning VIII.SCCP and Due Diligence
  4. 4. I. Supply Chain Risk Concerns in A VUCA World
  5. 5. Supply Chain Risk Management— Strategic Imperative "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. 5
  6. 6. What Is A VUCA World? 6
  7. 7. 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.”
  8. 8. 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. 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 9 Source: CATTAN Services Group, Inc. Research
  10. 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 10
  11. 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. External Drivers 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 Source: CATTAN Services Group, Inc. Internal Drivers 11
  12. 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 12
  13. 13. Supply Chain Disruption Amplified In 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% 13
  14. 14. Supply Chain Disruption Further Amplified
  15. 15. Stock Market Response to Global Events
  16. 16. How to Handle Disruptions in the Supply Chain—Two Perspectives Time Disruptive Event Happens Time
  17. 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 17
  18. 18. III. Preventing Supply Chain Disruption
  19. 19. "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." 19
  20. 20. Risk Management Process SCRM Strategy & Objectives SCRM Mitigation & SCCP Risk Avoidance Source: CATTAN Services Group, Inc. SCCP Risk Management Tools SCRM Assessment of Data Sources SCMR—Supply Chain Risk Management SCCP—Supply Chain Continuity Planning 20
  21. 21. Risk Management Flowchart—Example Risk Identification Risk Assessment Threat Expertise Threat Assessment Identify Threat Identify Material or Service Quantify Severity Of Threat • Supply Chain • Critical Logistics Components Yes Plan for Change • Alternate Sources • Alternate Material • Ease of Manufacture or Service • Multiplicity of Threats Material/Service Assessment Internal Customer Assessment Quantify Internal Customer Risk Risk Mitigation Business Case Quantify Criticality Of Material/Service Identify Changes Risk Too High? • Proprietary Infringement • Theft and Hijacking Security • Sole Source/Lack of Alternate • Inbound Pipeline Visibility • Incoming Quality Implications • Forecast Demand Capacity • Reverse Logistics No Implement Change Risk Database Process Assessment Assess Sourcing Process Measure Results New Tools Risk Metrics • Sources of Supply • Policy & Procedures • Supplier Base Information • Market Intelligence 21 Source: CATTAN Services Group, Inc. adapted in part from the Risk Management Guide for DOD Acquisition
  22. 22. IV. SCRM Process Model
  23. 23. Supply Chain Risk Management (SCRM) Process Model 1. 2. Strategic Supply 3. Chain Strategy and Objectives Risk Mitigation Assessment Risk Mitigation Planning Risk Mitigation Plan Implementation Supply Chain Risk Identification and Risk Analysis Supply Chain Risk Assessment and Mitigation Results Risk Tracking and Supply Chain Continuity Plan 23 Source: CATTAN Services Group, Inc.
  24. 24. Strategic Supply Chain Objectives— Example Objective A. Cultivate longterm relationships Action Step Date 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 ongoing A.4.Continue to hold quarterly “Supplier Sourcing Group Day” meetings with our suppliers. Continue 24 Source: CATTAN Services Group, Inc.
  25. 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.” 25
  26. 26. Supply Chain Strategic and Tactical Risk Planning 26
  27. 27. Supply Chain Scenario Planning 1. 2. 3. 4. 5. 6. 7. Focal Issue Key Factors and Driving Forces Critical Uncertainties Scenario Logics Scenario Experiences Implications Leading Indicators
  28. 28. 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
  29. 29. SCRM Scenario Planning Vision
  30. 30. V. Risk Identification and Analysis
  31. 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. 31
  32. 32. SCM Is Managing Uncertainty UnknownUnknown U n k n o w n / K n o w n Uncontrollable 1. Natural Disasters, Weather, & Epidemics 2. Energy and Fuel Price Swings 3. Supply Chain Compression & Reliability 4. Economic & Monetary Disruptions 5. Financial Viability of 3PLs & Carriers 6. Global Market Changes & Demand Shifts 7. Supply Chain Talent Brain Drain 8. Information & Communication Technology Change 9. Regulatory & Trade Environment 10. Panama Canal Expansion KnownKnown Controllable 32
  33. 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. 33
  34. 34. Levels of Likelihood Criteria—Example I Level Descriptor Description A The event is expected to occur in most circumstances B Almost Certain Likely C Possible The event should occur at some time D Low The event will probably occur in most circumstances The event may occur only in exceptional circumstances 34
  35. 35. Levels of Likelihood Criteria—Example II Descriptor Probability Rank Value Highly Probable >75% High 5 Probable >50%--<75% Medium High 4 Occasional >25%--<50% Medium 3 Remote >10%--<25% Medium Low 2 Improbable <10% Low 1 35
  36. 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% 36
  37. 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.” 37
  38. 38. Recent Trends of Global Supply Chains Expose Organizations to Increased Supply Risk 38 Source: World Economic Forum and Accenture Research
  39. 39. Severity of Consequence Criteria—Example I Level Descriptor 4 Critical 3 Major 2 Moderate 1 Minor Description General failure in meeting strategic supply chain objectives Significant shortfall in meeting strategic supply chain objectives Does not meet more than one strategic supply chain objectives Does not meet a strategic supply chain objectives 39
  40. 40. Severity of Impact Criteria—Example II Descriptor Rank Value Catastrophic High 5 Critical Medium High 4 Serious Medium 3 Marginal Medium Low 2 Negligible Low 1 40
  41. 41. VI. Risk Threat Assessment and Criteria
  42. 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. 42
  43. 43. Risk Quadrant Continuum HIGH L O i c k c e u l o r i f r h e o n o c d e 2 High Likelihood Low Severity 1 Low Likelihood Low Severity LOW 4 High Likelihood High Severity 3 Low Likelihood High Severity Severity of Consequence or Impact Source: CATTAN Services Group, Inc. HIGH 43
  44. 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. 44
  45. 45. Levels of Likelihood Criteria—Example II Descriptor Probability Rank Value Highly Probable >75% High 5 Probable >50%--<75% Medium High 4 Occasional >25%--<50% Medium 3 Remote >10%--<25% Medium Low 2 Improbable <10% Low 1 45
  46. 46. Severity of Impact Criteria—Example II Descriptor Rank Value Catastrophic High 5 Critical Medium High 4 Serious Medium 3 Marginal Medium Low 2 Negligible Low 1 46
  47. 47. Risk Identification to Risk Analysis Risk Analysis Likelihood and Impact Framework Source: Westec Advanced Productivity Exposition by Quality Plus Engineering 47
  48. 48. Risk Analysis to Risk Mitigation Risk Analysis Likelihood and Impact Framework Source: Westec Advanced Productivity Exposition by Quality Plus Engineering 48
  49. 49. 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.
  50. 50. VII. Risk Mitigation Methodology & Planning
  51. 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. 51
  52. 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. 52
  53. 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” 53 Sherlock Holmes
  54. 54. Five Logistics Risk Management Response Options 1. Infer logistical differences in a country’s economic capability 2. Understand the bullwhip effect 3. Invest in redundancy 4. Increase velocity in sensing and responding 5. Create an adaptive supply chain community
  55. 55. Risk Management Response— Logistical Dangers Country Type Economic Capability Differences that Impact Logistic Risks
  56. 56. Risk Management Response— Bullwhip Effect Wholesale Distributors Time Time Consumers Retailers Sales Sales Sales Manufacturer Sales Multi-tier Suppliers Time Bullwhip Effect—Supply Chain Management and Uncertainty Time
  57. 57. Risk Management Response— Redundancy • Respond to unforeseen events • Careful analysis of supply chain tradeoffs • Example
  58. 58. 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
  59. 59. 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
  60. 60. Five Global Logistics Risk Management Response Strategies • Speculative Strategy • Hedge Strategy • Flexible Strategy
  61. 61. Five Global Logistics Risk Management Response Strategies • Avoidance Strategy • Postponement Strategy
  62. 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. 62
  63. 63. VIII. SCCP and Due Diligence
  64. 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. 64
  65. 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? 65
  66. 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 66
  67. 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 67
  68. 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. 68
  69. 69. 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. 70. Questions and Answers 70
  71. 71. THANKS for Taking The Risk 71
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