Supply Chain Risk Management

Supply Chain Risk Management Minimising Risk Exposure in Supply Chain Anand Subramaniam

“Only those who risk going too far can possibly find out how far one can go."

- T.S. Eliot

Highlights

Supply Chain (SC) Today..

SC & Risk - Realities

Internal & External Drivers

Managing Risk Exposure

Risks Managing Suppliers

Risk Planning

SC Risk Framework

Risk – Tools, Techniques, Checklists

Supply Chain Today… Challenges

Supply Chain Today..

Supply Chain Today.. Riskier !!

Faster (Growth, Innovation)

Stronger (Competition)

Cheaper (Lean, Efficient, Savings $$)

Quicker (JIT, Short Product Lifecycle, Agile)

Shorter (Effective, Lead Times)

Wider (Globalisation)

Lesser ( Back up Vendor, VMI, Resources)

Changing (Demands, CPFR, Technology)

Heavier ( Requirements, Workload)

Risk Exposure – SC Network Design Top Pressures Driving Supply Risk Management 82% 79% 78% 77% 73% 70% 69% 59% 58% SC Disruption within past 24 mos Longer lead times Pressure from executives Customer pressures Global sourcing Lean/JIT initiatives Supply assurance outweighs cost Supply base reduction Regulatory pressures Transportation constraints 73% 20% 12% 10% 8% Supply Chain Price Fluctuations Labor Issues IT Systems Mgt Malfeasance 8% #1 Threat Factor To Revenue Source: Managing Business Risk 2006 & Beyond, FM Global & Harris / USA Today, 2006 Survey 602 Global CFOs / Financial Executives

AMR Research 2008 on Risk Change in level of risk from 1 year ago

Supply Chain disruption would mean..

“ Survival of the fittest”

Increase in cost / losses

Loss of reputation / image

Civil and criminal penalties

Liquidation / Chapter 11

Customer unhappy & lost to competition

Fall in revenue, profit, market share

AMR Research 2008 - SC Risk Mitigation 44% 33% 31% 29% 27% 42% 27% 10% 4% 10% 12% 5% 14% 10% Performance-based contracts with suppliers or service providers Increase in IT investment for better visibility across the supply chain Closer collaborative relations with trading partners Utilising modeling tools (optimisation, simulation) to be proactive about risk by conducting what-if analysis Outsourcing logistics function Dual/multi sourcing strategies and using redundant suppliers Outsourcing manufacturing function Top 10 methods used to mitigate risk Most successful method used to mitigate risk

Supply Chain & Risk - Realities

SCM Components.. Ideal World !! Store In-Stock Channel Design Network Rationalisation Flow of Merchandise Distribution Operations/ Transportation Planning, Buying, Allocation Supporting Infrastructure Right goods, right place, right time, right cost The optimum combination of facilities and transportation modes that achieve service targets The cost effective Distribution Channels at the lowest cost Synchronised flow of merchandise to optimise inventories and meet customer demand The most appropriate operational linkage between client and vendors Functions and processes consistent with vendor operating strengths and needs The most appropriate information systems and support areas to plan and manage the flow of goods strategy

Industry Challenges

Attracting and retaining employees

Workforce productivity

Data security

Network interruption

Working Capital

Cost allocation

High consumer debt

Globalisation

Foreign sourcing/outsourcing

Vendor indemnification management

Product recall

Creating a “customer experience”

Consolidation

Innovation

Training

Business continuity

“ Shrink” and other product losses

Workplace violence

High cost of employee benefits

Employment practices

Logistics and transportation issues

Brand integrity

Quality assurance

Supply chain disruptions

Product/brand mix complexity

2 6 7 4 3 9 8 1 10 5 High Low Relative Cost Manage Business Impact 11 High 12 13 14 15 16 17 18 19 21 20 24 22 23 25

Risks Impact - Strategy / Initiatives Shareholder Benefits Asset Utilisation Plant Specialisation

Product Profitability

Customer Value-based pricing

Matching strengths with segment

Product rationalisation

Customer survey implications

Shorten concept-to-market

Link demand chain to supply chain

Better architecture design

Capital appropriations

Selective outsourcing

Make/buy decisions

Retire unused assets

Capacity utilisation

Non-value adding elimination

Portfolio Management

Sales and Operations planning

Business resource planning

Best practice documentation

Safety stock reduction

Virtual inventory tracking

Redundant shipping elimination

Emergency shipping reduction

Reconciliation costs

Distribution/logistics improvement

Service cost analysis

Transportation routing and scheduling

Manufacturing flexibility

Plant yields

Profit / Revenue Growth Cost/ Productivity Improvement Capital Asset Evaluation Selling/Pricing Selectivity New Product Development Market/ Customer Segmentation Infrastructure Optimisation Acquisition Divestiture Inventory Management Shipping Efficiency Error Elimination Manufacturing Efficiency Strategy Initiatives Risk / Opportunity

Risks – Managing Stakeholder … Supplier SC Disruption Capacity / Quality Supplier Performance Supplier Environment Financial Distress Product / Process innovation Relationship Regulatory Disaster Customer Environmental Volume / Product mix Brand / Reputation Data Sharing Product Liability Legal Liability Market Mix Disasters Quality Internal Environmental Legal / Financial Technical / Operational Staff Turnover /OH&S SC disruption history Capacity / Sourcing Quality / Delivery Spend Leverage Innovation

Risk Management Realities… Insurance Not Purchased Political Risk Environmental Advertiser’s Liability Professional Liability E-Commerce Liability Certain lines of Products Patent Infringement Product recall Non-Owned Terrorism Liability Insurance Not Available War / Strike Reputational Terrorism Biological Nuclear / Radiation Regulatory Fines & Penalties Poor Business Judgment Supply Chain Interruption Loss of Market Share Breach of Contract Global Pandemic Fraud

Internal & External Drivers

Exposure – External & Internal Drivers Environment Supply Demand Process Governance / Controls Risk Response / Contingency Exposure External Internal External Internal

Risks - External Factors

Demand

Loss of major accounts

Volatility of demand

Concentration of customer base

Short life cycles

Innovative competitors

Buying to much / little

Environment

Natural disasters

Terrorism and war

Regulatory changes

Tax, duties, quotas

Strikes

Supply

Dependency on key suppliers

Downtime

Consolidation in supply markets

Quality issues

Potential disruption

Replenishment – lead times & variability

Risks - Internal Factors

Process

Manufacturing yield variability / quality

Lengthy set-up times, inflexible processes

Equipment reliability

Limited capacity / bottlenecks

Outsourcing key business processes

Product Complexity

Risk Response / Contingency

Awareness

Prevention

Remediation

Knowledge

Controls

Poor pipeline visibility

Inappropriate rules that distort demand

Lack of collaborative planning / forecasts

Bullwhip effects due to multiple echelons

Proprietary Technology

Risk Response / Contingency

Awareness

Probability & Impact

Recognition of effects of risk on: Physical assets & Information

Awareness on Internal & External Environment

Prevention

Goal is to reduce likelihood and / or impact of supply chain disruptions.

Key Processes include - risk identification, risk assessment, Risk treatment & risk monitoring

Remediation

Goal is to identify procedures for managing 4 stages of a disruption - Interruption, response, recovery, restoration of operations

Minimise adverse impact on:- Time, Cost, Resources

Determine most effective allocation of resources

Knowledge

Goal is to learn from experience by tracking results - things gone wrong, things gone right, future action list. & results of remediation efforts

Modify current procedures and systems to reflect lessons learned.

A SCP “post mortem”

Formalised activity

Risk Exposure in Managing…..

Risks -Managing Shareholder Value

Risks - Managing Competitive Pressures Requires a change in Business Model Serving localised customer with complex supply lines Demanding customers Changing market boundaries and new channels Aggressive global competition Industry consolidation and alliances Environmental and risk issues Stakeholder pressures Speed of technology change Shortening product life cycles Pressure on margins, growth, cost Supply & Demand Co-ordination Hyper – competition & Globalisation Compliance Green SCM Catastrophic events

Risks - Managing End to End Networks Supply Chain Redesign New Materials Cooperative Development New Relationships New Processing Product Adaptation Integrated Solutions Key Process Improvement New Products Supply Chain Responsiveness Alternative Channels Cost to Serve New Sales Sales Leadership Strategies New Business Systems Suppliers Manufacturing Distribution Retailer Consumer Flow of information, products, services and financials Capture Buying Habits Product Development Distribution Efficiency Product Replenishment Order Fulfillment Marketing Strategy Business Development

Risks - Managing SCM Performance Sell Product recall, service and quality issues can impact brand image High turnover coupled with poor training can result in serious customer service issues Plan Poorly designed products can result in future recalls Product complexity can create downstream execution issues Missed or lagging trends Design flaws & cycle time Source Globalisation & sourcing from emerging markets leads to product safety, quality, supply disruptions & monitoring issues, which Can impact customer perceptions Single / sole-sourcing creates failure points Deliver Consolidation of distribution and fulfillment creates risks - product theft, labour shortages / stoppages. Less resilient local hauling lanes create significant exposures within the last few miles of the delivery process Make Realigning and consolidating facilities creates risks – product rationalisation, labor disputes, stoppages etc. Outsourcing can create vulnerabilities that extend beyond the immediate business Service Fall in service levels (after Sales ), process returns, lack of spares etc can influence future buying behaviors brand image Lack of visibility across reverse logistics can impact top & bottom line Warranty failure can impact loyalty / image. Suppliers Manufacturing Distribution Retailer Consumer

Risks - Managing Product / Information Flow Postponement Vendor managed inventory Cross docking Continuous replenishment Flexible automation Modularisation Mass customisation Quick response Efficient consumer response End to End Supply Chain Time-based logistics Extended warehouse Visibility Integrated business planning / Sales & Operations Planning Cloud based services: Managed Services, On-Demand, SaaS Sustainability & Green Supply Chain Closed-loop Supply Chain Execution & Supply Chain Planning Demand Driven Lean Supply Chain Transportation Management & Global Trade Management Convergence Continuous Monitoring & Control of Risks

Risks - Managing SC Change Initiatives Supplier Rationalisation Flexible Manufacturing Strategies Cross- docking Activity- Based Costing CPFR Salesforce Planning Production Scheduling Inventory Planning Distribution Scheduling Integrated- Micro Marketing Customer-Focused Planning Vendors Inbound Logistics Manufacturing Transportation Warehousing Delivery Retailer Consumer Quick Response Forecasting EDI Category Management, Continuous Replenishment Net Landed Cost Palletisation, Bar Coding Vendor Managed Inventory Supply Chain Systems Selection and Implementation Promotion Planning Information, Finance & Product flows

Risks – Managing Inventory

Spend Aggregation

Procurement Expense

Direct / Indirect Materials Cost

Supplier & Material Rationalisation

Raw Materials Inventory

Throughput

Equipment Uptime

Parts / Spares Inventory

Replacement Part ID

Revenue

Selling Expense

Customer Retention

Competitive Advantage

Market Share

Maverick buys

Supplier proliferation

Parts proliferation & duplication

Disparate parts & supplier databases

Ineffective Supply Chain communication

Lack of visibility to inventories

Can’t locate parts & spares

Maverick buys

Disparate data sources

Lack of standardised product information

Can’t see product inventory

Can’t compare products

Lack of competitive differentiation

Key Success Metrics Risks Preventing Success

No tools to find parts

Lack of technical detail

Lack of standardisation

Can’t find alternates

No lifecycle status info

No tools for parts re-use

No visibility to supplier preferences

Engineering Productivity

R&D Costs

Time to Market

Product Quality

Design for Supply Chain

Product Design Supply Chain / Procurement Manufacturing & MRO Sales & Marketing Core Business Process

Risk Exposure - Managing Suppliers

Supplier - Risk Sources

Ineffective management

No sharing of information

No alternative suppliers

Inability to influence suppliers

Inability to meet required volumes

Lack quality process in operations

Financial instability or financial failure

Incorrectly interpreting requirements

Political instability/ war affecting suppliers’ operations

Suppliers exiting market on short notice

Product quality problems

Labour / Management problems

New or unproven product / process technology utilised

Long physical distances between buyer and suppliers

Variability / transportation disruptions with inbound supply channels

Currency rate & material price fluctuations

Natural disasters or “acts of God” affecting suppliers’

Managing Supplier

Supplier Handbook

Performance Measurement (Report Card)

Purchasing contracts

Weekly / Monthly / Quarterly Meetings

Audit planning; execution; reporting

Change Management

Continuous Risk Assessment and Response Strategies

Supplier Profiles & Risk Assessment Supplier Audits & Certification Non-conformance / Corrective & Preventive Actions Product Sampling & Test Results Performance Monitoring & Reporting

Root Cause Analysis Supplier Supply Chain Involuntary (bankruptcy) Voluntary (exit market) Business Exit Supplier Business Continuity Sole / Single Source Environmental Control Security Natural Disaster Building Contamination Inventory Handling & Managment Warehousing Poor RM Quality RM Out of Spec Contamination Inadequate Documentation Compliance Systems Process Procurement Raw Material Supply

Risk Planning - Integration (People, Process & Systems)

Risk Planning – Competency & Performance

Customer Integration

Relationships beyond sales transactions

Planning for individual customer requirements

Synchronising activities with customers

Continuously exploring new working relationships

Better Fulfillment Performance

Delivery to promise

Fill rate

Perfect order fulfillment

Internal Integration

Cross functional awareness of responsibilities

Common prioritisation of customers

Common product roadmaps

Sharing of operational information

Performance metrics that promote cost / service trade-offs

SC Network Integration Technology

Dist order management

Event management

Enterprise app integration

RFID

Risk Planning – C & P (Contd.)

Supplier Integration

Developing relationships to build on key supplier capabilities

Exchanging operational information

Synchronising activities with suppliers

Better Product Quality

Product conformance

Product design (performance and features)

Product reliability

X-functional awareness of responsibilities

Supply Chain Segmentation

Continuously updating customer segmentation strategy

Segmenting products based on profit contributions and lifecycle stage

Better Asset Utilisation

Cash-to-cash cycle

Inventory days of supply

Asset turns

Forecast accuracy

Planning Effectiveness

Formalised, disciplined processes addressing both long and short term planning

Contingency and risk analysis with scenario evaluations

Feedback loops addressing variances

Vulnerability and continuity planning

SC Network Integration Technology

Dist order management

Event management

Enterprise app integration

RFID

Strategic Planning Technology

Bus & SC intelligence

PLM

Network optimisation

Tactical Planning Technology

S&OP

APS

Distribution planning

Strategic Alignment

Clear SC goals and objectives driven by business strategy

Business strategy exploits SC capabilities and constraints

Strategies communicated to all employees

Better Flexibility

Order fulfillment lead time

Supply chain response time

Production flexibility

Relationship Management Technology

CPFR

CRM

SRM

Supplier Performance

Customer Integration

Relationships beyond sales transactions

Planning for individual customer requirements

Synchronising activities with customers

Better Cost Performance

Supply chain cost

COGS

Warranty & returns processing cost

X-functional awareness of responsibilities

Execution Systems Technology

WMS

TMS

ERP

eProcurement

JIT/Kanban

Risk Framework

Strategic Approach – Resilient SC Resilient Supply Chain Supply Chain (Re)Engineering Supply Chain Design Supply Chain Understanding Supply Base Strategy Supply Chain Collaboration Collaborative Planning Supply Chain Intelligence SC Risk Mngt Culture Agility Visibility Velocity Supply Chain Continuity Teams Board level responsibility Risk in decision making

Risk Framework Strategy Execution Tactical Iterate & Improve

Risk - Strategy

Input

Business Strategy

Value Drivers

Organisation Process

Define Risk Management Objectives

Determine Risk Appetite / Tolerance

Define Risk Organisation

Perform SWOT Analysis

Design supply chain to match Risk Profile

Map & Evaluate Current Network

Analysis – Cost, Inventory

Identify & Evaluate Alternative Structures

Techniques

Interviews

Questionnaires

Checklist

Assumption Analysis

SWOT template

Output

Risk Profile

Risk Organisation Chart

Roles & Responsibilities

SWOT Analysis

Optimal Network Structure

Risk Strategy

Risk Register

Risk Policies

Risk Governance Process

Risk - Tactical

Input

Risk Profile

Risk Organisation Chart

Roles & Responsibilities

SWOT Analysis

Optimal Network Structure

Risk Strategy

Risk Register

Select Optimal Network Structure

Identify Failure Points in the Supply Chain

Prioritise the Failure Points

Identify Alternatives

Define the Alert Criteria

Techniques

Qualitative Assessment - Probability / Impact Matrix, Brainstorming, Cause & Effect Diagrams

Quantitative Assessment - FMEA, Simulation, Modelling, Diagramming Techniques

Strategies for Negative and Positive Risks

Strategies for Opportunities & Threats

Contingency Response Strategies

Risk Management Information Systems

Output

Rank Alternatives

Risks Related to Contractual Agreements

Risk Categorisation

Ranking of Failure Points

Risk Database Populated with Alert Criteria

Alert Process Defined

Risk - Execution

Input

Risk Strategy

Risk Policies

Risk Governance

Risk Register

Rank Alternatives

Risks Related to Contractual Agreements

Risk Categorisation

Ranking of Failure Points

Risk Database With Alert Criteria / Process

Performance Reports

Collaborate on Risk Response Plan

Continuously Monitor

Techniques

Status Meeting

Risk Reassessments

Risk Audits

Variance / Trend Analysis

Performance Measures

Reserve Analysis

Alert Mechanisms

Risk Management Knowledgebase

Output

Risk Registers

Recommendation –Preventive, Awareness, Remediation

Monitor Inherent, Residual & Secondary Risks

Evaluate Effectiveness

Knowledge - Iteration & Improvement Lessons Learnt Capture Communicate Collaborate Continuously Improve

Stakeholder / Change - Management

Capture

Input

Detect disruptions and estimate impact on supply chain performance

Process

Identify & categorise disruptions

Record risk in risk database

Output

Disruption list

Risk database

Follow-up

Communicate

Input

Communicate impact of disruptions

Process

Risk responsible identifies disruption & leads meeting with participants

Distribute reports and documents from ‘capture’ to ‘closure’

Output

Review action points & follow up

Collaborate

Input

Review immediate action and identify causes

Process

Identify alternative solutions

Select best alternative

Delegate assignment

Output

Project closure report

Improve

Input

Review action plan from project closure phase

Process

Review success / failure of solutions implemented

Re-group if mitigation is unsuccessful

Record / update the solutions

Output

Updated risk database

Risk – Tools, Techniques, Checklists

Risk Categories Relationship Relationship Supply Chain Disruption Human Resources Performance Supply Chain Performance Financial Health Environment SC Risk Category Quality, Delivery, Capability, Service Influence, Alignment, Information, Sharing Turnover, Union issues, Pay Position Market Power, Information Visibility, Concentration, Disruption Potential Size, Asset Utilisation, Capitalisation, Profitability 1 2 3 4 5 6 Market Dynamics, Mergers, Regulatory, Disasters, Transportation

Questionnaire on SC Risk Issues

Supply Chain Risk Barriers

Supply Chain Description

Risks - Demand, Supply, Control Etc.

Risk - Scoring Results

Risk – Scoring System Consequences 1. No direct effect on operating service level 2. Minor deterioration in operating service level 3. Definite reduction in operating service level 4. Serious deterioration in operating service level 5. Operating service level approaches zero Likelihood of occurrence E. Probability of once in many years D. Probability of once in many operating months C. Probability of once in some operating weeks B. Probability of weekly occurrence A. Probability of daily occurrence Likelihood of detection A. Detectability is very high B. C onsiderable warning of failure before occurrence C. Some warning of failure before occurrence D. Little warning of failure before occurrence E. Detectability is effectively zero

Risk - Quantification / Qualification Valuation (factors to consider) Quantitative factors Revenue value Asset value Cash flow value Qualitative factors Brand Compliance Strategy Uninsurable Risks

Supplier non-performance

Customer demand volatility

Partner work stoppages

Product defects/recalls

Emerging risks (pandemic)

Others

Insurable Risks

Catastrophic disaster

Property damage/loss

Product liability

Business interruption

Others

Risk – Prioritised Consequence Likelihood 0 Tolerate Terminate Treat Transfer

Risk Classification

Cause & Effect Analysis Failure to Deliver on Time No Stock Available Lead-Time Too Short Carrier Performance Quality Problems Capacity Constraint Inflexible Systems Inadequate Communications Poor Scheduling Inadequate Supplier Management Materials Supply Problem Failure to Achieve Plan Forecasting Problems Poor Process Control

Risk Control Matrix Key Process Number Process Risk Number Risk Control Objective Control Number Control Description Control Owner Process Narrative Control Category Control Type Primary/ Secondary Control Frequency Design Assessment

Example – Contingency Risks How Long Can You Do Without? Impact of Doing Without? Vulnerabilities? Contingency in case of a disaster? Equipment (IT only) 5 days After five days no way to schedule production or track orders No UPS/generator, MD hardware, SPOF SME Use paper reports for 5 days then go manual for as many members as possible Facility 0 days No production, potential for bankruptcy, IT non-existent Metal building, flood zone, poor maintenance, no perimeter security, door lock broken Look for warehouse space, attempt to salvage equipment and restart operation, file bankruptcy Personnel 0 days Degraded operations, low service levels Too many SPOF Best effort shifting of available staff, temps Raw Materials 30 days before new deliveries None until on hand exhausted Single supplier relationship Search for alternative supplier Transportation System 30 days in 2 days out No supplies No deliveries Location, design of entrance None Utilities 0 hours/power 0 hours/water Extrusion shuts down, lines cleaned, waste collected and prepared for grinder, IT non-existent Single power feed, no generator or backup water supply None Vendors (Sourcing) 4 hours No call center Mercy of vendor Bring in-house