APICS DC 2016, Gary S Lynch, The Risk Project, LLC
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Market volatility; corruption; unfair trade practices; environmental issues; and a relentless stream of geopolitical, natural, and man-made events challenge today’s supply chain management leaders constantly. As such, these industry professionals are increasingly recognizing and valuing the rewards of resilience in their networks. However, a lack of effective guidance and inadequate information on how to quantify resilience make it difficult for supply chain managers to take a logical, data-driven approach to making resilience investment decisions. This educational session will explore the benefits of measuring supply chain resilience, proven techniques and processes used for measuring, and the decision-support tools and platforms that can provide valuable assistance.
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APICS DC 2016, Gary S Lynch, The Risk Project, LLC
- 1. How and Why to Measure Supply Chain Resilience Quantifying resilience to improve decision-making Gary S. Lynch The Risk Project, LLC www.theriskproject.com
- 2. #APICS2016www.theriskproject.com Key Issues § Why measure? Who’s asking the question or making the decision? § What is the expected outcome? § What competencies and capabilities are needed?
- 3. #APICS2016www.theriskproject.com Why? § Exposure – An event. How much to reserve, forecast, advise. § Impact – Allocation/prioritization. Risconomics. § Performance – Return/exposure on investment. § Compliance – What must we do? § Urgency – Speed of investment, decisions, actions. § Opportunity – Differentiation. Stay tuned. November 2016. – ”Uncertainty Advantage: Leadership Lessons for Turning Risk Outside-In” – www.theriskproject.com – Gary.lynch@theriskproject.com
- 4. #APICS2016www.theriskproject.com Who § Exposure – Underwriters, Rating agencies, Investors, Risk management (insurance), Legal, CFO § Impact – Risk management (program), Security, Executive Management § Performance – Operations management § Compliance – Procurement/sourcing, Auditors (internal/external), Legal, Compliance, Quality § Urgency – Operations management, Leaders § Opportunity – Leaders, Executive management, Marketing, Product Category Managers
- 6. #APICS2016www.theriskproject.com Key Issues § Why measure? Who’s asking the question or making the decision? § What is the expected outcome? § What competencies and capabilities are needed?
- 7. #APICS2016 Exposure – Contribution Margin Exposure Any Value Contribution Margin Sourcing Country Plant Country Over 50 Over 250 Over 20 Any Value Over 50 Over 250 Over 20 Source: The Risk Project, LLC
- 9. #APICS2016 Impact Source: The Risk Project, LLC
- 10. #APICS2016 Impact Amount Time TARGET INVENTORY Risk Tolerance Risk Appetite Upper Risk Threshold Lower Risk Threshold ACTIVATE Plans ACTIVATE Plans Quantitative Trigger Linked to Target Inventory Volatility Normal Volatility Abnormal Volatility Source: The Risk Project, LLC
- 11. #APICS2016 Impact Portfolio Management Risk Solutions Financed/Insured Financed/Financial Products Financed/Alternative Products Retained & Mitigated Retained & NOT Mitigated Finance Product Solutions • Hedges (commodity, transportation, f/x) • Derivatives Transfer Solutions • Marine & Cargo/Stock Throughput) • Property Insurance/Business Interruption • Contingent (3rd party) Business Insurance • Supply Chain (non-physical damage) Insurance • Terrorism (hedge, derivatives) • Product Liability Insurance • Trade Finance, Credit Insurance • Cyber Insurance Mitigation Solutions • Business continuity programs • Property loss/control programs • Environmental, health & safety programs • Crisis management programs • Emergency management programs • Quality/Product recall programs • Security (people, asset, cyber) programs Inventory Mitigation Solutions • Stock redundancy (safety stock) • Stock diversification • Direct ship • Alternate sourcing • Inventory substitution or repurpose • Increase inventory investment within channel • Segmentation and prioritization (allocation) • Salvage or repackage Alternative Finance Product Solutions • Captives Source: The Risk Project, LLC
- 12. #APICS2016 Performance Supply Chain - Aggregate Fill Rate 0% 20% 40% 60% 80% 100% 0 5 10 15 20 25 Weeks FillRate 1 DC 2 DC 99+% Fill 2 DC Network 99+% Fill 1 DC Network In-transit inventory from DC to customer Plant production ramp-up Inventory at DC Plant production, Inventory that was inbound in-transit prior to the disaster event, 1 DC Model Reaches 99% Fill Rate in 18 Weeks 2 DC Model Reaches 99% Fill Rate in 4 Weeks Product Demand (top 10 product families) Inventory (50 – 50 split 1 DC Model begin processing in 3 weeks) In-transit Inventory (depleted in first few days) Production Capacity (production supply/meets demand, capacity then ramps-up) Facility Recovery (assumes 1 DC unavailable for 3 weeks) $230 mil aggregate annual revenue exposure. $1mil risk mitigation investment yields ~ $180 mil reduction in revenue exposure. Source: The Risk Project, LLC
- 13. #APICS2016 Compliance Source: The Risk Project, LLC
- 14. #APICS2016 Urgency • The average loss caused by the random selection of one of the supply chain disruption scenarios was over $375 million for the three years post-disaster. A second disruption during that same time period would on average result in a total loss of roughly $800 million in net sales • The worst case loss caused by the random selection of one of the supply chain disruption scenarios was over $3.5 billion in sales for the three years post-disaster. A second disruption during the same time period would on average result in a total loss of roughly $5.7 billion in net sales Source: The Risk Project, LLC
- 15. #APICS2016 Opportunity Uncertainty Advantage Leadership Lessons for Turning Risk Outside In Source: The Risk Project, LLC
- 16. #APICS2016www.theriskproject.com Key Issues § Why measure? Who’s asking the question or making the decision? § What is the expected outcome? § What competencies and capabilities are needed?
- 17. #APICS2016 Method A Plan and Process Source: The Risk Project, LLC Risk Identification Value Alignment Prioritization & Allocation Output: Impact identified, measured & prioritized Risk Financing & Mitigation Execution Monitoring & Optimization Continuous Improvement Risk Measurement Output: Investment options identified, quantified, modeled, & selected Output: Risk design decisions and mitigation/finance programs funded and executed Option Analysis & Modeling Pricing & Measurement Gap Recognition
- 18. #APICS2016 Value Segmentation Impact Filters • Revenue • Margin • Asset • Cash Flow • Strategic • Regulatory • Brand • Life Snacks Product Rationalization Impact Filters • Revenue • Margin • Asset • Cash Flow • Strategic • Regulatory • Brand • Life What to measure? What is the decision to be made?
- 19. #APICS2016www.theriskproject.com What to measure? Another example Five product families make up 80% of FY12 total net revenue Eleven product families make up 92% of total net revenue over the past two fiscal years ILLUSTRATIVE ONLY ILLUSTRATIVE ONLY
- 20. #APICS2016 Active Ingredient Material Providers Japan (8) Italy (1) Excipient & Packaging Material Suppliers Japan USA New Zealand BBuster® Tablet Production & Packaging Loc 3, PR Location 1, Japan (Back-up) BBuster® DistribABCon Loc 4, IN (Rest of Country) Location 5, PA (13 Northeast States) CardinalHealth ~37%* McKesson ~36%* ABC ~19%* Regional and Specialty Distributors ~8.2%* Hospitals, Long Term Care/Infusion, Retail/Chain Drug Stores, Physician/Office Clinics, Specialty Pharmacies, Mail Order Pharmacies, Government Facilities Patients/End Users Patients/End Users Patients/End Users Patients/End Users Raw materials / In process products Finished goods products BBuster API Production Location 1, Japan Loc 2, Japan (Back-up) PHARMA ORG America PharmaceABCcal, Inc. ABIGGIANTPHARMAPARENT PHARMA MOVE Logistics Osaka (Kansei airport) to San Juan, PR Drums, Foam Excipients, Final Packages Osaka (Kansei airport) to Indianapolis, IN Port of Nuevo, PR to Port of Jacksonville, FL Where to measure? Visibility needed
- 21. #APICS2016 Active Ingredient Material Providers Japan (12) Italy (4) Excipient & Packaging Material Suppliers Japan USA New Zealand Blockbuster Tablet Production & Packaging Puerto Rico Japan Blockbuster Distribution Midwest Pennsylvania CardinalHealthMcKesson ABC Regional and Specialty Distributors Hospitals, Long Term Care/Infusion, Retail/Chain Drug Stores, Physician/Office Clinics, Specialty Pharmacies, Mail Order Pharmacies, Government Facilities Patients/End Users Patients/End Users Patients/End Users Patients/End Users Raw materials / In process products Finished goods products Blockbuster API Production Location 1, Japan Location 2, India Big ManufacturerBig Parent Big 3PL Logistics Drums, Foam Excipients, Final Packages France Analytical Lab USA (10) Japan (2) Belgium (2) Source: The Risk Project, LLC $2bil $1bil $500mm $3bil $500mm $250mm $50mm $100mm $500mm $25mm What is the purpose of the measure? For this example, impact
- 22. #APICS2016 What are the direct/indirect impacts? 55,000 Toyota Motor Corp. vehicles delayed 70% of Japan’s auto production temporarily shut down Honda, Nissan, Mitsubishi, Mazda, Suzuki, and Fuji Heavy Industries stopped or slowed production Farms use sawdust as cozy and clean bedding Construction/particle-board makers use as cheap building material Auto-parts manufacturers, wineries, oil-rig operators all impacted North America’s only source of the base isotope for technetium- 99 Injected into patients 20 million times in the U.S. to create images used in diagnosis and treatment (e.g. cancer, heart ailments) Isotopes Atomic Energy of Canada reactor at Chalk River, Ontario shutdown – scheduled to open 5 days later, but delayed 60 days Piston Rings 6.8 magnitude earthquake shuts down Riken Corp. Sawdust Housing market slows – sawdust shortage Sawdust prices rise in 15 months from $25 a ton to more than $100 a ton E V E N T DIRECT and INDIRECT CONSEQUENCES
- 23. #APICS2016 What action? What are the priorities? Effort low high high • Upstream Supplier Relationships • Foundry • Order tracking • CAD Applications • Day Labor • Shipping Agents • Adobe Creative Suite • Shipping management system • U.S. Ports • Delivery Trucks • Dock Masters @ Port Klang • Denim (@ Desired Quality & Price) • Labels • Zippers • ABC WW Relationship • Port Klang • Environmental Agency Relationships • Local Government Relationships • “Wash” Guidance • Supplier IT Infrastructure ¡ Tactical options ¡ Quick hits ¡ Minimal investment to provide greater resiliency ¡ Knowledge / strategy exists, but not formally documented Low Impact / Low Effort ¡ Strategic options ¡ Focus on the priorities ¡ Identify risk mitigation and financing options ¡ Model and price ¡ Require longer term programs and solutions, probably some degree of risk acceptance Low Impact / High Effort High Impact / Low Effort High Impact / High Effort Impact Source: The Risk Project, LLC
- 24. #APICS2016 What are my options? = Applied to most critical suppliers = Applied to critical suppliers = Applied to all suppliers Time Risk Risk Mitigation, Financing, Retention, Monitoring, Validating, & Optimizing Tir1 Identification & Assessment Risk Measurement & PricingAggregation Analysis Root Cause Analysis Single Point of Failure Risk Aggregation Analysis Threat Assessment Supplier Business Model Analysis Expert external source threat assessment Benchmarking Integration impact analysis & modeling (cost, service, social, quality) Decision modeling Solution pricing & modeling Incentive & Penalties Programs On-site Inspections Vulnerability assessments Corporate Responsibility Audits Type 1 Financial Viability Assessment Quantitative investment modeling Risk option analysis & modeling (finance, alternate finance, mitigation, acceptance) Qualitative Investment modeling Quantitative analytics & analysis Property/BI & Cargo/Stock throughput insurance Static threat monitoring Certificate Management Contingent business interruption insurance Trigger monitoring Financial viability & agreement reviews Non- damage business interruption insurance for named suppliers Integrated supplier testing Product recall, liability & trade disruption insurance Real-time, predictive monitoring Solvency reviews Source: The Risk Project, LLC Source: The Risk Project, LLC
- 25. #APICS2016 What technology and data sources can be used? Delivery Management & Visualization Platforms (sample) External Data Sources Measures Threat Data Sources Threats Vulnerability Profile Vulnerabilities SourceMap D&B DJ Factiva Briefcase Analytics iHS Maplecroft Nathan MunichRE SwissRe AIR NC4 iJet Stratford Resilinc EigenRisk SC Mapping Resource Mapping Impact Analysis Design Analysis SPOF Analysis Data Sources (sample) Hiperos 3rdParty Mgmt® D&B Supplier Risk Mgr® NC4® Resilinc® SAP Supplier InfoNet® iJet WorldCue® Elementum® Achilles® Razient® Pinkerton/ Vigilance Source: The Risk Project, LLC Insurance Exposure Data & Analytics (sample) AIR RMS EigenRisk Prism DHL Resilience360 @Risk Kinaxis Rapid Response Llamasoft SCair Dow Jones Risk Center Cogniiitics Century links LoJack SCI TransVoyant SourceMap
- 26. #APICS2016www.theriskproject.com Critical questions • Does your supply chain risk program, methods and measures work? • How do you know? Would anyone notice if it didn’t? • What would be the consequences if they didn’t? • Is your supply chain risk program your greatest uncertainty? • What data, models and level of transparency is needed to measure?
- 27. #APICS2016www.theriskproject.com Disclaimer This document and any recommendations, analysis, or advice provided by The Risk Project, LLC (“The Risk Project”, collectively, the “The Risk Project Analysis”) are intended solely for the entity identified as the recipient herein (“you”). This document contains proprietary, confidential information of The Risk Project, LLC and may not be shared with any third party, without the Risk Project’s prior written consent. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors. Any modeling, analytics, or projections are subject to inherent uncertainty. The Risk Project Analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Except as may be set forth in an agreement between you and The Risk Project, The Risk Project shall have no obligation to update the The Risk Project Analysis and shall have no liability to you or any other party with regard to the The Risk Project Analysis or to any services provided by a third party to you or The Risk Project.
- 28. #APICS2016 Uncertainty Advantage Leadership Lessons for Turning Risk Outside In