Planning for Supply Chain Disruptions

1
Planning for Supply Chain Disruptions

• Yossi Sheffi
• MIT, Cambridge MA

December 5th, 2002
2
Outline

• The threat
• Past disasters
• Supply chain preparedness
• preliminary research findings

3
Terror Threats

• Physical

• Chemical/biological

• Nuclear/dirty

• Cyber attack

4
The Economic Targets Infrastructure

• Agriculture
• Tourism
• Transportation
• Electric grid
• Banking finance systems
• Oil and gas
• Communications
• Continuity of government
• Medical services delivery
• Water supply
• Food supply

5
Learn From Past Disasters

• Kobe Earthquake -- Jan 16 1995, gt6,300 killed,
  100K buildings destroyed, 80K damaged. Total
  damage 250B

• Bhopal -- Dec 2nd, 1984, Union carbide factory,
  2500 dead, 50,000 hospitalized.

• Chernobyl April 26, 1986, 15M people affected,
  Belarus still affected

6
Learn From Past Disasters

• Influenza 1918 675,000 dead in the US alone
  Started in army barracks and prisons in the US
  30 50 million worldwide (the Spanish Flu)

• The Mont Blanc -- Dec. 6, 1917 the Mont Blanc
  explodes in Halifax port (400,000 lbs. Of TNT,
  2,300 ton of Citric Acid, 10 tons of gun cotton,
  35 tons of Benzol). 2500 dead 9,000 injured
  shock wave felt in Cape Bretton (270 miles away).

• Foot and Mouth Disease (FMD) and Mad Cow Disease
  UK, 2001, quarantines and slaughter of
  suspected animals 3B - 5B hit.

7
Danger Government Response

• On 9/11
• Ford idled several production lines
  intermittently due to delays at the Canadian
  border
• Toyota came within hours of halting production
  since a supplier was waiting for steering wheels
  shipped by air from Germany
• After Flight 587 crashed, Nov. 12, 2001
• Bridges to NY were closed for several hours
• In UK FMD
• Farmers costs lt1B
• Tourism costs (after the government issued a ban)
  2B - 4B
• Japanese government bankrupted many private
  hospitals in the Kobe area

8
Preparing for Another Disruption

• Supplier relationships
• Core suppliers vs. public auctions
• Use of off-shore suppliers
• Dual supply relationships
• Inventory management
• The vulnerability of JIT manufacturing
• Advantages of JIT manufacturing
• Strategic Inventory (SoSo management)
• Knowledge backup
• Developing backup processes
• Backing up the companys knowledge
• Standardization and cross-training
• CRM and customer relationships

9
Supply Chains under Uncertainty

• Better visibility
• Transportation visibility involves multiple
  handoffs
• Need for full supply chain visibility, including
  detailed handling
• Independent data acquisition sources
• Better collaboration
• Last decade VMI, CMI, EDR, QR, JIT, JIT II, CPD,
  CPFR Now implementation
• New joint emergency planning (alternate shipping
  methods alternate suppliers)
• Also security knowledge sharing
• Better forecasting
• Postponement
• Build-to-order
• Product variability reductions
• Centralized inventory management

10
Industry-Government partnerships

• Clear role for cooperation happening already
• Industry participation in Free and Secure Trade
  (FAST) and Customs Trade Partnership Against
  Terrorism (C-TPAT)
• Known shipper and known carrier programs
• Difficult to get terrorism insurance role of
  government as insurer of last resort
• Insurance companies are only starting to model
  terrorism threats.

11
New Business Trade-offs

• Efficiency vs. redundancy (who pays for cells,
  electricity, medicines, etc.)
• Collaboration Vs. Secrecy (example hazmat
  placards)
• Centralization vs. dispersion (physical vs. I/T
  attack)
• Lowest bidder vs. known supplier (whats in the
  container)
• Security vs. privacy (vs. efficiency of search)

12
When Disaster Strikes
Crisis Impact Prepared Management Unprepared management
Hurricane Mitch (Nov. 1998) Floods destroyed banana plantations Chiquita leveraged existing alternative sources Dole took time to find alternatives and lost sales and
Taiwan Earthquake (Sep. 21 1999) Component supplies to PC OEMs disrupted Dell priced to steer customers to available components Apple could not change config.- faced backlogs and lost sales
Mad Cow FMD (Spring 2001) Shortage of hides for leather manufacturers Gucci, Wilson supply contracts Naturalizer, Danier - inventories Etienne-Agner suffered cost increases
9/11 Closed borders Daimler-Chrysler Alt. modes based on contingency plans Ford idled several plants
13
Preliminary Research Data

• Two responses active and do nothing
• Active
• Past bad experience
• Corporate culture (defense business, work in
  dangerous places around the world, etc.)
• Security departments staffed with experience
• Do nothing
• Believe 9/11 is a one-time event
• Cannot find a way to pay
• Believe government will help
• All companies most concerned about government
  response to terrorist attacks
• All companies report a large increase in cyber
  attacks

14
Preliminary Research Data(Active Respondent)

• Build redundancies
• Tighten collaboration with partners
• Work with government to understand and influence
  security initiatives
• Look for technology to help (RFID, GPS, e-cargo
  seals, biometrics, sensors, etc.)
• Education
• Awareness
• Contingency planning (including drills with
  supply chain partners)

15
Summary

• A long term adjustment
• In past incidents the economic impact was a lot
  less than initially feared
• collateral benefits of preparedness
• Better collaboration
• Better supply chain operations
• Better controls (less theft, IP loss, better
  standards)
• Participation in communities

16
Any Questions?
?
?
?
?
?
Yossi Sheffi SHEFFI_at_MIT.EDU