Supply Chain Risk and What You Can Do About It

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Supply Chain Risk and What You Can Do About It

• Jack White
• Jack.White_at_altarum.org
• Katie Kasper
• Katie.Kasper_at_altarum.org

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Supply Chain Risk and What You Can Do

• Supply Chain Risk
• Introduction
• Some Definitions
• Surprised or Prepared
• Defense Supply Chains

• What You Can Do
• Risk Management Strategies
• Lean and Risk
• Robust, Lean Supply Chains
• Some Thoughts for SCOR

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Introduction Supply Risk Management

• Typically 60-85 of the product cost is embedded
  in the supply chain
• Supply chains are global, serving multiple
  customers
• Supply disruptions have a greater impact on final
  production
• Lean practices, reduced inventories, outsourcing,
  and chaotic demand can increase the brittleness
  of the supply chain to surge and disruption
• Insuring against supply chain risk has become too
  expensive

Take Away Supply Risk Management Is a Crucial
Element of Enterprise Planning, and Execution
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Some Definitions

• Contingency
• A possibility that must be prepared for a future
  emergency
• So, Contingency Planning means Planning for an
  unlikely event or future emergency
• Continuity
• Uninterrupted duration or continuation,
  especially without essential change
• In effect the result of good Contingency
  Planning
• Risk Management
• A cyclic process to reduce uncertainty associated
  with a desired outcome. Risk management entails
  Risk Identification, Risk Analysis, and Risk
  Response
• i.e., ensuring continuity through good
  Contingency Planning
• Supply Chain Risk Management
• End-to-end management of the flow of goods and
  services in the Supply Chain to insure
  uninterrupted service at the promised level to
  the customer at known cost.
• In other words managing to ensure continuity in
  the supply chain

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Disaster or Predictable Surprise?

• Feb. 1997 Brake plant fire interrupts Toyota
  production worldwide
• Jun.-Jul. 1998 Labor strike disrupts GM North
  Amer. Ops. 2B loss
• Sept. 1999 Taiwan earthquake disrupts PC memory
  production
• Mar. 2000 Fire at supplier plant in Los Alamos,
  NM interrupts cell phone chip production for both
  Nokia Ericsson
• Sept. 2001 Terrorist Attacks U.S.-Canada Border
  Closures
• Oct. 2002 Longshoreman Strike West Coast Ports
  Lockout
• Apr. 2003- SARS outbreak in China impacting Asian
  region
• Aug. 2003 East/Midwest/Ontario power outage

Predictable or Bolts From the Blue?
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What Are the Risks in Supply?

• Disruptions/Disasters
• Delays
• IT System Failures
• Transportation and Infrastructure
• International Trade and Transportation
• Supplier Health

• Production or Quality Problems
• Capacity
• Forecast Errors/ Surge
• Procurement
• Inventory
• Loss of Intellectual Property

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Surprised ? Prepared

• Insurance companies and actuaries can tell you
  the risk associated with most disaster events
• E.g., fires, earthquakes
• Sometimes you can buy insurance to protect you
  financially
• Insurance premiums will reward those with low
  risk positions
• Today, most companies cant buy significant
  amounts of disruption insurance
• Corporate governance reforms are putting a lot of
  emphasis on risk management.

We must learn how to reduce the risk!
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Defense Supply Chains Are Different
End Products and Customers are Different
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Types of Supply Chain Risk of Concern to Defense

• Surge
• Massive increase in production requirements that
  are outside normal range of variation for any
  critical node in the supply chain
• Disruption
• Loss of critical capacity anywhere in the supply
  chain
• Loss of transportation or communication links to
  critical nodes in the supply chain leads to
  inability to access that capacity
• Quality problems in a supplier can be a form of
  disruption
• Disruption in one part of a supply chain can
  result in surge in another as alternate sources
  are found

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Top Level Risk Management Strategy

• Risk Identification
• What can go wrong
• Risk Assessment
• What is the likelihood it will go wrong
• What is the magnitude of the consequences
• Aggregation into an overall impact on the firm
• Risk Management
• What strategic, operational, or tactical
  contingencies are available to mitigate the risks
  and ensure continuity?
• What are the tradeoffs among the risks and the
  costs and benefits of the options?
• Selecting, implementing and tracking solutions
  over time

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Supply Risk Management Pillars

• Develop the Right Risk Management Metrics
• Continuously Identify, Assess, and Reduce Risk
• Develop, test and communicate risk prevention and
  risk management strategies
• Assess and Report Supply Risk At the Top
• Educate Suppliers
• Rate Suppliers on Risk Management and Contingency
  Planning
• Gain Better Visibility and Control Of the Supply
  Network

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Effective Supply Risk Management

• Alignment of Supply Chain
• Align the goals and objectives of all functions
  and organizations along the supply chain
• Help to integrate support and supply strategies
  with corporate objectives
• Develop, integrate and influence Balanced
  Scorecards to insure supply
• Educate suppliers and rate their risk management
  performance
• Supply Chain Visibility
• Gain visibility of critical supply chains
• Supply chain mapping, analysis and improvement
• Supply Chain Risk Management
• Strategies for end-to-end visibility of emerging
  risks,
• Identify and prioritize risks
• mobilize resources to mitigate risks or manage
  their consequences.

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Building Lean and Robust Supply Chains   

• Robust 3 conditions for robustness
• Resilience
• Reconfigurable
• Recovery
• Resilience the supply chain suffers minor
  disruption and remains unaffected for the most
  part. This was no surprise at all!
• Reconfigurable the disruption is more severe but
  mitigation plans have been formulated and
  response time is immediate. This was a
  foreseeable surprise!
• Recovery in case of failure, plans have been
  made for crisis management and path to recovery.
  This could be the unforeseeable, but time to
  recovery is minimized!

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Lean Supply Chains

• What is Meant By Lean Supply Chains?
• Alignment
• Lean supply chains are aligned along critical,
  customer-focused, processes
• Lean supply chains are focused on creating value
  for the customer
• Visibility
• Lean supply chains provide more visibility of the
  entire value stream so that waste can be seen and
  attacked
• Interoperability
• Lower transaction costs and improve data quality
• Agility
• Lean supply chains will be more responsive to
  changing needs
• Why is this critical?
• Lower Cost
• Reduced Cycle Time
• Improved value to the customer

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Lean Supply Chain Concept
Apply Lean to extended value stream as an end to
end system
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Robust Lean Supply Networks

• Risk Identification
• Identify Risks that are the greatest threat
• Multi-discipline team review
• Risk Assessment
• What is the likelihood of a failure
• What is the magnitude of the consequences
• Aggregate probability and criticality into an
  overall impact
• Risk Mitigation
• Develop Playbooks that outline strategic,
  operational, and tactical options available to
  mitigate the risks (e.g.)
• Build in greater resilience
• Plan for reconfiguration
• Plan for fast recovery
• War-game around scenarios
• Identify the tradeoffs among the risks and the
  cost/benefits of the options
• Manage implementation and track solutions over
  time.

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Robust Lean Supply Networks A Process for
Lowering Supply Chain Risk
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RLSN Early Risk Identification
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RLSN Detailed Risk Identification
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Risk Identification AssessmentWatch Out for
List

• Number of strikes over last 3 years
• Number days lost to strikes over last 3 years
• Number of months left on current union contract

• Manufacturing Capability Surge
• Total production lead time
• Alternate production facilities owned by the
  supplier
• Outsource production capacity
• Dependence of your company on this supplier
• Inventory
• Machine utilization
• Ability to add production or testing equipment
• Ability to activate existing unused equipment
• Ability to add labor
• Administrative lead time
• Production lead time

• Manufacturing Capability Disruption 
• Expertise in manufacturing process
• Finished goods inventory
• Process flexibility
• Quality rating
• Preventive maintenance
• History of machine reliability
• Labor relations
• Use of hazardous material
• Political instability
• Weather and other Act of God
• Financial health
• Facility reliability
• Alternate production facilities owned by the
  supplier
• Outsource production capacity
• Inbound logistics

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RLSN Risk Assessment
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Example Assessment
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2
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Assessment measures supplier criticality (1) and
the likelihood (2) and severity of five failure
modes (3)
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RLSN SC War-Gaming
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Risk AssessmentSimulation And War-Gaming

• Assessing risk in complex supply networks is not
  easy
• In addition to tables guiding experts, necessary
  to develop simulation tools to assess risk and
  evaluate contingency plans
• Metrics needed to measure risk in the model
• Calamity modeling. User can define impact of
  disruption on any supplier and calculate impact
  on total production
• Contribution margins. Model the value added in
  the SC, to quantify cost of lost productivity
• Supply chain manipulation. Users can edit supply
  flows, including forecasts, availabilities, and
  the SC structure.
• What-if? scenarios. Scenarios can be defined and
  saved to look at impact of disruption and changes
  to SC

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Risk Assessment ToolsSupply Chain War-Gaming
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RLSN Best Practices
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RLSN Risk Management

• Management tools to help manage the risk
  identification, assessment, mitigation plans, and
  improvement progress

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SCOR Overview with a Risk Watch Out List
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Potential Supply Chain Disruptions or
SurgesNotional
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Evaluate the Best Practices and Metrics for
optimization of ENTIRE Supply Chain
Collaboration

• Best Practices and Metrics
• Best Practices effectiveness
• Evaluate the impacts on each areas metrics
  throughout the supply chain.

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How do we address Risk Management within the
SCOR-model?

• Propose to the TDSC the establishment of a
  Special Interest Group (SIG) to
• Evaluate the impacts of disruptions and surges on
  supply chains in various industries.
• Expand the Watch Out List.
• Evaluate Best Practices and Metrics.

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Summary

• Complexity of supply chains growing, so is risk
• Lean can result in frail/brittle supply chains
• Prediction, probability, and criticality are the
  basis for managing supply risk
• Risk management tools can help manage risk
• Enable SCOR to help manage/mitigate risk

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Questions and Discussion