Supply Chain Risk

1. Supply Chain Risk Presented by: Adam Voak

2. It’s a big World • Australia is not in the centre of the “action” (“the tyranny of distance”). • What are the only two ways something physical gets into or out of Australia?

3. Drop in the Bucket?

4. Change • Any change, regardless of scale, carries with it the potential for disruptive and / or systematic risk • Whether anticipated: eg. Migration to an Enterprise Resource Planning Platform or • Unanticipated: eg. a pandemic or volcano

5. Atomic Energy Canada Ltd • May 2009 Atomic Energy Canada scheduled shut down NRU reactor in Chalk River, Ontario • Supposed to take 5 days • Medical isotopes produced – represented 50% of global production • Critical element in the North American healthcare supply chain

6. Atomic Energy Canada Ltd • It is the only source of base isotope for technetium-99 • Injected into patients in the USA alone 20 million times a year – used in treating a diagnosing heart conditions and certain types of cancer • Routine shutdown of 5 days turned into an unscheduled 60 days

7. 2007 – 6.8 Magnitude - Japan

8. 2007 – 6.8 Magnitude - Japan

9. 2007 – 6.8 Magnitude - Japan • Riken Corp manufacturing plant in Niigata Prefecture • Machinery displaced by the quake • Inability to produce 1 discrete low value part • $1.50 piston ring but used in nearly half of Japan’s automobile supply chain.

10. 2007 – 6.8 Magnitude - Japan • Juts in time manufacturing and lean supply chains all but eliminated inventory that used to be held as a buffer • Delayed production of more than 55,000 Toyota vehicles and • Slowdown or shutdown of 70% of Japan’s auto production assembly Honda, Nissan, Mitsubishi, Mazda, Suzuki and Fuji heavy industries

11. Some Definitions • Transport • Logistics • Supply Chain

12. WhatisTransport? Point B Point A The physical movement of goods

13. What is Logistics? Point of Consumption Point of Origin Systematic organisation of goods and /or services

14. What is Supply Chain? Supply Demand The interdependence and organisation of supply and demand, including raw product forecasting and asset investment

15. What Makes A Supply Chain? Information Technology Systems Thinking Procurement /Purchasing Sourcing Labour Supply Chain Management Oil and alternative energy Commercial Power Transport Legal and Regulatory Systems Logistics People /Relationship/ Resistance to Change Business Processes Strategic Asset and Investment Finance Transaction Systems Global, Political Economy Demand Supply

16. Competition • Companies don’t compete .......... supply chains compete • Excelling in supply chains can make a good company great

17. A Supply Chain?

18. The Supply Chain? Raw Materials Consumers Distributors Suppliers Manufacturers Wholesalers Retailers / Customers Products / Services Information Finances

19. Supply Chains are Ecosystems

20. Conflicting Converging Agendas • Business goals and risk return • Increased competitive pressures • Escalating customer service demands • Rising complexity • Accelerating costs

21. Supply Chains are all about Relationships

22. Buyer Seller Asymmetry

23. Opportunism

24. The Lemon Phenomenon

25. The Moral Hazard • Eg. Careless handling of goods in transit • Warehouse burned or looted by its owner to collect insurance • In essence supplier poor quality can impact on you! • Need information – which prevents faulty operations and services; needed for in-process services and operations and the inducement of collaborative exchange

26. Signalling and Screening • In conditions of information asymmetry – how to get closer to transparency?

27. Iceberg Right Ahead!

28. Some risks just not seen?

29. or are they?

30. Supply Chain Complexity

31. Supply Chain Risk Management • Still an art, not a science • Requirements to drive to SCRM performance are coming from everywhere • No industry is immune to the SCRM Imperative

32. Irrationality, Inconsistency & Incompetence “The evidence. . .reveals repeated patterns of irrationality, inconsistency and incompetence in the ways human beings arrive at decisions and choices when faced with uncertainty.” -Peter L. Bernstein, “Against the Gods – The Remarkable Story of Risk”

33. Why Supply Chain Risk? • 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

34. Why Supply Chain Risk • To uncover, prioritise, measure, treat (mitigate and finance) and monitor the risk of Single Points of Failure in the supply chain; and • Diminish the impact of an event through comprehensive and efficient resiliency practices

35. Types of Supply Chain Risks • Internal or External to the local firm • Internal or External to the supply chain

36. Supply Chain Risk Sources • Organizational risk • Network risk • Environmental risk

37. What are the Risks in Supply? Production or Quality Problems Capacity Forecast Errors/ Surge Procurement Inventory Loss of Intellectual Property • Disruptions/Disasters • Delays • IT System Failures • Transportation and Infrastructure • International Trade and Transportation • Supplier Health

38. Some Recent Events • Pirates off the coast of Somalia • Chile Volcano 2011 • Poor Software Implementation • Nike’s Child Labor Issue • Hurricane Katrina Why Important Now???

39. 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 can’t buy significant amounts of disruption insurance • Corporate governance reforms are putting a lot of emphasis on risk management.

40. Supply Chain Risk Management Strategies Avoidance • Exiting a market (or product) or delay entering a market (or product) • Postponement - delay commitment of resources to maintain utmost flexibility • Speculation - assuming risk to gain competitive advantage • Hedging - globally dispersing your portfolio of suppliers, customers and facilities

41. Supply Chain Risk Management Strategies Control • Vertical and lateral integration of suppliers and business partners • Transferring/sharing risk - outsourcing, off-shoring, contracting • Security - identifying and protecting against unwanted penetration

42. Building 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!

43. Kidney Failure and Supply Chain Risk • A drop in the bucket can create global waves? • Nearly 300,000 people, mostly children sick from acute kidney failure • The result of chemicals added to raw milk and animal feed • Magnitude of this drop unanticipated by the food industry not previously experienced

44. Kidney Failure and Supply Chain Risk

45. Kidney Failure and Supply Chain Risk • Second half of 2008 • Most likely caused by the addition of melamine – an industrial chemical to milk supplies in China • When it was over 21 companies in the supply chain were implicated and found guilty of these tragic events

46. Kidney Failure and Supply Chain Risk • The immense ripple effect: • Many countries banned Chinese dairy products; • 2 million Chinese farmers unable to sell their dairy products • Chinese authorities 2,176 tons of milk powder in a warehouse owned by San Lu, the primary culprit • 9,000 additional tons were recalled

47. Kidney Failure and Supply Chain Risk • You would probably think that this a Chinese matter? • Fonterra one of the worlds leading dairy suppliers owned 43% of San Lu • Fonterra wrote off 107 million of its initial 2005 investment • Fonterra’s later impairment charges 139 million including product recall costs, liability claims and impairment of the San Lu brand.

48. Kidney Failure and Supply Chain Risk On September 27, 2008 San Lu Declared Bankruptcy

49. Kidney Failure and Supply Chain Risk • Mistakes – Fonterra buys an “unkown” Chinese based Sanlu Corporation • Assumed that its upstream suppliers (farmers, farm and their cows) were exercise the same amount of care that Fonterra demanded of all its suppliers • However lack of hygiene, health and nutritional practices led to poor product quality

50. Supply Chain Design • A supply chain is more likely to be severely impacted if there is: • supply chain density supply chain complexity • node criticality