Supply Chain Continuity – The New World of Risk

1. Supply Chain Continuity – The New World of Risk Lori C. Adamo Code Red Business Continuity Services, LLC Michael J. Gravier, PhD, CTL Bryant University NEDRIX Annual Conference – October 19th – 21st, 2009

2. Today’s Agenda: • What is Supply Chain Management . • Risk in Supply Chain Management. • Using Business Continuity to manage and mitigate your Risk. • Supply Chain Risk Assessments and Methodologies.

4. International Importance of SCM Imports and export markets experiencing rapid growth from 1989 to 2007 imports increased from $473 to $1,953M exports increased from $363M to $1,162M 70% of US-made products are subject to direct international competition Development of international economic relationships NAFTA, EU, ECOWAS, OAS, ASEAN, etc. One US-made Jeep has 60% American-made parts One US-made Toyota has 70% American-made parts

5. Supply Chain Insights Multiplier Effect Supply Chain Risks Risks of Popular Supply Chain Strategies

6. Model Supply Chain Raw Materials Wholesaler/Assembler End Consumer Manufacturer Retailer Identify Experiment Analyze Extend Validate Discussion

7. Supply Chain Complexity 1 1 1 1 1 2 2 Consumer/end user 2 3 3 3 3 Tier 2 Supplier 4 4 2 Tier 1 Supplier Tier 1 Customer Tier 2 Customer Manufacturer Adapted from Lambert, Douglas M., and Terrance L. Pohlen, “Supply Chain Metrics,” International Journal of Logistics Management, Vol. 12, No. 1 (2001), pp. 1-15.

8. Inventory Positions and Major Flows in a Supply Chain Orders Orders Orders Payments Payments Payments Manufacturers Retailers Suppliers Wholesalers Information Information Information Product Product Product Variable costof materialAcquisition costOther variablecostsTotal variablecost of productFull manufac-tured costSelling price $10 $1 $14$25$40$60 Variable costof productOther acquisition costsSelling price $60 $2 $70 Variable costof productOther acquisition costsSelling price $70 $2 $120 $5 $7 $10 Variable costof productFull manufac-tured costSelling price Source: Adapted from Douglas M. Lambert and Mark L. Bennion, “New Channel Strategies for the 1980s,” in Marketing Channels:Domestics and International Perspectives, ed. Michael G. Harvey and Robert F. Lusch (Norman: Center for Economic ManagementResearch, School of Business Administration, University of Oklahoma, 1982), p. 127.

9. Manufacturers 60-70% of value added Services just surpassed Often have huge capacities Traditionally “channel captains”

10. Retailers Numerous outlets Highest margins Small relative to manufacturers/wholesalers Retailing as a %of U.S. employment Retailing as a %of U.S. businesses Retailing as a %of GDP 11.6% 13% 40%

11. Supply Chain “Geography” 1 icon = 1,000 companies Manufacturers n=898 Wholesalers n=13,732 Retailers n=46,742 Households X 100,000 … Over 100 million households

12. Service Impacts 1 manufacturer ≈ 100,000 households 1 manufacturer ≈ 15.3 wholesalers 1 manufacturer ≈ 52 retailers 1 wholesaler≈ 3.4 retailers 1 wholesaler ≈ 7,283 households 1 retailer ≈ 2,139 households

13. A Few Risks Natural disasters Tsunamis, quakes, droughts, hurricanes Epidemics SARS, H1N1, bird flu, mad cow Rogue nations North Korea threatens ~45% of world’s semiconductors Supplier quality Toyota floor mats, lead paint, contaminated breast milk Unethical supplier actions Child labor, blood diamonds, unfair wages Other: Change in currency rate Recession

14. Definition of Risk: a chance of danger, damage, loss, injury or some other undesired circumstance. • What are the potential losses if the risk is realized, what losses will result? • How likely are those losses, i.e. the probability of the occurrence of the event that leads to the realization of the risk? • What is the significance of the losses? In Sum: Global Supply chains are complex, constantly evolving, face multiple uncertainties, and are of importance to all levels of the organization.

15. Pitfalls of Popular Techniques JIT Possible negative environmental consequences At risk from disrupted transportation Requires complex internal management structures Lean Ideal for high volume, low variety products with predictable demand patterns Reduced supplier base Adaptability of remaining suppliers may be inadequate Supplier “lock-in” Six Sigma Doesn’t distinguish good from bad processes Not suitable for corporate re-engineering

16. SUMMARY OF RISKS Summary of Risks:

17. Supply Chains Today: • An increase in globalization has led to longer supply chains and less visibility; • US Trade with foreign countries in goods has reached almost three trillion dollars. • Today’s supply chains are more virtual, more global and more dependent on external partners. • With the growth of outsourcing and partnerships, the ability to manage product quality has also been strained. • SO how do we meet these challenges?

18. Business Continuity Planning (BCP) Phases Project Initiation Functional Requirements Design & Dev Implementation Supply Chain Management BRP Testing BIA Maint DRP Project Mgmt Policies & Standards Cont Imp. Risk Assessment CMT Execute Disaster Recovery Institute Model 18

19. Classifying risks into supply, operations, demand and security risks. Step 1: Risk Identification Step 2: Risk Assessment and Evaluation Decision analysis, Case Study, Perception Based. Work with Procurement to select vendors and suppliers. Step 3: Selection of Appropriate Risk Management Step 4: Implementation of Supply Chain Risk Management Strategies Business Continuity Strategies and Planning. Step 5: Mitigation of Supply Chain Risks Test your Plan with your critical Suppliers. Manuj and Mentzer (2008), “Global Supply Chain Risk Management,” Journal of Business Logistics, Vol. 29, No. 1, pp. 133-155.

20. What is a Business Impact Analysis? It is an information-gathering exercise designed to methodically identify: • The processes or functions performed by an organization • The resources required to support each process performed • Interdependencies between processes and/or departments • The impact of failing to perform a process • The criticality of each process • A recovery time objective (RTO) for each process • A recovery point objective (RPO) for the data that supports each process

21. Risk Assessments and Business Impact Analysis • Supply Chain Management relies on the information • uncovered by a Risk Assessment & a Business • Impact Analysis. • Defines Probability, Impact and Tolerance to a disruption. • Often performed as a step in the development of • business continuity plans, the BIA, along with risk • analysis (RA), provides the foundation for strategy • that will allow the organization to continue to perform • developing and selecting a business continuity. • critical processes in the event of a disruption • 1. Identifies and prioritizes your supply chain process and • determines RTO.

22. Risk Assessment and Evaluation: Loss of 10% if supply disruption lasts over 3 weeks Many competitors with no quality differences who can supply to our customers 10,000 Per day 0.25 2.50 NO Serious

23. Points to begin Planning: • What are our suppliers doing to support our disruption? • How are they affected by a geographic disruption. • The supply chain complexity brought about by global sourcing can also • complicate and delay recovery efforts as, for example communications • delays can result from time zone differences, language, • transportation stoppage or cultural barriers. • Planning for continuity in the supply chain will ultimately involve • working collaboratively with suppliers and other key business partners. • Plan for our own recovery and resiliency.Resiliency is the Key! • One must ask themselves: • Is my sourcing strategy a fit for my business continuity requirements? • What are my key suppliers doing abut business continuity? • Can we survive a crisis together?

24. Integrated Logistics & Supply Chain Management Activities Procurement & Strategic Sourcing Transportation Management These departments are where you can be impacted! Inventory Planning & Management Physical Distribution Customer Service & Support

25. How can a BIA help to manage your Supply Chain? • Identify and assess the impacts on the business caused by disruptions. • Identify recovery requirements – Networked technologies that allow continued operations through redundant communications systems. • Identify interdependencies. (mapping & strategy) • Prioritize the order in which business units will need to recover. • Identify staffing ramp-up during recovery. • Identify business unit work-arounds while in recovery mode. • Once these items have been identified, work with your suppliers to educate, then strategize a recovery together.

26. Develop BIA with your Critical Suppliers: • Understand which business processes are tied to profit, image and continuity of business. • Understand which applications are needed to support vital business processes and customer service. • Understand which resources, suppliers, vendors and staff are most critical to your business continuity, as well as those who support those processes and applications. • Are the single source suppliers? • Dependency Relationship with high Risk Supplier? • How are we impacted if one fails?

27. Evaluate the types of supplier relationships exist • High dependency – high availability: utilities, generic components • High dependency – low availability: highly specialized product • components • Mid dependency – high availability: generic IT equipment – monitors • Mid dependency – low availability: specialized IT equipment – • scanners • Low dependency – high availability: consumables – paper • Low dependency – low availability: redundant design furniture. • Business Continuity solutions should be focused on strategically significant supplier dependencies enhanced through risk assessment and a business impact analysis.

28. Major Factors of a Good Supply Chain Business Continuity Plan: • Awareness that the supply chain is susceptible to potentially crippling disruption; • Prevention through risk identification, risk assessment, risk treatment and risk monitoring; • Remediation plans for recovery from a disruption; • Knowledge management calls for a shareable, post-event audit of supply chain disruptions throughout the organization and supply chain.

29. Major Factors of a Good Supply Chain Business Continuity Plan: • Networked technologies that allow for continued operations through redundant communications systems. • A highly mobile, global, collaborative workforce; access to relevant data anytime and anywhere; real-time data and decision support, visibility, velocity and flexibility across the value chain, shared solutions, process and assets. • Each of these capabilities relies on an intelligent collaboration and communications platform.

31. Preparation is Key: • Prepared Responses let you react only when you have to • Business & Supply Chain Scenario Planning & Development • Basic Supply Chain capabilities and enablement • Visibility & Event Management…, the key to staying ahead • Review situational changes in your organizations risks and • vulnerabilities, analyze how your current plans stack up against • them. • Be aware of Critical Suppliers who can no longer meet SLA’s, or • meet your recovery needs

32. Last Thought There are no secrets to success. It is the result of preparation, hard work, and learning from failure.” Colin Powell (Chairman of the US Joint Chiefs of Staff (1989-93 • Mark Twain once said: "The secret of success is honesty and fair dealing. If you can fake these, you've got it made." Lori C. Adamo – ladamo@coderedbcs.com Michael Gravier – mgravier@bryant.edu Thank you!