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MIT CenterforTransportation&Logistics

Supply Chain Risk Management

Shell Chemicals Best-in-Class SC1xNovember 16-17, 2016

Rotterdam, The Netherlands

Agenda• ManagingUncertainty….à DealingwithDisruptions• DisruptionsàManagingRisks• ManagingRiskà ResilienceandPrevention• KeyResilienceSuccessFactors• AddingResiliencetoSupplyChains....

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The“BullwhipEffect”&ManagingUncertainty

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STRUCTURAL PROBLEMS:Information lagsDelivery lagsIndependent forecastingOrder batching Price fluctuationsInconsistent incentives- Gaming allocationsPromotions/discounting

Customer Retailer Distributor Factory Tier 1 Supplier Equipment

SOLUTION STRATEGIES:• Reduce Uncertainty

• Reduce Variability

• Reduce Lead time

• Improve Channel Mgt

• Align policies, incentives, KPIs

Butdailyvariationisdifferentthandisruption

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• BuildingCollapse,Rana PlazaBangladesh,2013

• ThaiFloods2013• HurricaneSandy2012• EuropeFinancialCrisis2012• ThaiFloods2011• JapanQuake/Tsunami2011• HaitiEarthquake2010• GulfOilSpill2010• IcelandVolcano2010• RussianWildfires2010• GlobalFinancialCrisis2008+• BeijingOlympicsSummer2008

6Ref: Source material from “The Japan Disaster: Rebuilding Supply Chains” webinar for Journal of Commerce, by B. Artnzen and J. Rice, March 24, 2011; and Resilinc Event Watch Annual Report 2014, March 2015 available at https://www.resilinc.com/products/eventwatch-2014-annual-report/

• AvianBirdFluOutbreak(US),April2015

• GEApplianceWhse Fire,April2015• WestCoastUSPortCongestion&Labor

Action,2014-2015• TyphoonHalong,SEAsia,Aug2014

($10Brevenue&41weekimpact)• Severeflooding,NYUSA,2014($4B

revenue&38weekimpact)• TyphoonRammsun,SEAsia,July2014,

($1.5Brev&38weekimpact)• Gasexplosions,Kaoshing,Taiwan,2014

($900Mrev&26weekimpact)• Hazmatspill,ArizonaUS,2014($900M

revenue&10weekimpact)

Howdidtheseaffectyoursupplychain?

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HighImpactofSupplyChainFailures

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• JapanEarthquake/Tsunami/NuclearMeltdown2011:$Bs+

• PhilipsFire2000– NokiavsEricsson,Ericssonloses$400m

• WestCoastLockout2002,$~20Beconomicloss

• Boeing787OutsourcedSC2007-8,2-yrdelay,$2Bcharges

• MattelProductQualityRecall,2007,50%stockpricedrop

• HersheyHalloweenMiss(IT),1999,$150Mloss,-30%stock

• NikeITsystemfailure,$100Mrevenuedrop,-20%stock

• P&GFolgers(HurricaneKatrina)• GM(tornadoatOklahomaCity)• LandRover/UPFThompsonframe

supplierbankruptcy• Toyota(Aisin)brakeplantfire1997• Toyotadefectivegaspedals,$1.2B

settlementandequity/shareloss• Andmanyothers…….LA/LBport

disruption/congestion2014-2015,HurricaneRita,London-Madrid-Bombayterroristattacks,laboractions/strikes,SARS,H1NI,HiN5,Somalipirates….

EffectofSupplyChainProblems

Source: Hendricks & Singhal, “Association Between Supply Chain Glitches and Operating Performance”

Adapted from Y. Sheffi, June ’10 MIT Executive Education Program

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SARS

Toyota Brake Plant Fire

1997

UPS Labor Strike

1998

Sept. 11 Terrorist Attacks

GM Labor Strike

Taiwan Earthquake

1999 2000 2001 2002 2003

Philips Plant Fire

West Coast Ports Lockout

Iraq War

Scandals: Enron, Andersen, Worldcom

Firestone-FordTire Recall

Blackouts US - EU

FMD in UK

Ref: Adapted from Dr. Debra Elkins, General Motors

Quebec Ice Storm

2004 2005

Nor’Easter

Tsunami

London Madrid Attacks

Katrina

GM-Ok. tornado

ATen-YearLookatHighConsequence-LowProbabilityDisruptions

2006 2007 2008

Global Financial Crisis

Tornadoes, Pirates, Wash. storms, bridge collapse

SupplyChainRiskManagement

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SupplyChainRiskLeadershipCouncil(SCRLC)

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An industry council comprised of world class supply chain firms working together to develop and share supply chain risk management standards and best practices

www.scrlc.com

RiskManagementFramework&ISO31000

1. Vulnerabilityassessment

2. OngoingMonitoring&Measurement

3. CrisisManagement&EmergencyResponse

4. Mitigationplanning&implementation(resilience)

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ESTABLISH THE CONTEXT

RISK IDENTIFICATION

RISK ANALYSIS

RISK EVALUATION

RISK TREATMENT

CO

MM

UN

ICA

TIO

NA

ND

CO

NSU

LTA

TIO

N

MO

NIT

OR

ING

AN

DR

EVIE

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ISO 31000:2009RISK MANAGEMENT – PRINCIPLES AND GUIDELINES

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ReduceVulnerabilitytoDisruption

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1. Reduce probability of disruption: increase security, prevention

2. Reduce consequences of disruption: increase resilience

Ref. – Sheffi, Rice, Supply Chain View of the Resilient Enterprise, SMR 2005

Actions

• Identifyoptionsforreducingprobabilities&consequences– Identifycompanyriskprofile– Chooserightmixofeachforthebusiness– PreventionorResponse?Howmuchofeach?

• ReduceProbabilityà SecurityandPrevention

• ReduceConsequencesà ResponseandResilience

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SupplyChainResilience• Inmaterialscience,resilienceisthephysicalpropertyofa

materialthatcanreturntoitsoriginalshapeorpositionafteradeformationthatdoesnotexceeditselasticlimit.

• Today,resilienceiswidelyusedtocharacterizeanorganization’sabilitytoreacttoadisruption(e.g.onecausedbyanaturaldisaster)andrestorenormaloperations.

• It’stheabilitytorecreatesupplychaincapabilities,to‘bounceback’fromvariationsanddisruptions*

• “Wedefineresilienceas‘theabilityofasystemtoreturntoitsoriginalstateormovetoanew,moredesirablestateafterbeingdisturbed’.”

• Howhasyoursupplychainbeenresilient?Ornot?

15*Source: “Building a Secure and Resilient Supply Network” by J. Rice, F. Caniato, SCMR Sept-Oct 2003** Source: Christopher, Peck, at https://dspace.lib.cranfield.ac.uk/bitstream/1826/2666/3/Building_the_resilient_supply_chain-2003.pdf

DesignforFlexibilityandRedundancy• Flexibility:priorinvestmentsincapabilities&options

• Workforcetrainedtoperformmultipletasks• Productsdesignedtobeeasilyreconfiguredbasedonmaterialandsupplierselection

• Productionassetsdesignedtobereconfiguredtoaccommodatevariabilityindemand

• Providesbenefitdealingwithdailyvariations

• Redundancy:priorinvestmentsinassets• Inventorymaintainedthroughoutthesupplychain,atsuppliers,internally,finishedgoodsinventory

• Additionalproductioncapacitymaintainedbeyondneedstoserveknowncustomerneeds

• Onlyprovidesbenefitwhenassetsareused

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KeySuccessFactors• FailureModeAnalysis(Outcomes)– failsmartly

17Sources: “SC Response Project Interim Report” by J. Rice, F. Caniato, Aug 8, 2003; Draft of SC Response Book project, Oct. 2004

SupplyChainFailureModes/OutcomesAlldisruptionsresultinalossofoneormoreofthesecapacities:

- Capacitytoacquirematerials(supply)- Capacitytoship/transport- Capacitytocommunicate- Capacitytoconvert(internaloperations)- Humanresources(personnel)- Financialflows

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KnownRisks– EnterpriseVulnerability

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Loss of Key Personnel

Restriction of Access / Egress

3PL Failures

Dealer Distribution Network Failures

Computer Virus / DOS Attacks

IT System Failures: Hware, Sware, LAN, WAN Service Provider

Failures

Harassment & Discrimination

Loss of Key Equipt

Tier 1, 2, 3, …nSupplier Problems

Warranty / Product Recall Campaigns

Logistics RouteDisruptions

KidnappingExtortionVandalism

Arson

HR: Skill Shortage, Turnover

Loss of Key Supplier

Accounting or Internal Controls Failures

Embezzlement

Gov’t Inquiries

Theft

Operator Errors / Accidental Damage

Workplace Violence

Health & Safety Violations

Utilities Failures: Comms, Electricity, Water, Power

Revenue Management

Equip., Facilities, Business Acquisitions & Divestitures

Asset ValuationLiquidity / Cash

Debt & Credit Rating

Fuel PricesInterest Rate Fluctuations

Currency & Foreign Exchange Rate Fluctuations

Accounting / Tax Law Changes

Economic Recession

Currency Inconvertibility

Credit Default

Uncompetitive Cost Structure

Financial Markets Instability Inadequate /

Inaccurate Financial Controls & Reporting

Health Care & Pension Costs

Shareholder Activism

Adverse Changes in Industry Regulations

Adverse Changes in Environmental Regulations

Boiler or Machinery Explosion

Property Damage

Bldg. or Equip Fire

Building Collapse

Asbestos Exposure

Mold Exposure

Cargo Losses

Land, Water, Atmospheric Pollution

Geopolitical RisksSevere Hot / Cold Weather

Disease / Epidemic

Animal / Insect Infestation

Blizzard / Ice Storms Hail Damage

Lightning Strikes

EarthquakeFlooding

Wildfire

Hurricane / Typhoon

Heavy Rain / Thunderstorms

Tsunami

Volcano Eruption

Wind Damage

3rd Party Liability

General Liability

Product Liability

Directors & Officers Liability

Workers Compensation

Deductible Limits

Terrorism / Sabotage

Tornados

Loss of Key Facility

Customer Relations

Corporate Culture

Cost Overruns

“Gotta-have” products

Attacks on Brand Loyalty

Public Boycott & Condemnation

New or Foreign Competitors

Market Share Battles

Joint Venture / Alliance

Relations

Price Wars

Ineffective Planning

Union Relations, Labor Actions

Demand Seasonality & Variability

M&A Industry Consolidation

Perceived Quality

Inadequate MgtOversight

Negative Media Coverage

Product Design & Engineering

NPI

Dealer Relations

Technology Decisions

Product Dev Process

Supplier Relations

Foreign Market Protectionism

Ethics Violations

Offensive Advertising

Loss of IntellProperty

Enterprise Vulnerability

Financial Risk

Hazard Risk

Strategic Risk

Operations Risk

IT System Failures (Hardware, Software, LAN, WAN)

Harassment & Discrimination

Warranty / Product Recall Campaigns

Extortion

Info. Mgmt. Problems

Loss of Key Supplier

Accounting or Internal Controls Failures

Fuel PricesInterest Rate Fluctuations

Accounting / Tax Law Changes

Economic Recession

Credit Default

Uncompetitive Cost Structure

Adverse Changes in Industry Regulations

Property Damage

Bldg. or Equip. Fire

Mold ExposureCargo Losses

EarthquakeFlooding

Wind Damage

Deductible Limits

Customer Relations

Pricing & Incentive Wars

Customer Demand Seasonality & Variability

Mergers & Industry Consolidation

Product Design & Engineering

Dealer Relations

Technology Decisions

Product Development Process

Foreign Market Protectionism

Ethics Violations

Loss of Intel. Property

Fuel Prices

Economic Recession Health Care

Costs

Bldg Fire

Credit Default

Liquidity/Cash

Facility Loss

Product Liability

Cargo Losses

EarthquakeWildfire

Epidemic Tornados

Ice Storm

Tax Law Changes

TheftUtility failure

Key Supplier

Loss

Logistics Route Failure

IT Failure

Personnel Loss

Health & Safety Violations

Workplace ViolenceDenial of Service Attack

New CompetitionNegative

Media

M&A/Industry Consolidation

Foreign MktProtectionism

Labor RelationsPerceived Quality

Technology Choices

Mkt ShareBattles

Ethics Violation

Loss of IP

Interest Rate Fluctuations

Ref: Dr. Debra Elkins, General Motors

KeySuccessFactors• FailureModeAnalysis(Outcomes)– failsmartly• BusinessContinuityPlanning– systemdesign,plantoreconstitute

• Responseplanning– developresponseplaybooks,CERTteams

• Riskassessment– Impactanalysis,maturityassessment• Manypathstoflexibility• Makingtheresilienceinvestment:QuantifyingResilience

– Costtomitigate,costtorecover,value-at-risk,effectivenessofrecoveryoptions,probabilityofdisruption

20Sources: “SC Response Project Interim Report” by J. Rice, F. Caniato, Aug 8, 2003; Draft of SC Response Book project, Oct. 2004

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ManyPathstoFlexibility• Interchangeability

• Usestandardizedfacilities,parts,processes• Intel,Lucent/Alcatel,Southwest,Helix,UPS

• Postponement• Delaycustomizationofproduct

• Benetton,H-P,Sherwin-Williams• Supply

• Structurecontract&relationshipswithsuppliersforresponse• Jabil,Lucent,Toyota

• Distribution• Usedistributionsystemfordownstreamoptions

• Caterpillar,Dell• Flexibilityculture

• Educateforriskawareness,tradeoffs,trainforresponse• Nokia,Intel

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Afewexamplesofflexibility….

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• Autopartsupplier:Fireburnedfacilities,data– Standardproductionprocess,suppliers provide‘lost’info

• CantorFitzgerald:Losttraders,customerinfo– Recaptured50%oftradesusingCRMforinfo

• Intel– Interchangeableplants via“CopyExact!”,EarthquakesBCP

• UPS– Standardizedprocesses enableworkforceflexibility

• LucentTechnologies– Interchangeableparts,standardmodels,concurrentSC

• Reebok– Postpone customizationofNFLjerseys

• HelixTechnology– Simplifiedproductionsosupplierproducesinemergency

• JabilCircuits– Buildsflexibilityintostandardcontracts,100%in4weeks

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Afewexamplesofusingredundancy….

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• MorganStanley– RedundantITsystem,restarted9-12-01– Redundancyaddedafter’93attackonWorldTradeCenter

• USPS:Anthrax– Usedexcesscapacity toshiftprocessingtoothersites

• BostonScientific– Financialanalysisindicatedcashflowcrunch– Setupredundantproductionfacility,staff – ready&waiting

• USGovernment&J&J– Maintainstock ofmedicalsupplies,rollinginventory

Vendors PlantsPartWarehouses

RetailOutlets

DistributionCenters

Adding Resilience to a Supply Chain

How would you add resilience to this supply chain?

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Vendors PlantsPartWarehouses

RetailOutlets

DistributionCenters

Adding Resilience to a Supply Chain

Options include…..- Redesign entire SC for resilience (streamline)- Adding back up supplier- Adding additional inventory- Add additional facility- Choices on response time - Buying options for additional capacity in your network….

Break

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