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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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