Planning for Supply Chain Disruptions

Yossi SheffiMIT, Cambridge MA

December 5th, 2002

Outline

The threatPast disastersSupply chain preparednesspreliminary research findings

Terror Threats:

Physical

Chemical/biological

Nuclear/”dirty”

Cyber attack

The Economic Targets: Infrastructure

Agriculture Tourism Transportation Electric grid Banking & finance systems Oil and gas Communications Continuity of government Medical services delivery Water supply Food supply

Learn From Past DisastersKobe Earthquake -- Jan 16 1995, >6,300 killed, 100K buildings destroyed, 80K damaged. Total damage: ~$250B

Bhopal -- Dec 2nd, 1984, Union carbide factory, 2500 dead, 50,000 hospitalized.

Chernobyl – April 26, 1986, 15M people affected, Belarus still affected

Learn From Past DisastersInfluenza 1918 – 675,000 dead in the US alone; Started in army barracks and prisons in the US; 30 – 50 million worldwide (“the Spanish Flu…”)

The Mont Blanc -- Dec. 6, 1917 the Mont Blanc explodes in Halifax port (400,000 lbs. Of TNT, 2,300 ton of Citric Acid, 10 tons of gun cotton, 35 tons of Benzol). 2500 dead; 9,000 injured; shock wave felt in Cape Bretton (270 miles away).

Foot and Mouth Disease (FMD) and Mad Cow Disease – UK, 2001, quarantines and slaughter of suspected animals; $3B - $5B hit.

Danger – Government ResponseOn 9/11:

Ford idled several production lines intermittently due to delays at the Canadian border

Toyota came within hours of halting production since a supplier was waiting for steering wheels shipped by air from Germany

After Flight 587 crashed, Nov. 12, 2001 Bridges to NY were closed for several hours

In UK FMD – Farmers’ costs <$1B Tourism costs (after the government issued a ban) $2B -

$4B

Japanese government bankrupted many private hospitals in the Kobe area

Preparing for Another Disruption

Supplier relationships Core suppliers vs. public auctions Use of off-shore suppliers Dual supply relationships

Inventory management The vulnerability of JIT manufacturing Advantages of JIT manufacturing Strategic Inventory (SoSo management)

Knowledge backup Developing backup processes Backing up the company’s knowledge Standardization and cross-training CRM and customer relationships

Supply Chains under Uncertainty

Better visibility Transportation visibility involves multiple handoffs Need for full supply chain visibility, including detailed handling Independent data acquisition sources

Better collaboration Last decade: VMI, CMI, EDR, QR, JIT, JIT II, CPD, CPFR… Now:

implementation New: joint emergency planning (alternate shipping methods; alternate

suppliers…) Also: security knowledge sharing

Better forecasting Postponement Build-to-order Product variability reductions Centralized inventory management

Industry-Government partnerships

Clear role for cooperation – happening already Industry participation in Free and Secure

Trade (FAST) and Customs Trade Partnership Against Terrorism (C-TPAT)

“Known shipper” and “known carrier” programs

Difficult to get terrorism insurance – role of government as insurer of last resortInsurance companies are only starting to model terrorism threats.

Efficiency vs. redundancy (who pays for cells, electricity, medicines, etc.)Collaboration Vs. Secrecy (example: hazmat placards)Centralization vs. dispersion (physical vs. I/T attack)Lowest bidder vs. known supplier (what’s in the container…)Security vs. privacy (vs. efficiency of search)

New Business Trade-offs:

When Disaster StrikesCrisis Impact Prepared

ManagementUnprepared management

Hurricane Mitch(Nov. 1998)

Floods destroyed banana plantations

Chiquita leveraged existing alternative sources

Dole took time to find alternatives and lost sales and

Taiwan Earthquake(Sep. 21 1999)

Component supplies to PC OEMs disrupted

Dell priced to steer customers to available components

Apple could not change config.- faced backlogs and lost sales

Mad Cow & FMD(Spring 2001)

Shortage of hides for leather manufacturers

Gucci, Wilson – supply contracts; Naturalizer, Danier - inventories

Etienne-Agner suffered cost increases

9/11 Closed borders Daimler-Chrysler Alt. modes based on contingency plans

Ford idled several plants

Preliminary Research DataTwo responses: active and “do nothing”Active: Past bad experience Corporate culture (defense business, work in

dangerous places around the world, etc.) Security departments staffed with experience

“Do nothing”: Believe 9/11 is a one-time event Cannot find a way to pay Believe government will help

All companies – most concerned about government response to terrorist attacksAll companies – report a large increase in cyber attacks

Preliminary Research Data(Active Respondent)

Build redundanciesTighten collaboration with partnersWork with government to understand and influence security initiativesLook for technology to help (RFID, GPS, e-cargo seals, biometrics, sensors, etc.)Education Awareness Contingency planning (including drills with

supply chain partners)

Summary

A long term adjustmentIn past incidents: the economic impact was a lot less than initially feared“collateral benefits” of preparedness: Better collaboration Better supply chain operations Better controls (less theft, IP loss, better

standards) Participation in communities

Any Questions?? ??

Yossi SheffiSHEFFI@MIT.EDU

?

?