Managing Sourcing Risks Dirk De Waart Management Consultants

Managing Sourcing Risks Dirk De Waart Management Consultants Where Innovation Operates

Agenda PRTM Introduction Supply Chain Risk A New Model For Managing Sourcing Risks Case Study SCRLC October 2008 | © 2008 PRTM Proprietary |2

PRTM Introduction Management Consultants Where Innovation Operates

Our Focus: Defining and Implementing Operational Strategy PRTM is the premier operational strategy consulting firm § We help clients envision and design more effective operations § Our specialty is implementing changes to affect measurable results Operational Innovation Game-Changing Ways to Win Business Strategy Operational Execution Where and Why We’ll Win How We’ll Win Executing to Win We focus on the critical link between business strategy and execution § Operational strategy orients your business and economics for competitive advantage § We help you establish a winning operational strategy…and realize it SCRLC October 2008 | © 2008 PRTM Proprietary |4

PRTM Global Experience § 31 years of operational strategy and innovation § More than 600 consultants worldwide Aerospace and Defense § 17 offices worldwide Automotive § Over 1, 200 clients and 6, 000 projects Chemicals and Process Industries § 90% level of repeat business Consumer Goods § Major commercial sectors: Electronics and Computing Bangalore Boston Chicago Dallas Detroit Dubai Frankfurt Glasgow London Munich New York Orange County Paris Shanghai Silicon Valley Tokyo Washington, D. C. Energy Government and Public Sector Industrial Goods Life Sciences and Healthcare Semiconductors Software Telecommunications SCRLC October 2008 | © 2008 PRTM Proprietary |5

Sourcing Risks Defined Management Consultants Where Innovation Operates

We Are Seeing Increased Emphasis On Supply Chain Risks have increased …. • Number of natural disasters has tripled since 1970 • Man-made disasters have increased by 50% over the same period … while at the same time the vulnerability to these risks has grown § Outsourcing and off shoring have increased sourcing and distribution risks § Lean and JIT have taken away traditional buffers against supply chain risk § Supplier reduction waves have increased exposure to single source suppliers SCRLC October 2008 | © 2008 PRTM Proprietary |7

Supply Chain Disruptions Can Have Significant Impact Statistics show that a crisis will hit large companies every 4 -5 years and 73% of companies that suffer a disruption of 10 or more days will shut down or experience considerable, long term effects Source: Crisis Management International Unprepared companies can be significantly impacted by these events…. A lightning strike at an Ericsson supplier’s plant disrupted production for three weeks and significantly impacted process yield. Ericsson lost $400 M as a result and eventually withdrew from the mobile phone business A fire in one of Toyota’s suppliers’ plants shut down production for 5 days. Costs related to disruption: $195 M After Hurricane Mitch hit Central America, Dole had no alternative sources and suffered a $100 M loss … and there are many more undocumented cases! SCRLC October 2008 | © 2008 PRTM Proprietary |8

Sourcing Risk Is An Important Type Of Supply Chain Risk Planning risk (e. g. unplanned demand) Logistics risk (e. g. port shut down) Plan Sourcing risk (e. g. supplier shutdown) Deliver Return Suppliers’ Supplier Source Make Return Deliver Return Supplier Internal or External SCRLC October 2008 Source Make Return Deliver Return Your Company Manufacturing risk (e. g. factory shutdown or labor strike) | © 2008 PRTM Proprietary Source Return Make Deliver Source Return Customer’s Customer Internal or External |9

A New Model For Managing Sourcing Risks Management Consultants Where Innovation Operates

Common Models For Managing Sourcing Risk Are Inadequate Current models for sourcing risk management are either too simplistic (relying on expert opinions) …. . Impact H M L L M H Risk SCRLC October 2008 | © 2008 PRTM Proprietary | 11

Common Models For Managing Sourcing Risk Are Inadequate …. or unrealistic Suppliers’ Suppliers Etc. SCRLC October 2008 | © 2008 PRTM Proprietary Processes Etc. | 12

Common Models For Managing Sourcing Risk Are Inadequate We developed a new model that is flexible, scaleable, and easy to implement S M A R T Specific Be specific about what contributes sourcing risks in the company and identify the unique risk and impact attributes Measurable Quantify the risks and their potential impact on the business Actionable Move from studying risks to mitigating them. Pinpoint the risks that will have the most severe impact on the business and define initiatives to mitigate them. Realistic Understand what resources are required to mitigate risk and prioritize the initiatives to address resource constraints. Time Phased Develop actionable implementation plans with clear roles and responsibilities SCRLC October 2008 | © 2008 PRTM Proprietary | 13

Case Study Management Consultants Where Innovation Operates

Started With Defining Risk Attributes Specific In defining risk management for sourcing, the “object” is the material sourced and supplier from which the material is sourced § 1, 500 part numbers sourced § 200 suppliers The “attributes” determine the risk and impact of the risk on each object relative to other objects § Measurable elements that contributes to the magnitude of the risk and impact SCRLC October 2008 | © 2008 PRTM Proprietary | 15

Started With Defining Risk Attributes Specific Example Supplier, Materials, and Impact attributes: Supplier specific risk attributes • Financial health • Delivery performance • Dependency • Physical location For example: Financial health Low risk: QR > 1 High risk: QR < 1 (industry specific) SCRLC October 2008 Materials specific risk attributes Impact specific attributes • Sole/single/multi sourced • Lead time • Available alternatives • New supplier ramp up time • Inventory • Supply governance • Demand increase • Shelf life / storage constraints • Supplier’s sole sourced For example: Sole/single/multi sourced Low risk: Multi sourced High risk: Sole sourced | © 2008 PRTM Proprietary • Where used (product & process) For example: Where used by product Low risk: Used in one product High risk: Used in all products | 16

Defined Approach To Measure Each Attribute Risk Attribute Measurable Measure Number of suppliers by material Sole/single/multi source Input from commodity managers Demand increase Forecast / usage Financial health Quick Ratio Supplier dependency Spend / Supplier Revenue Etc. SCRLC October 2008 | © 2008 PRTM Proprietary | 17

Developed Scoring Method Measurable Min score Max Score Material specific risk attributes • Sole/single/multi sourced • Demand increase • Shelf life / storage constraints • Supplier’s sole sourced 0 0 Maximum risk score: Impact specific attributes • Where used (product & process) • Lead time • Available alternatives • New supplier ramp up time • Inventory • Supply governance 200 100 50 200 550 Min score Max Score 0 0 0 100 100 100 50 Maximum impact score: 550 SCRLC October 2008 | © 2008 PRTM Proprietary | 18

Measured Risk and Impact For Each Material Measurable High Risk/Impact “Isobar” RISK HIGH PRIORITY MATERIALS (15% of PART NUMBERS) Sole sourced material Low High IMPACT SCRLC October 2008 | © 2008 PRTM Proprietary | 19

Case In Point… Measurable • Sole sourced material • Supplier with quality and delivery problems • Used in 80% of products SCRLC October 2008 | © 2008 PRTM Proprietary | 20

Determined Risk Profile By Commodity Actionable Risk Profile: • Single sourced • Long lead time • Long ramp up time SCRLC October 2008 | © 2008 PRTM Proprietary | 21

Identified Risk Mitigation Strategies Actionable Risk drivers (e. g. poor supplier performance) Risk mitigation levers (e. g. qualify additional supplier) SCRLC October 2008 | © 2008 PRTM Proprietary | 22

Selected Appropriate Mitigation Levers For Each High Risk Material Actionable In some cases, a combination of levers was required (e. g. build inventory for period of qualifying additional supplier) Risk Factors Mitigation Strategy • Sole sourced • Shelf life and storage constraints • Long ramp up time of alternatives • Increase site and supplier stock • Qualify additional supplier • Supplier Management SCRLC October 2008 | © 2008 PRTM Proprietary | 23

Next We Identified Resource Requirements Identified resources required for mitigation initiatives Estimated workload per task and resource SCRLC October 2008 | © 2008 PRTM Proprietary Identified constraints Realistic Reviewed with functional stakeholders | 24

And Finally Defined And Kicked-Off Specific Initiatives With Approved Resources Time Phased Priorities were determined based on three factors: § Return on risk investment – investment required to move risk/impact “isobar” § Resource constraints § Judgment from senior management team SCRLC October 2008 | © 2008 PRTM Proprietary | 25

Lessons Learned Executive sponsorship is critical Risks can be quantified but requires lots of data Focus on few high priority areas for risk mitigation Risk mitigation is cross-functional and requires broad support Continue to monitor risk on regular basis and track progress Balance complexity with risk SCRLC October 2008 | © 2008 PRTM Proprietary | 26

Thank You! ddewaart@prtm. com SCRLC October 2008 | © 2008 PRTM Proprietary | 27