Supply Chain Risk Presented by Adam Voak

Supply Chain Risk Presented by: Adam Voak

It’s a big World • Australia is not in the centre of the “action” (“the tyranny of distance”). • What are the only two ways something physical gets into or out of Australia?

Drop in the Bucket?

Change • Any change, regardless of scale, carries with it the potential for disruptive and / or systematic risk • Whether anticipated: eg. Migration to an Enterprise Resource Planning Platform or • Unanticipated: eg. a pandemic or volcano

Atomic Energy Canada Ltd • May 2009 Atomic Energy Canada scheduled shut down NRU reactor in Chalk River, Ontario • Supposed to take 5 days • Medical isotopes produced – represented 50% of global production • Critical element in the North American healthcare supply chain

Atomic Energy Canada Ltd • It is the only source of base isotope for technetium-99 • Injected into patients in the USA alone 20 million times a year – used in treating a diagnosing heart conditions and certain types of cancer • Routine shutdown of 5 days turned into an unscheduled 60 days

2007 – 6. 8 Magnitude - Japan

2007 – 6. 8 Magnitude - Japan • Riken Corp manufacturing plant in Niigata Prefecture • Machinery displaced by the quake • Inability to produce 1 discrete low value part • $1. 50 piston ring but used in nearly half of Japan’s automobile supply chain.

2007 – 6. 8 Magnitude - Japan • Juts in time manufacturing and lean supply chains all but eliminated inventory that used to be held as a buffer • Delayed production of more than 55, 000 Toyota vehicles and • Slowdown or shutdown of 70% of Japan’s auto production assembly Honda, Nissan, Mitsubishi, Mazda, Suzuki and Fuji heavy industries

Some Definitions • Transport • Logistics • Supply Chain

What is Transport? Point B Point A The physical movement of goods

What is Logistics? Point of Consumption Point of Origin Systematic organisation of goods and /or services

What is Supply Chain? Supply Demand The interdependence and organisation of supply and demand, including raw product forecasting and asset investment

What Makes A Supply Chain? Systems Thinking Labour Oil and alternative energy Transport Logistics Finance Business Processes Transaction Systems Supply Information Technology Procurement /Purchasing Sourcing Supply Chain Management Commercial Power Legal and Regulatory Systems People /Relationship/ Resistance to Change Strategic Asset and Investment Global, Political Economy Demand

Competition • Companies don’t compete. . supply chains compete • Excelling in supply chains can make a good company great

A Supply Chain?

The Supply Chain? Raw Materials Suppliers Distributors Consumers Manufacturers Wholesalers Products / Services Information Finances Retailers / Customers

Supply Chains are Ecosystems

Conflicting Converging Agendas • • • Business goals and risk return Increased competitive pressures Escalating customer service demands Rising complexity Accelerating costs

Supply Chains are all about Relationships

Buyer Seller Asymmetry

Opportunism

The Lemon Phenomenon

The Moral Hazard • Eg. Careless handling of goods in transit • Warehouse burned or looted by its owner to collect insurance • In essence supplier poor quality can impact on you! • Need information – which prevents faulty operations and services; needed for in-process services and operations and the inducement of collaborative exchange

Signalling and Screening • In conditions of information asymmetry – how to get closer to transparency?

Iceberg Right Ahead!

Some risks just not seen?

or are they?

Supply Chain Complexity

Supply Chain Risk Management • Still an art, not a science • Requirements to drive to SCRM performance are coming from everywhere • No industry is immune to the SCRM Imperative

Irrationality, Inconsistency & Incompetence “The evidence. . . reveals repeated patterns of irrationality, inconsistency and incompetence in the ways human beings arrive at decisions and choices when faced with uncertainty. ” -Peter L. Bernstein, “Against the Gods – The Remarkable Story of Risk”

Why Supply Chain Risk? • Typically 60 -85% of the product cost is embedded in the supply chain – Supply chains are global, serving multiple customers – Supply disruptions have a greater impact on final production • Lean practices, reduced inventories, outsourcing, and chaotic demand can increase the “brittleness” of the supply chain to surge and disruption • Insuring against supply chain risk has become too expensive

Why Supply Chain Risk • To uncover, prioritise, measure, treat (mitigate and finance) and monitor the risk of Single Points of Failure in the supply chain; and • Diminish the impact of an event through comprehensive and efficient resiliency practices

Types of Supply Chain Risks • Internal or External to the local firm • Internal or External to the supply chain

Supply Chain Risk Sources • Organizational risk • Network risk • Environmental risk

What are the Risks in Supply? Disruptions/Disasters Delays IT System Failures Transportation and Infrastructure • International Trade and Transportation • Supplier Health • • • Production or Quality Problems • Capacity • Forecast Errors/ Surge • Procurement • Inventory • Loss of Intellectual Property 37

Some Recent Events • • • Pirates off the coast of Somalia Chile Volcano 2011 Poor Software Implementation Nike’s Child Labor Issue Hurricane Katrina Why Important Now? ? ?

Surprised Prepared • Insurance companies and actuaries can tell you the risk associated with most “disaster” events – E. g. , fires, earthquakes – Sometimes you can buy insurance to protect you financially • Insurance premiums will reward those with low risk positions – Today, most companies can’t buy significant amounts of disruption insurance • Corporate governance reforms are putting a lot of emphasis on risk management.

Supply Chain Risk Management Strategies Avoidance • Exiting a market (or product) or delay entering a market (or product) • Postponement - delay commitment of resources to maintain utmost flexibility • Speculation - assuming risk to gain competitive advantage • Hedging - globally dispersing your portfolio of suppliers, customers and facilities

Supply Chain Risk Management Strategies Control • Vertical and lateral integration of suppliers and business partners • Transferring/sharing risk - outsourcing, offshoring, contracting • Security - identifying and protecting against unwanted penetration

Building Robust Supply Chains • Robust: 3 conditions for robustness: – Resilience – Reconfigurable – Recovery • Resilience: the supply chain suffers minor disruption and remains unaffected for the most part. This was no surprise at all! • Reconfigurable: the disruption is more severe but mitigation plans have been formulated and response time is immediate. This was a foreseeable surprise! • Recovery: in case of failure, plans have been made for crisis management and path to recovery. This could be the unforeseeable, but time to recovery is minimized! 42

Kidney Failure and Supply Chain Risk • A drop in the bucket can create global waves? • Nearly 300, 000 people, mostly children sick from acute kidney failure • The result of chemicals added to raw milk and animal feed • Magnitude of this drop unanticipated by the food industry not previously experienced

Kidney Failure and Supply Chain Risk

Kidney Failure and Supply Chain Risk • Second half of 2008 • Most likely caused by the addition of melamine – an industrial chemical to milk supplies in China • When it was over 21 companies in the supply chain were implicated and found guilty of these tragic events

Kidney Failure and Supply Chain Risk • The immense ripple effect: – Many countries banned Chinese dairy products; – 2 million Chinese farmers unable to sell their dairy products – Chinese authorities 2, 176 tons of milk powder in a warehouse owned by San Lu, the primary culprit – 9, 000 additional tons were recalled

Kidney Failure and Supply Chain Risk • You would probably think that this a Chinese matter? • Fonterra one of the worlds leading dairy suppliers owned 43% of San Lu • Fonterra wrote off 107 million of its initial 2005 investment • Fonterra’s later impairment charges 139 million including product recall costs, liability claims and impairment of the San Lu brand.

Kidney Failure and Supply Chain Risk On September 27, 2008 San Lu Declared Bankruptcy

Kidney Failure and Supply Chain Risk • Mistakes – Fonterra buys an “unkown” Chinese based Sanlu Corporation • Assumed that its upstream suppliers (farmers, farm and their cows) were exercise the same amount of care that Fonterra demanded of all its suppliers • However lack of hygiene, health and nutritional practices led to poor product quality

Supply Chain Design • A supply chain is more likely to be severely impacted if there is: – supply chain density supply chain complexity – node criticality

Supply Chain Mitigation Capability • A supply chain is less likely to be severely impacted if there is adaptive capacity (recovery capability) information sharing/ visibility (warning capability)

Supply Chain Vulnerability • Which parts of the supply chain are most important? (”Criticality”) • What can we do if something happens? (”Preparedness”) Not being prepared is the biggest risk (”Passive Acceptance”).

Supply Chain Vulnerability • Prioritize earnings drivers Identify critical infrastructure that affect the earnings drivers • Locate vulnerabilities in the critical infrastructure • Model scenarios for the vulnerabilities • Develop responses to the scenarios • Monitor, detect and respond to potential disruptions as soon as possible • Preparing for Evil

Risk Summary • Risk is Everywhere • Cost Reduction Increases Risks Probability • Reduction of Risk is Relationship Dependant