A proposed methodology on how to identify, evaluate and manage risk in your supply chains in a systematic and objective way.

1. Securing Supply Continuity:
Dual Sourcing and Alternative Approaches
Raffaele Muscetta

2. Steel shortage forces Nissan to halt production. Sept
2004
• An output loss of 10-15,000 units
could dent profits by 6 billion yen
($58.46 million). The suspension at
three of its four domestic plants on
November 29 and 30 and December
6-8 was expected to result in lost
production of about 25,000 vehicles
to be made up early next year, the
company had said.
• 20% Cost reduction program, supply
base reduction… punishment?
• Keiretsu vs. Contract Managed
Relationship.

3. Toyota to Resume Production Tuesday
Despite Riken rings shortage, Japan’s auto-industry managers cling to JIT.
One week after July earthquakes played havoc with its engine piston-ring facilities, Riken Corp. (Tokyo, Japan)
managed to resume operations to turn out the key parts for the Japanese automotive industry, where it holds tremendous market share. This made
it possible for 11 of Japan’s 12 vehicle manufacturers to start running their factories again at about the same time, except for Honda Motor’s two
engine factories for subcompacts The
suspension resulted from both the natural disaster and the
fact that the vehicle makers use unique piston rings, which Riken’s and the clients’ engineers
jointly design.
As for the Just-in-Time system, Toyota Motors president Katsuaki Watanabe defended it, saying, "We shouldn’t be afraid of stopping production lines. We made the
best use of the lessons we learned in the past." He appeared to have been referring to the great Kobe quake of 1995 and the fire in 1997 at Aisin Seiki Co.
(Kariya, Aichi Prefecture), a major supplier to Toyota. None of the members at the Japan Automobile Manufacturers Assn. (JAMA; Tokyo) intends to amend their
JIT procedures, as Fujio Cho, Toyota chairman, told the Japanese media at the trade group, where he concurrently serves as its chairman. JAMA, however, would
sound out parts makers to see if they could diversify production sites for important products with high market shares.
The ring problem affected the industry to the tune of some 124,000 units, including 55,000 cars at Toyota alone. It plans to make up for the lost
production by the year’s end, with its employees asked to work over weekends. Other automakers are likely to follow suit.
The so-called "Riken shock" caused piston-ring users in other industries like off-road and marine diesel to worry. But their fears turned out to have been largely unwarranted because
of their refusal to adopt the JIT in favor of maintaining larger ring inventory volumes in their warehouses. Only Kubota Corp. (Osaka) seems to have been forced to suspend
producing, with about 1,500 tractors, fewer than 300 construction machines, and some 9,000 engines affected.
Unique Design…
Like Kubota, Yanmar Co. (Osaka) is a diversified machine maker based traditionally on agricultural hardware. It counted on sizable parts inventories. Its emergency plans, which did
not have to be implemented, called for temporarily amending the sequences of its engine-assembling steps. Similarly, Komatsu Ltd. (Tokyo), the world-class construction-machine
Sole Suppliers…
builder, and Mitsubishi Heavy Industries Ltd. (MHI; Tokyo), a leading shipbuilder, avoided plant shutdowns. MHI revealed its diesel-engine piston rings stock can withstand one-month
of suspension at Riken or its subsidiary.
Posted: Aug 6th, 2007 Natural Disasters…
Lot of Revenue Loss!!!
3

4. Credit Crunch!
R.Muscetta
4

5. November ‘08
R.Muscetta
5

6. P&G is Spending
more on Transport
and Storage than on
running its factories
Oil Prices
and
Logistic
Costs
Risk!
R.Muscetta
6

7. Palm Pre Shortage: Supply Chain
Slip-Up or Retail Fairy Tale?
By Renay San Miguel
E-Commerce Times
Part of the ECT News Network
05/22/09 12:57 PM PT
Sprint has publicly stated it anticipates shortages for the
Pre, Palm's new smartphone set to go on sale June 6. If
Palm is in such dire need of a hit, why did it go to market
with a shortage rather than delay release? Or is talk of a
shortage just a ruse to try and stir up buzz in what looks
to be an extremely competitive summer for the
smartphone sector?
7

8. Still Work to Do… and this is why we are
here…!
Latest news
Supplier risk ‘not getting sufficient attention’
21 April 2009 www.cpoagenda.com
Procurement organizations are paying insufficient attention to the issue of supplier risk despite
the threat of key partners going out of business, a global study suggests.
A survey of purchasing functions in large organizations from the UK, US, Italy, Spain and France, commissioned by Bravo Solution, a supply management technology
just 31 per cent had evaluated financial and fulfillment risk in
provider, found that
the past six months.
This failure was common across the countries surveyed, ranging from 35 per cent of US businesses to 27 per cent of UK and French companies.
“Perhaps distracted by the need for immediate cost savings, resources are being diverted elsewhere,” the report said. “Analyzing risk without
sufficient spend visibility or supplier transparency is a very difficult and often inaccurate exercise. However, these challenges should not excuse this absence of risk
evaluation and accountability.”
Of those organizations that have evaluated the threats they face, 72 per cent had either introduced changes as a result or were intending to do so in the near future.
“With such a high level of change resulting from risk evaluation, the implication is that those businesses yet to undertake risk evaluation are moving further away from an
appropriate response to supplier and process instability,” the report said.
Separate data released this month by the Hackett Group, a benchmarking and advisory firm, found that two-thirds of world-class performers managed supply risk as a
consistent, enterprise-wide process. The figure for other companies was just 13 per cent, and almost half had not implemented it at all. The most important objective
cited in the BravoSolution research over the next 12 months was identifying new areas of cost savings, with 77 per cent of all organizations saying this was the priority.
Those in the US and Spain (both 87 per cent) gave this the most emphasis, while 65 per cent of French organizations agreed.
The research also suggested the economic recession is enabling procurement departments to strengthen their internal standing. Forty-four per cent of those surveyed
reported a wider mandate to control costs than they had 12 months ago, with 38 per cent experiencing a greater strategic input. Purchasing now enjoys a closer working
relationship with other business units in 37 per cent of cases, the survey found, while 28 per cent reported greater board exposure.
“Undoubtedly, purchasing professionals are enjoying greater responsibility, control and visibility than before but with this also comes significant risk,” the report said.
“Purchasing objectives are becoming more extensive and challenging while pressure from the organization to find new areas of cost saving show no signs of abating.”
UK organisations have been the main beneficiaries of the greater status, the research suggested, with 55 per cent seeing a greater input on company strategy and
experiencing a closer working relationship with other functions and 37 per cent gaining greater board exposure. This compared to 39 per cent, 32 per cent and 28 per
cent respectively for US companies.
8

9. Background
THE WORLD
RISK
IS FLAT
EnablerS
9

10. The World is Flat 3.0
In the book, Friedman recounts a journey to THE WORLD IS
Bangalore, India, when he realized globalization has changed
RISK
FLAT
core economic concepts. He suggests the world is "flat" in the
sense that globalization has leveled the competitive
playing fields between industrial and emerging market
countries.
Globalization 1.0, which ran from 1492 until 1800 and was driven by
countries …
Globalization 2.0, in which "the key agent of change, the dynamic force
driving global integration, was multinational companies" driven to look abroad
for markets and labor, spurred by industrial-age "breakthroughs in hardware"
such as steamships, trains, phones and computers.
That epoch ended around 2000, replaced by one in which individuals are the
main agents doing the globalizing, pushed by "not horsepower, and not
hardware, but software" and a "global fiber-optic network that has made us all
next-door neighbors." Globalization 3.0
10

11. Global Sourcing
• Many companies have either made or are in the process
of making the transition from a:
• Build and Sell: Global
local Business • Sell-Anywhere,
Model
• Build-Anywhere
• Source-
Anywhere
Local
• The transition includes both new global sources of supply
and new global sources of demand.
11

12. Reaping the Benefits
• Outsourcing has allowed companies to split service and manufacturing
activities into components which can be subcontracted and performed
Outsourcing in the most efficient, cost-effective way.
• The internal relocation of a company's manufacturing or other processes to
Offshoring & a foreign land in order to take advantage of less costly operations there.
BCS/LCC China's entrance in the WTO allowed for greater competition in the playing
field. More entrants: Malaysia, Thailand, Vietnam, Brazil, etc
• Companies using technology to streamline item sales, distribution, and
Supply- shipping.
chaining
• UPS as a prime example for insourcing, in which the company's
employees perform services--beyond shipping--for another company.
Insourcing For example, UPS repairs Toshiba computers on behalf of Toshiba. The
work is done at the UPS hub, by UPS employees.
12

13. Driving Value with Global Sourcing
Global sourcing is unavoidable in today's flat
world, but it's a highly complex undertaking.
THE WORLD IS
RISK
FLAT
Many companies with successful global sourcing
objectives have not only lowered their overall supply
costs, but also pioneered innovative supply partnerships
enabling value-driven transformation
Strategic sourcing demands that companies align what the
customer wants, what's best for the business, and what's
needed to get the supply. And they need to do this while
dealing with the inherent intricacy of navigating global
suppliers, inventory, cultural differences, currency, time
zones, connectivity, language, and supply chain
requirements.
13

14. 0
50
100
150
200
250
300
1992M2
1992M6
1992M10
1993M2
1993M6
1993M10
1994M2
1994M6
1994M10
1995M2
1995M6
1995M10
1996M2
1996M6
1996M10
1997M2
1997M6
1997M10
1998M2
1998M6
1998M10
1999M2
1999M6
1999M10
2000M2
2000M6
2000M10
2001M2
2001M6
2001M10
2002M2
2002M6
2002M10
2003M2
2003M6
2003M10
2004M2
2004M6
2004M10
2005M2
2005M6
50,000,000
100,000,000
150,000,000
200,000,000
250,000,000
300,000,000
0
2005M10
2006M2
2006M6
2001
2006M10
2007M2
2007M6
2007M10
2002
Background Factors for Risk
2008M2
2008M6
2008M10
2003
2009M2
2009M6
2009M10
2004
(USD)
2005 2006
Metals index
Trade Balance US-China
2007 2008
Commodity Fuel (energy)
Commodities (2005=100)
Index of Non-Fuel Primary
Gas, and Coal Price Indices
Index, 2005 = 100, includes
Crude oil (petroleum), Natural
14

15. EnablerS
THE WORLD
RISK
IS FLAT
EnablerS
900
800
700
600
500
400
300
200
100
0
0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50
15

16. Few Words about Risk
Risk is characterize by both the probability
of an event and its severity given that an
even occurs.
Impact
RISK
Probability
16

17. SC: Network of Nodes.. And its Disruptions
17

18. Supply Chain Risk
Is a function of sum or probabilities of disruption
at critical nodes in the network, multiply by the
revenue impact of a disruption in revenue dollars on
the end customer.
Function of Global Nodes and Constrained
(Amplifiers) = Dependencies
-
% Pr (D)
Function of SC Planning and SC Redesign
(Risk Reducers) = and Visibility Effectiveness
x Function of Excess Resources and Visibility
$ Risk (Revenue Loss) = effectiveness
$ I (D) +
Function of SC Redesign and excess
$ I (D): Impact of Disruption
(Cost to Stabilize) = Resources
% Pr (D): Probability of disruption
18

19. Supply Chain Risk Management Process
I II III
Map the SC and Identify Risk a. Excess Resources
Measure the Reduction b. SC Collaboration &
Planning
Risk of Critical Mechanism for c. Invest in visibility
Nodes in the High Risk systems
Network Nodes d. Major SC redesign
19

20. How to assess the SC Risk?
20

21. Environmental
Shipping Political Riskv Wage
Employment LevelsPort of Entry
Route and
Weather and Transportation
Disaster Risk Methodology
Rate
Routes
Weather and Transportation Routes
Earthquake Risk Tornado Risk
Hurricane Risk
Within 60 miles of coast -5
60-100 miles of coast - 4

22. A Risk Assessment System in Use
The primary reporting review: Risk Index Index
next reporting review: Risk Probability Matrix
Distribution
A set of disruption predicators based on
experience and research.
• The Diagnostic • The Analytical or Risk • Is constructed by
• Reflects the event mode plotting the revenue at
comparative level of • The events are risk (Rev Impact) with
risk in the supply assigned a probability a supplier vs. the
chain. of occurrence. average Risk
• The center of the • This is a relative Probability Index (RPI)
circle is the Risk Index measure used to rank- of that supplier.
of the demographic order the suppliers • It is used to view all
(supplier, sub- according to the suppliers within a
category, commodity, e potential of a supply commodity group
tc). chain disruption according to their Risk
and potential impact to
your company.
Risk
Risk Probability
Risk Index Distribution
Index
Matrix
22

23. Risk Index at Glance
Bargain Power with RM Suppliers
Forecast Frequency with Suppliers
Employee Turnover Supplier Performance Review Freq
Senior Staff Turnover Supplier SC Disruption Likelihood
Labor Unionization / Pay Position Risk Management Approach
Sole Sourced Material
Accreditations
Engineering Support VI. Human I. Supply Chain
Capacity Utilization Resources
Capacity Changes Disruption Profitability of Business Unit
Upside Flexibility Customer Satisfaction of BU
Manufacturing II. Financial
Issues
V. Performance
Employees Response to Technical RI Health
Supplier Risk Report
Performance of Business Unit
Performance vs Competition
Time Since Last Supplier Audit A/R vs A/P Cycle Time
Supplier Audit Results
Delivery Results III. Business
Quality Results
IV. Relationship
Environment
Corrective Action
Industry Focus
Market Dynamics
Customer Leverage
Merger and Acquisitions
Reputation
Regulatory Issues
Critical Info Sharing
Disasters
Transportation Disruption
23

24. Risk Probability Index at Glance
Supplier Locked
Union Strike
Rapid technology changes
Tier-2 Supplier Stoppage Material
Tier-2 Supplier Stoppage Business
Supplier Ownership changes Tier-2 Supplier Shutdown
VI. Human I. Supply Chain
Resources Disruption
II. Financial
Quality Problem
Delivery Problem
Service Problem
V. Performance
RPI Health
Supplier Bankruptcy
IV. Relationship III. Disasters
Misalignment of Interest
Delivery Problems due to Environment
Service Problem due to Environment
Force Majeure
Location Risk
24

25. SC: a complex network consisting of supplier-
customers-suppliers relationships..
25

26. Supply Disruption Risk Analysis
Risk Impact and Risk Probability Index
Supplier Risk Assessment Questionnaire
Risk
Index
Risk
Probability
Index
26

27. Supply Disruption Risk Analysis
Risk Index (Diagnostic) and Risk Probability Index (Analytical)
Risk Index
Risk Probability Index
27

28. Risk Distribution Matrix
• Used to view all
suppliers within
a commodity S3
group plotted
according to
their risk and S2
potential impact
on your S1
company
28

29. Supply Disruption Risk Analysis
Strategy Impact on Risk Mitigation
Supplier Risk Index Supply
Chain Disruption
Environ- Financial
mental Health
HR Relation-
ship
S3
Performance
S2
Supplier Supplier
Locked
Risk Probability
Index Tier-2 Disruption
S1
Supplier
Supply Bankruptcy
Chain Disruption
Disasters
Environ- Financial
mental Health
HR Relation-
ship
Misalignment
of Interest
Ownership
Change
Performance
Service Quality S1
Problem Problem
S2
Delivery
Problem
S3
29

30. Risk Distribution Matrix
Commodity Strategy Impact on Risk Mitigation
Risk Index (RI) Risk Probability Index (RPI)
5 900
4
800
3
3.06 2.97
2
2.22 2.06 700
1
0 600
S1
Aaseby S2
Kima S3
Rojax S4
Saivs
S2
Kima
Revenue Impact
500
400
S3
Rojax
300 S4
Saivs
200
S1
Aaseby
100
0
0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50
30

31. Double Sourcing the Panacea
Risk Probability Index (RPI)
900
• Lowering the spend.
800
700
600
Revenue Impact
• Logistics bottleneck
S2
500
400
• Communication
S3
300
S4
200
problems 100
0
S1
• Planning and
0.00 0.10 0.20 0.30 0.40 0.50
Risk Index (RI)
forecasting 5
4
3
3.06
• Union trends and
2 2.97
2.22 2.06
1
0
issues
Aaseby Kima Rojax Saivs
S2 S2 S3 S4
• Etc…
31

32. Supply Chain Risk Management Process
I II III
Map the SC and Identify Risk a. Excess Resources
Measure the Reduction b. SC Collaboration &
Planning
Risk of Critical Mechanism for c. Invest in visibility
Nodes in the High Risk systems
Network Nodes d. Major SC redesign
32

33. Risk Mitigation Mechanisms
Disruption Discovery Visibility
Strategically Positioned Excess
Supply Chain Planning and
Systems
Supply Chain Redesign
• Risk monitoring systems • Network redesign
Resources
Collaboration
• Expediting • Supplier qual/ assessment tools
• Safety Stock
• Inventory visibility systems • Relationship management and
• Product or process
joint planning
redesign
• Event management
• Demand/Supply forecast reviews
systems across entire SC
• Deploy RFID at strategic • Daily status meetings
nodes in supply chain • Defined communications network
• Predictive analysis protocols and mechanism
modeling tools • Defined contingency plan
responsibilities with decision‐
• Task forces to analyze end‐ making authority for critical
to‐end supply chain events at all nodes
operations
33

34. Service Providers

35. BEFORE..
Concerns
High Cost
Higher CO2
footprint.
High dependency on
internal capability
High volume been
transported
intercontinental
High transport risk
YOUR Plant
Global Supplier
LCC Supplier
Inter‐Regional Supply
Intra‐Regional (JIT) Supply
35

36. … and AFTER
Benefits
Increasing Low Cost
Country
manufacturing
capability
25-55% immediate
saving through
reduced
transportation and
duty charges
Reduce lead times
through avoidance of
Intercontinental
transport
Improved
communication
YOUR Plant through local supply
Global Supplier
LCC Supplier
Inter‐Regional Supply
Intra‐Regional (JIT) Supply
36

37. Conclusions
Global Sourcing will continue to be a
driver of value creation while adding
complexity to the Supply Chain.
Assessing and managing Risk will be a
“must-have” in all SCM/CPO/Procurement
professionals
Using objective, multidimensional and
visible tools will drive better and founded
decisions to mitigate, reduce or avoid risk.
37

38. Thanks… Q&A?
38