Supply Chain Risk Managment

MBtech Consulting

February 5, 2009
Content Page

1. Executive Summary 3

2. Current Situation 4

3. MBtech Approach 8

4. Foundation Research

5. Key Observations

6. Examples
6 a p es

7. Contact Information 23

© Copyright – MBtech NA LLC 2009 2

1 Executive Summary

Current market situation is difficult to manage

Current Situation

In today‘s
today s Global Economy,
Economy the response to Supply Chain Risk is “reactive”
reactive

Traditional, “Cost Down” Procurement efforts often amplify and expedite Supply Chain Risk
(e.g. moving contracts from a troubled supplier, delaying supplier payments, Competitive
Bidding etc
Bidding, etc.))

Existing Supply Chain Risk Management evaluation tools and techniques utilize “lagging”
financial indicators (e.g. Sales, Cost Trends, Profit Margin, Sales Growth, etc.)

MB Technology Consulting Solution

The identification and qualification of Risk is essential in the migration from reactive to
predictive Risk Management
p g

Supply Chain Risk evaluation tools should qualify Risks against specific Failure Modes

Risk Management efforts should focus on:

ƒ Identification of Supply Chain Failure Modes
ƒ Comparative likelihood of occurrence of Failure
ƒ Current measurement methods and controls
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 2 Current Situation – Brand Image Damage

Unmitigated Risk can cause disruptions in even the most

recognizable brand’s Supply Chain
Example Initiative: Moving Production from Indiana to China

Mattel Issues Third Major Recall Annotations

Top Toy Brands Barbie,
Fisher-Price Are Latest • Supplier Quality Assurance did not take the
F i Lead-Paint
Facing L d P i t Issues
I Risk in the full Supply Chain into
consideration
By NICHOLAS CASEY(1) • Because of Supply Chain, OE is unable to
ensure production standards
• Failure Mode Detection may not have
prevented this failure if detection was in the
p
Mattel Inc.'s problems deepened yesterday as U.S. not the point of development or
the company announced its third major recall, production
• Incorrect “Corrective Action” implemented
this one for its signature Barbie brand, in a due to communication lag between OE,
widening cascade of safety issues as designer and production
consumer anxiety heightens and the holiday • Responses
R occurredd after
ft consumers were
season draws near. exposed to the Supply Chain failures

In today‘s Global Economy, the response to Supply Chain

Risk is “reactive”
Notes (1): The Wall Street Journal, September 5, 2007; Page A3

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2 Current Situation – Disassociated Purchasing Functions

Traditional “Cost Down” procurement initiatives often force

“Relative Risk” decisions in the Supply Chain
Example Initiative: Moving Production from Indiana to China

China to Indiana to
Michigan Michigan
Piece Price $35 $50
Raw Material Transportation Procurement initiatives
$4.00 $.80
(MI to China) vs. (MI to IN)
are often based on
Transportation per Piece
$9.94 $.79 “Landed Costs”
Ocean/Rail/Truck vs. Truck Only
without considering the
Packaging per Piece
$1.14 $.14 additional inventory
Expendable vs. Returnable
Inventory Carrying Cost $.58 $.10
and increased supply
chain risk costs
Floor Space Cost $.08 $.02
Total Landed Cost p
per Piece $50.74 $51.85
Premium Freight Risk $250,000/per transport $1000/per transport
Supply Chain Risk and
its unaccounted
Total Inventory Cost mitigation costs can
$577,500 $100,000
In supply Chain
often burden cash flow

S
Supply
l Chain
Ch i Risks
Ri k can have
h broad
b d negative
ti impacts
i t when
h
potential Failure Modes become reality
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2 Current Situation – Supplier Performance & Visibility

Existing Risk Management evaluation tools and techniques are

reactive because they utilize lagging indicators

Lagging Subjective

Supplier Timeframe % On-Time Quality Technology Cost Overall

Delivery Advances Competitiveness
ABC Stamping Qtr 1 85% 98% 20% 90% 73 25%
73.25%
DEF Plastics Qtr 1 99% 96% 90% 80% 91.25%

Useful in helping supplier development and current assessment

but lacks supply chain risk assessment due to unforeseen
“di
“disasters”
t ” or happenings
h i

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2 Current Situation – Layoffs Announced in Q4 2008 & Q1 2009

Furthermore, deteriorating macro- and micro-economic conditions will

pressure companies to move forward with far fewer resources.

15,000 jobs 35,000 jobs

7,000 jjobs 3,700 jobs

12,000 jobs
3,500 jobs

© Copyright – MBtech NA LLC 2009 7

3 MBtech Consulting Approach - Supply Chain Risk Assessment

Supply Chain Risk Assessment is a five step process that

systematically identifies potential failures in the supply chain

Identify Evaluate Perform

Identify Study Calculate
Failure Failure Quantitative
Approach Risk Level
Modes Modes Analysis
y
• Define the system • Divide system into • Evaluate failure • Develop severity, • Finalize RPN
and problems of logical sub-units modes capable of occurrence and calculation
bjectives

interest • Identify failure modes producing problems detection scales • Prioritize Risks
• Determine analysis of the system • Identify the causes • Score severity, • Include Risk
approach type • Determine key input and effects of each occurrence and Mitigation activities
• Identify the level of variables failure mode detection for each • Distribute results
Ob

Study • Determine controls Failure Mode, Cause

currently in place and Control

• A defined • A list of failure • A list of effects each • Severity, occurrence • Finalized “RPN”
methodology for the modes A list of all
modes. failure will have and detection scores calculations
Deliverables
s

supply chain failure the way the inputs to downstream across all failure • Prioritized list of
mode analysis a supply chain can • A list of causes each modes Supply Chain Failure
fail failure mode can • Initial “RPN” Modes based on
have calculation Supply Chain risk
• A list of controls in
place for each failure
D

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3 MBtech Consulting Approach - Supply Chain FMEA

Several Tools can be used to Support Risk Identification,

Analysis and Evaluation

Supply Chain FMEA Supply Chain Map Supply Chain Audits

Sub supplier dependence
Standardization
Data processing
…

ƒ Structured scheme to analyze ƒ Identification of supply chain ƒ Customized list of questions

failures and their effects parties and related data ƒ Standardized risk identification
ƒ Extensive, complex method ƒ Visualization of supply chain and facilitation of data
processing

Boundary Diagrams Affinity Diagrams P-Diagrams Risk Calculation

Boundary Diagram Affinity Diagram P-Diagram

In any Supply Chain, there are a minimum of 4 players that need It is critical to understand the relationships that exist between Each player can generate Failure Modes within the system, or be Three factors are necessary in the development of a Supply
g Boundary
to be identified utilizing y Diagrams
g the pplayers
y subject
j to Noise generated
g by
y other players
y Chain FMEA
External Influencers Noise Factors 1. Reaction Severity How will the Failure Mode be received through the
• System Interactions • Variation Supply Chain?
Buyer Seller(s) • Deterioration • Customer Usage
Examples include: • Environment
Examples include:
2. Event Probability How likely is the Failure Mode to occur within the
Original Equipment Manufacturer Tier 1 Supplier Supply Chain?

Aftermarket Sales & Distribution Tier N Supplier

Inputs, ex.
Outputs, ex.
• Supplier Invoices
Etc. • Component Orders
• Vehicle Orders
• Payments 3. Outcome Manifestation Where will the Failure Mode be felt in the Supply
• New Product Introductions
• Finish Vehicles Chain?
• Payments from Customers
Connector External Influencer(s) Concurrently,
Examples include: Examples include:
Controls, ex. Failure Modes, ex. When will the Failure Mode be felt in the Supply
International Markets • Purchase Orders • Purchase Orders Chain?
Trucking Company
• Long Term Contracts • Long Term Contracts
Overseas Shipping Company Currency Exchanges • Supplier Quality Assurance • Supplier Quality Assurance
• Currency Hedging • Currency Hedging Supply Chain Risk = Reaction Severity x Event Probability x Outcome Manifestation
3rd Party Logistics Provider Environment • Inventory • Inventory
Seller Connector Seller Connector Buyer
2007-06-26 19
17 2007-06-26 18
2007-06-26 17 2007-06-26

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3
6 MBtech Consulting Approach - Supply Chain FMEA – Boundary Diagram

In any Supply Chain, there are a minimum of 4 players that need

to be identified utilizing Boundary Diagrams

Buyer Seller(s)
Examples include: Examples include:

Original Equipment Manufacturer Tier 1 Supplier

Aftermarket Sales & Distribution Tier N Supplier

Etc.

Connector External Influencer(s)

E
Examples
l iinclude:
l d Examples include:

Trucking Company International Markets

Overseas Shipping Company Currency Exchanges

3rd Party Logistics Provider Environment

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3
6 MBtech Consulting Approach- Supply Chain FMEA – Affinity Diagram

It is critical to understand the relationships that exist between

the players
E t
External
l Influencers
I fl

Seller Connector Seller Connector Buyer

© Copyright – MBtech NA LLC 2009 11
3
6 MBtech Consulting Solution - Supply Chain FMEA – P Diagram

Each player can generate Failure Modes within the system, or be

subject to Noise generated by other players
Noise Factors
• System Interactions • Variation
• Deterioration • Customer Usage
• Environment

Inputs, ex.
Outputs, ex.
• Supplier Invoices
• Component
p Orders
• Vehicle Orders
• Payments
• New Product Introductions
• Finish Vehicles
• Payments from Customers

Controls, ex. Failure Modes, ex.

• Purchase Orders • Purchase Orders
• Long Term Contracts • Long Term Contracts
• Supplier Quality Assurance • Supplier Quality Assurance
• Currency Hedging • Currency Hedging
• Inventory • Inventory

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3
6 MBtech Consulting Approach - Supply Chain FMEA – Risk Calculation

Three factors are necessary in the development of a Supply

Chain FMEA
1
1. R
Reaction
ti S Severity
it How will
H ill th
the F
Failure
il M
Mode
d bbe received
i d th
through
h th
the
Supply Chain?

y & Trends
2. Event Probability y is the Failure Mode to occur within the
How likely
Supply Chain?

What is the predicted likelihood that the Failure Mode

will occur within the Supply Chain?

3. Outcome Manifestation Where will the Failure Mode be felt in the Supply
Chain?

Concurrently,

When will the Failure Mode be felt in the Supply

Chain?

Supply Chain Risk = Reaction Severity x Event Probability x Outcome Manifestation

© Copyright – MBtech NA LLC 2009 13

4 Foundation Research - Supply Chain FMEA

Research Partnership with Western Michigan University

ƒ Scope
S
ƒ Focus: Questionnaire on Risk and Failure Modes
ƒ Target: Procurement Officers & Managers, Supply Chain Executives, Plant Management
ƒ Scope: Multi-Industry
ƒ Renewable: Yearly

ƒ Data Utilization
ƒ Failure Mode Identification
ƒ Relative Risk Levels
ƒ High Risk Events in the Supply Chain
ƒ Trends
ƒ Metrics and Sensors
ƒ Current Corrective Actions

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4 Foundation Research - Supply Chain FMEA

Respondent Summary

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4 Foundation Research - Supply Chain FMEA

Respondent Summary

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4 Foundation Research - Supply Chain FMEA

Respondents were asked to rank order five of the following risks which would have the greatest
severity or impact on the supply chain if it occurred (e.g., 1=most severe, 2=second most severe, etc.).
The numbers below indicate the frequency of responses.

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4 Foundation Research - Supply Chain FMEA

The respondents were asked if each supply chain risks would increase, stay the same, or decrease in
the next 1-2 years?

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4 Foundation Research - Supply Chain FMEA

Respondents were asked which techniques or tools are currently utilized to identify and analyze risk
within the supply chain.

ƒ Initial supplier evaluations ƒ Multi-sourcing

ƒ Financial risk assessment ƒ Price hedging for commodities
ƒ Supplier quality audits ƒ Back up carriers
ƒ Capacity planning for operations and ƒ Historical data review
suppliers ƒ Cross-functional team review
ƒ Lead time analysis for project management ƒ Risk management group review
ƒ Supplier scorecard ƒ Project service levels
ƒ Management review ƒ Information sharing with suppliers
ƒ Supplier risk analysis based on accounts ƒ Total spend management
payable performance ƒ Open communication
ƒ Contingency plans ƒ Supplier competency reviews
ƒ On-site capability review ƒ Benchmarking
ƒ Forecasting techniques ƒ Life cycle management
ƒ Safety stock ƒ Failure mode & effects analysis
ƒ Capacity and network planning, ƒ Develop local supply base
ƒ Contract management & leverage
ƒ Demand planning
ƒ Inventory management
ƒ Vendor managed inventory.
© Copyright – MBtech NA LLC 2009 19
5 Example - Supply Chain FMEA

The Supply Chain FMEA is developed collaboratively with Purchasing, Engineering,

Logistics, Finance, and Supplier Management

Commodity: Carpet/Floor Covering

Participants: NN

Date: 09.01.09

ITEM FAILURE MODE EFFECT S CAUSE O PREVENTATIVE DETECTION CONTROL SYSTEMS D RPN PROPOSED CORRECTIVE ACTION RS RO RD RRPN
Pre-mature wear
through due to
Pre-Production Approval Include item in post sales customer
9 product 3 Process Audit 5 135 9 3 4 108
Process satisfaction survey.
Customer Dissatisfaction specifications not
being met
Enforce Part Sample Submission
9 3 3 81
process
Pre-mature wear
through due to
1 Supplier Failure / Reliability Pre-Production Approval Include item in post sales customer
9 material 3 Process Audit 5 135 9 3 4 108
Process satisfaction survey
Long Term Warranty Issues specifications not
being met
Enforce Part Sample Submission
9 3 3 81
process
Pre-mature wear
through due to
Pre-Production Approval
Intermittent Warranty Issues 7 material 2 Process Audit 7 98 Material Lot Level Traceability 7 2 3 42
Process
specifications not
being met
Supplier Financial Risk
Poor supplier
6 4 Annual Supplier Meetings Management Team; 5 120 Consolidate supply base 7 5 3 105
financial health
IP Ownership
Complete liquidation; Need to re- Diversify supply base 5 4 5 100
source component to new
Review and modify (as required)
supplier 5 4 3 60
payment terms with suppliers quarterly
Dual source critical commodities and
6 2 5 60
Bankruptcy, ruin, or default of services
2
suppliers, shippers, etc.
Poor supplier Supplier Financial Risk
7 5 Annual Supplier Meetings 5 175 Consolidate supply base 8 6 3 144
fi
financial
i lhhealth
lth M
Management t Team
T
Diversify supply base 6 4 5 120
Supplier continues to operate;
Renegotiation of all contracts Review and modify (as required)
6 4 3 72
payment terms with suppliers quarterly
Dual source critical commodities and
7 2 5 70
services
Supplier Production
Daily Planning Volume
7 does not meet 3 EDI 3 63 Collabarative Planning & Forecasting 8 1 2 16
Transmission
requirements
Inclement weather
Daily Planning Volume Increase safety stock levels to
3 Logistics Failure Production Shutdown 7 does not allow for on- 3 EDI 3 63 8 2 3 48
Transmission accommodate late shipments
time delivery
Short Ship of Daily Planning Volume Increase safety stock levels to
7 4 Balanced Scorecard 4 112 8 2 3 48
components Transmission accommodate late shipments
Short Ship of Daily Planning Volume Increase safety stock levels to
7 4 EDI 3 84 8 2 3 48
components Transmission accommodate late shipments

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5 Example - Supply Chain FMEA

The Supply Chain FMEA is used to prioritize efforts, compare/contrast mitigation

strategies, and provide comparison to industry benchmarks

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5
6 Key Observations - Supply Chain FMEA

Reaction Severity can only be measured at one point in the

Supply Chain, but can be felt throughout.

Distance and 3 5 7 7 6 5 4 3 2 1
Direction from
Epicenter

Epicenter:
Supplier
Insolvency
“Shockwave” Measurement Point

Reaction Severity Rules

1. Measurement can be taken at only one point in the Supply Chain
2 Effect can be inferred by the closeness to the Epicenter
2.
3. Traditionally, downstream players are affected far more than upstream players

© Copyright – MBtech NA LLC 2009 22

5
6 Key Observations - Supply Chain FMEA

Supply Chain Risk Level Control manages risk through active

“RPN” and mitigation costs trade-offs

Risk Management by Reducing Standard Deviation

• Reducing the standard deviation in a supply chain’s

chain s risk profile

Uses standard deviation to

focus Risk Mitigation activities

“RPN” “RPN”

© Copyright – MBtech NA LLC 2009 23

5 Key Observations - Supply Chain FMEA

Certain factors were identified as having a critical impact on

predisposition and progress toward managing risks in SCM.

These factors included:

ƒ Consistent and well communicated Corporate Strategy

ƒ Cohesive Supply Chain Organization

ƒ Focus on Process Management

ƒ Predictive Performance Metrics

ƒ Utilized information & technology

© Copyright – MBtech NA LLC 2009 24

7 MBtech Consulting – Contact Information

Contact

Michael Vitek
Vice President

MBtech North America

400 East Beaver
Troy, MI 48083
Phone: + 1 (248)-312-0277
F
Fax: +1
1 (248)-312-0279
(248) 312 02 9
Mobile: + 1 (248)-217-7198
Mike.vitek@mbtech-group-na.com

Nähere Informationen: www.mbtech-group.com

© Copyright – MBtech NA LLC 2009 25