time is money – business interruption & the supply chain

Time is Money – Business Interruption & the Supply Chain

Dr Grant FosterAon Global Risk Consulting

Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)Proprietary & Confidential (Optional) | Date (Optional) 2

Resilience

Define: resilience:

the physical property of a material that can return to its original shape or position after deformation that does not exceed its elastic limit


Supply Chain Drivers

Driver (Balance): time, quality

Driver: cost:

• Increase efficiency

• Remove duplication

• Outsourcing (concentrate on key skills, speed to market, risk sharing)

• Single Sourcing (better contractual terms)

• Minimise stock levels

FAT

LEAN


Three Steps To Improving Supply Chain Resilience

1. Create a model (Know when the elastic band will

break)

2. Quantify ‘What Ifs’

3. Respond Appropriately (Stop the band breaking – or have

something else in place)

2.0 Irons Supply Chain

XXX Supply Chain Notes On ThreatsExternalWeeks

ChinaJapan

Korea (until 1st wk Dec 09)

2.5b xxx packages irons into retail

packs

2.3 Warehouse ( limited storage)

2.4 Products freighted (Sea &

Air)

2.2 Product assembly at xxx

factory

2.1 Component Supplier

1

2

2

11

6

Third party could persuade component supplier (Korea) to send poor quality components

Third party could attempt BI event at xxu (e.g. fire, damaging ingress/egress, power supply etc)

Third party could allege problems with customs either at shipping point or destination

2

2

Retail packs to USA SA NZ & AustraliaBulk packs to Europe

Third party could attempt BI event at warehouse (e.g. fire, damaging ingress/egress, etc)

Third party could attempt BI event with xxxThird party could interfere with QC process by coercion of employees

Third party could attempt BI event with xxx

2.6 Retail Packs sent to xxx (Internet distribution)

2.7 Retail Packs sent to other

markets

2.8 Retail Packs sent to large

clients

2.5a Reta il Box Manufacture (xxx)

QC Batch Testing

QC Logisitics

QC Batch Testing


PackagingManufacturingPackagingManufacturing

Inventory at various stages

What is in the model?

Raw Materials Manufacturing Packaging Distribution

Production capacity

Bill Of Materials

This all relates (eventually) to time

What does a link in the chain look like?


Manufacturing

Bill Of Materials

Storage Capacity

Flow rate

Operating modes

Call off rate



So what do we calculate?


Production capacity

Consider the loss of production from a particular Manufacturing site.

Several types of risk event may lead to this outcome. Some insurable (e.g. fire, flood etc) some non insurable (Strike, Government restrictions etc).

1. Reduction of production capacity (e.g. if it is the only site -> 0%, if there are multiple sites we assume the others can go to maximum capacity which may make up some of the capacity shortfall)

2. Recovery time for the site3. The supply chain can still operate for a certain length of time depending on the inventory in the downstream chain4. The following components give us a critical buffer time (i.e. how long we can keep going before BI really starts): the stock

buffer time (from 3), the production achieved in this buffer time (from 1)5. Business Interruption occurs if recovery time (from 2) is larger than the Critical Outage Time (from 4)


Bill Of Materials




Production capacity

Consider the loss of production from a particular supplier.

1. There is a certain amount of inventory at the Manufacturing site2. Recovery time to find an alternative supplier – this may be small

if there are other suppliers available3. The supply chain can still operate for a certain length of time

depending on the inventory in the downstream chain4. The following components give us a possible outage time is :

the inventory buffer time (from 1), the recovery time (from 2)5. Business Interruption occurs if possible outage time (from 4)

exceeds the critical buffer time for the Manufacturing site





Production capacity

Consider the loss of a Distribution Centre site.

1. Reduction of production capacity – may be zero if at the end of the chain and if we can meet demand by directly shipping from production

2. Recovery time for the site3. The supply chain can still operate at full production capacity4. The following components give us a critical buffer time (i.e. how long we can keep going before BI really starts): the time

to put in place alternative logistics arrangements5. Business Interruption occurs if recovery time (from 2) is larger than the Critical Outage Time (from 4)


PRODUCT X Packaging Suppliers

$0 $0

$21,396,114140

84

130

0 0

11

0 0 0$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

Company X Company Y Company Z

Label Bottle Lids

0

20

40

60

80

100

120

140

160

Day

s

BI LossBuffer TimePossible Outage TimeCritical Buffer Time

Product X Manufacturing Suppliers

$0 $0 $0 $0 $0 $0 $0

122133

126

81 84

301

224

0

6774

120

0 0 0

151 151 151 151 151 151 151

$0

$0

$0

$0

$0

$1

$1

$1

$1

$1

$1

A Corp B Corp C Corp D Corp E Corp F Corp G Gorp

Commodity A Commodity B Commodity C Commodity D Commodity E Commodity F Commodity G

0

50

100

150

200

250

300

350

Day

s

BI LossBuffer TimePossible Outage TimeCritical Buffer Time

Supply Chain BI Exposures

$0 $0

$407,400,000

$0 $0

$93,700,000

$0$0 $0

$110,300,000

$0 $0

$70,500,000

$0

7

8

5 5

2

0 0

7 7

18

7 7

3 3

$0 $0

$517,700,000

$0 $0

$164,200,000

$0$0

$100,000,000

$200,000,000

$300,000,000

$400,000,000

$500,000,000

$600,000,000

Boehringer IngelheimAXR

Cambrex AXR DSM AXR Sharp AXR Packaging DSM AXR Packaging DC Canada UPS0

2

4

6

8

10

12

14

16

18

20

Tim

e M

onth

s

Loss Market ShareLoss Of ProfitRecovery TimeDownstream Buffer TimeTotal Loss

2. Quantify The ‘What If’s’

Overall Supply

Chain BI graph

Manufacturing

Suppliers BI graph

Packaging Suppliers BI graph

What if?

Each part of supply chain fails?

Trends exceed certain thresholds?

Different levels of inventory are held?

Structure of the Supply Chain is changed?


Production Optimisation

UK NL

Be

Turkey

A production model has been developed for white goods manufacture across the four European sites.

Notable features include:

• A production optimiser that gives the minimum cost production distribution based on manufacture and transportation costs

• Optimiser works between minimum and maximum levels of production at sites

• Variable costs due to increased shift work

• Business interruption exposures based upon a demand profile across a year

• Consideration of stock levels on actual BI numbersThe Excel model estimates the following:

Production cost delta – i.e. difference in cost of production given a BI event

Additional transport costs – arising from supplying from stock

Shortfall production costs – production costs to bring stock up to pre BI event level

Loss profit costs – loss of profit when demand cannot be met

£0 £0 £0 £0 £0 £0 £0 £0 £0 £0 £0 £0£0 £0 £0 £0 £0 £57,

318

£76,

773

£0 £0 £0 £0 £0

£6,648,445

£5,946,579

£6,885,094

£5,916,826

£6,475,514

£7,719,167 £7,831,649

£8,498,190£8,195,875

£8,594,023

£8,011,194

£4,850,024

£2,273,867

£0

£1,000,000

£2,000,000

£3,000,000

£4,000,000

£5,000,000

£6,000,000

£7,000,000

£8,000,000

£9,000,000

£10,000,000 Loss of profitExtra transport costsProduction CostBaseline Production Costs


3. Respond Appropriately

Prevention &Preparedness• Impact Evaluation • Risk Management• Risk Control• Testing• Audit

Response• Incident Management• Crisis Communications

Strategy• Governance• Objective Setting• Stakeholder Management

Recovery• Continuity Plans• Workflow Management• Evaluation and Lessons Learned

Retained risk:

Transferred risk:

Insurance for Loss of profit, lost market share, AICOW etc


Response Example – Supplier Support

Simplified Process

Supplier Support Tactics

1. Do Nothing

2. Work with Supplier to identify corrective actions and monitor implementation

3. Initiate Dual Supplier Arrangement

4. Improve Payment Terms For Supplier

Optimistic: Situation will resolve itself

Most likely: Cat 3 impact on product X

Pessimistic: Cat 1 impact on product X

5. Arrange Loans or other financial assistance to Supplier

6. Joint Venture With Supplier

7. Purchase Supplier

8. Buy controlling interest in company competing for similar resource

Optimistic:

Most likely:

Pessimistic:

Optimistic:

Most likely:

Pessimistic:

Optimistic:

Most likely:

Pessimistic:

Optimistic:

Most likely:

Pessimistic:

Optimistic:

Most likely:

Pessimistic:

Optimistic:

Most likely:

Pessimistic:

Optimistic:

Most likely:

Pessimistic:

Supplier Monitoring

Red Flag Raised

Committee Endorsement

Action

Product Procurement Team

Supplier Management Team

Escalation as appropriate

Recommendation

Red Flag Criteria should include:• Likely time scales• Supplier Profile• Impact on Product Portfolio


Summary – Some ideas to increase Supply Chain resilience Companies may accept different supply chain risks depending on the stage of the production lifecycle Supply Chain risks are closely related to business interruption and product recall risks. Resilience depends on having alternatives and creativity. Companies need to make time to nurture

this. A multi discipline approach is required to address supply chain risk. including Procurement,

Production, Logistics, Insurance, Loss Control, Legal, Finance, Planning etc.

A simple approach for resilience is based upon the following:– Preparedness– Response– Recovery– Strategy

Create a model to allow you to test scenarios Test your assumptions on the response to ‘what ifs’ particularly;

– Contractual arrangements– Business Continuity Management– What is possible

Know your inventory strategy Be clear on trends – when are they going to be reviewed? Know what your organisation is comfortable with

Fin

Dr Grant FosterAon Global Risk Consulting


What are Supply Chain Managers Worried About?

Unfavourable exchange rate movements 39% Input price increases 34% Energy price increases 33% Declining customer confidence 24% Protectionism 23% Insolvency of suppliers 21%

Negotiated lower prices from suppliers 58%Increased efficiency of logistics 35%Increased use of outsourcing 30%Reduced inventory levels 29%Increased number of suppliers 23%Reduced number of suppliers 20%Moved production to lower-cost countries 19%Reduced headcount in supply chain function 19%

Trends


Tier 4 Supplier

Tertiary Supplier

Supply Chain Basics

Tier 2 Supplier

Tier 1 Supplier

‘Our Company’

Customers

Upstream Downstream

Value Generating Activities

Tier n

Level of control

decreases with

each tier of sup

ply

And is harder to assure an

d insure


Case Study #1 – ‘We Messed Up’

Tier 2 Supplier

Tier 1 Supplier

‘Our Company’

Customers

Pharmaceutical Company

Background

A drug manufacturing facility was taken in house due to regulatory issues

Supply chain in place with a ‘make it & take it’ agreement with supplier

What Happened?

Serious fire at the facility

Supply Chain Interruption

Forced to take the stock from the supplier, and then dispose of it as it had a limited shelf life

Contract RiskLoss Control

Change Management


Case Study #2 – ‘Face the music’

Tier 2 Supplier

Tier 1 Supplier

‘Our Company’

Customers

Entertainment UK (Woolworths)

Background

EUK was the most profitable arm of Woolworths Group

Major supplier of CDs and DVDs to UK market

Winner of several awards for supply chain management

What Happened?

Woolworths Group and hence EUK put into administration in 2008

Zavvi (Virgin Megastores) had an exclusive supply deal.

Unable to get favourable terms from other suppliers Zavvi also forced into administration

Contract Risk BCM


Case Study – Wessex Foods July 2010

BCM

PrioritisedCustomer?


Case Study #3 – ‘Two becomes one’

Tier 2 Supplier

Tier 1 Supplier A

‘Our Company’

Customers

Packaging Company

Background

Manufacturer of rubber stoppers for phials

Rubber sourced from a Tier 1 supplier

What Happened?

Tier 2 supplier had a fire

Alternative Tier 1 suppliers were in place. Unfortunately they both sourced rubber from the same Tier 2 supplier.

BCMInventory Control

Tier 1 Supplier B


Case Study #4 – Downstream Problem

Tier 2 Supplier

Tier 1 Supplier

‘Our Company’

Customers

Chemical Company

Background

Large scale industrial chemical company

‘Fixed supply chain’ in that customers take output directly from a shared pipeline

What Happened?

Unplanned shutdown of customer site

Sufficient output storage available (Site production policy was to run with minimum storage)

Arrangements in place with other customers to receive extra output in short term

Stock / Inventory Control Contract Risk BCM

Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)Proprietary & Confidential (Optional) | Date (Optional)

Launch Growth Saturation Decline

Uncertainty of forecasts

Increase range

Line extensions

Competition,price

New product introductionsrapid launches

Maturity

Manag

e for

Gro

wth

Manage for Profit Manage for

Cash

Free-up in-house capability by outsourcing

Divestment

Product Withdrawal

Consider:- risk in supply chain designcapacity provision ahead of demand line as back-up

Establish back-up capacity & stock as

appropriate

Dual sourcing Reduce stock

Accept greater BI risk - lean

Range rationalisation SimplificationSingle sourced?

Supply Chain risk profile across lifecycle


Prevention &Preparedness• Impact Evaluation • Risk Management• Risk Control• Testing• Audit

Response• Incident Management• Crisis Communications

Strategy• Governance• Objective Setting• Stakeholder Management

Recovery• Continuity Plans• Workflow Management• Evaluation and Lessons Learned

How to improve resilience

time is money – business interruption & the supply chain

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