1. Day 1 Afternoon: Managing Extreme Supply Chain Events Lecture – Market Turbulence and Risk Lecture - Environmental Assessment – estimating likelihood and impact of high impact, low probability events. Break out – Calculating Turbulence and VaR Read: DRK Environmental Assessment Method (Class Handout) Supplier Network Risk Management in Turbulent Environments, Kevin McCormack, DRK Research, kmccormack@drkresearch.org. Peter Trkman, University of Ljubljana, Faculty of Economics, peter.trkman@ef.uni-lj.si (Class Handout)kmccormack@drkresearch.org 1

2. Market Turbulence and Risk Dr. Kevin McCormack Feb 2011

3. Situation v. Capabilites Turbulence Ability to Sustain H L H 3

4. Turbulence Customer, Technology, Commodity, Demand Volatility H L H PublicPrivate High DebtLow Debt HighLow Small ChurnStable Private EquityFamily Large Demand Drop Growth last 5 years Debt Structure Leadership 4

5. Ability to Sustain Turbulence H L H Graham Promens RajivParamount Blowpast Int’l Paper Alpha Wellmac 5

6. Measuring Market Turbulence 6

7. Environmental Assessment Dr. Kevin McCormack Jan. 2010

8. 8 SCOR Risk Management Training Risk Prioritization

9. | Copyright © Supply Chain Council. 2006. All rights reserved. 9 Assessment (how likely, what is the impact) Now that you have a list of potential risks, it is time to assess the magnitude of each The purpose is to help prioritize mitigation efforts Common Measures Likelihood – that risk event will occur Quantitative based on history etc. or Qualitative based on experts Impact – if the risk event does occur Financial or on qualitative scale Charting ex.

10. | Copyright © Supply Chain Council. 2006. All rights reserved. 10 Assessment -> Prioritization Moderate risk; medium priority for mitigation Critical risk; high priority for mitigation Low risk; low priority for mitigation Moderate risk; medium priority for mitigation HighLow High Risk Prioritization Potential Impact Likelihood of Occurrence

11. | Copyright © Supply Chain Council. 2006. All rights reserved. 11 Likelihood Assessment For each potential risk, determine the likelihood that it will actually occur. There are several ways to do this Historical occurrences (hurricanes, distribution disruptions, unreliable partners) Analogy (occurrences in similar locations or processes) Simulation models Expert opinion Express the likelihood for each risk in an annual percent (i.e., percent chance it will occur in a given year) Note: some risks may increase or decrease by year Demand uncertainty may decrease as a product matures Events, such as facility relocation, can impact likelihood

12. | Copyright © Supply Chain Council. 2006. All rights reserved. 12 Impact Assessment For each potential risk, identify the potential impact of the event occurs. The impact is the direct financial losses (asset destruction, lost orders, etc.) plus the customer service impact (future lost sales, brand damage, etc.) There are several ways to assess impact Historical occurrences (what was the impact last time this happened?) Analogy (What was the impact in in similar locations or processes?) Simulation models Expert opinion Impact should be expressed in financial terms. Note: some risks may have varying impacts depending on seasonality or process changes.

13. | Copyright © Supply Chain Council. 2006. All rights reserved. 13 Calculate Magnitude For each risk, the magnitude is the likelihood multiplied by the impact. VAR = L x I

14. | Copyright © Supply Chain Council. 2006. All rights reserved. 14 Exercise 2: Risk Assessment For each of your risks, assess the likelihood and impact For today’s purposes, use estimates or educated guesses where necessary Calculate the VAR of each risk Rank each risk as High, Medium, Low

15. Day One - Afternoon: Break out - Environmental Assessment Case: Groups will break out and develop environmental risk assessments and present their results: Read: DRK Environmental Assessment Method Cases (Class Handout) 15

16. | Copyright © Supply Chain Council. 2006. All rights reserved. 16 Exercises - Report Out and Discuss Each team (or maybe 2 teams for time reasons) presents their results. Results – What is your VAR? Issues – What was difficult? Comments on tools and techniques Q and A Outcome: Participants are able to explain how they used SCRM components to complete the exercises.

17. 17 Mitigation (what can be done)

18. | Copyright © Supply Chain Council. 2006. All rights reserved. 18 Exercises 3 - Risk Mitigation: A short lecture will explain the key concepts of the exercise. Mitigation measures (e.g. improved planning methods, alternative suppliers, response plans, redundant infrastructure, etc.) should be evaluated for the serious risks. A risk can be mitigated by deceasing the likelihood that it will occur or by decreasing its impact if it does occur. Outcome: Mitigation Plans defined for highest risks. How can risks be controlled and monitored and likelihood / impact reduced?

19. | Copyright © Supply Chain Council. 2006. All rights reserved. 19 Mitigation: What Can Be Done? To deal with risk you can: Mitigate – reduce the magnitude of risk by: Reducing likelihood it will occur – How can you avoid that risk event? For example – help a risky supplier to improve their operations Reducing the impact if it does occur – How can you deal with the event better if it does occur? For example – have more than one supplier for a certain type of commodity Transfer – cause someone else to be responsible for that risk, For example – buy insurance or restructure your contracts Avoid – Completely eliminate the risk by making it impossible to occur For example – stop sourcing from a supplier that is too risky Accept – do nothing, may decide the risk is too small or too difficult to mitigate For example – don’t do anything about the risk of nuclear war Sharing – share the risk with another supply chain member For example – create a purchase contract with low initial prices and shared profits for you and them if your end product sells well

20. | Copyright © Supply Chain Council. 2006. All rights reserved. 20 Picking Risks to Mitigate You cannot mitigate everything Rank your list of risks from highest to lowest VAR based on the assessment Select the highest risks for potential risk reduction Consider the cost of mitigation vs. the reduction in VAR ROI = Reduction in VAR - Cost to Implement

21. | Copyright © Supply Chain Council. 2006. All rights reserved. 21 Source Risk Mitigation Strategies For source risks, here are some example strategies Multiple sources of supply — having multiple sources of supply for a raw material reduces the impact of one source failing to deliver materials Strategic agreements or partnerships with suppliers —strategic agreements with suppliers can lead to continued service in the event of capacity constraints. Collaborative Planning Forecasting and Replenishment (CPFR) — by sharing demand and fulfillment data with supply chain partners, there is a reduced risk of unforeseen demand swings or supply shortages. Joint product design and delivery — designing products with suppliers reduces the risk of material non- performance or material shortages Strategic inventory — keeping extra inventory of high risk critical inventory in case of a disruption

22. | Copyright © Supply Chain Council. 2006. All rights reserved. 22 Supply Chain Network Configured to Mitigate Risk Design node locations, transportation routes, capacity size and location, number of suppliers, number of production locations, etc. in a fashion that mitigates potential disruptions to the ability to deliver product and service to the end customer. Use information collected through risk identification and risk assessment processes to identify nodes that are at a high risk of disruption due to the location of the node.

23. | Copyright © Supply Chain Council. 2006. All rights reserved. 23 Crisis Communication For all types of risks, good communication helps to reduce the impact of a risk event. Some characteristics of good crisis communication are: Open, i.e. directly able to reach the right person Fast and reliable with redundant methods available Periodic reports with supply chain partners to coordinate efforts A crisis communication plan includes: Crisis definitions Crisis roles and responsibilities Pre-defined communication points of contact, methods of contact, etc. Media relations procedures Crisis response operating procedures Test and exercise requirements for the plan

24. | Copyright © Supply Chain Council. 2006. All rights reserved. 24 Monitoring (coordination) (what should be watched) Monitor environment Predict when risk events are about to occur Detect and react quickly Focus on Supply Chain metrics Statistical analysis (predictors) Internal monitoring Visibility into customer and supplier metrics SCOR model pre-defined metrics are ideal “Watch-out” lists – precursors / indicators/ predictors of supply chain risk events

25. | Copyright © Supply Chain Council. 2006. All rights reserved. 25 Exercise What are your highest risks? How could you control them? Create a mitigation plan for each one. What could you do to reduce the risk (likelihood or impact or both)? How much would it cost to implement? What supply chain partners do you need to coordinate with to implement this plan? Calculate your new VAR Calculate you ROI

26. | Copyright © Supply Chain Council. 2006. All rights reserved. 26 Exercises - Report Out and Discuss Each team (or maybe 2 teams for time reasons) presents their results. Q and A Outcome: Participants are able to explain how they used SCRM components to complete the exercises.