Presentation to IMHX: What is the right approach to Black Swan events?

Transcription

1 Presentation to IMHX: What is the right approach to Black Swan events? A presentation by Transport Intelligence to IMHX, Birmingham John Manners-Bell, CEO 21 st March 2013

2 1. About Ti Established in 2002 to fill a gap in the market for high quality, cost effective market research Ti has now become the leading provider of market research solutions to the global logistics industry Advisors to World Economic Forum, World Bank, UN and European Commission Global research centre based in UK; research offices in Atlanta, USA and Hong Kong Key Pillars: Research reports, Consulting, Knowledge Portal, M&A, Conferences/Training Ti s Global Associate Network provides a multi-country, multidisciplinary and multi-lingual extension to Ti s capabilities

3 Theme of presentation Against the backdrop of a world beset by natural catastrophes, are corporations taking the right approach to Black Swan events? What strategies should companies take to avoid the huge disruptions felt globally by such sectors as the automotive and electronics industries following the Japanese Tsunami?

4 What is a Black Swan event? A Black Swan is an event which cannot be foreseen, but when it occurs changes the whole understanding of the market. The theory is outlined in Nicholas Taleb s book The Black Swan published in It is so-called as, prior to discovering black swans in Australia, Europeans believed that all swans were white. In fact, a lack of knowledge and experience showed that their understanding of nature was fundamentally mistaken. All observed swans are white hence all swans are white By assuming some event is impossible, people and companies become complacent and this leads to lack of preparedness.

5 Black Swans and Turkeys Taleb says that corporate managers and turkeys have a lot in common! Turkeys are fed for 300 days in the run up to Christmas On a straight line regression analysis, turkeys will expect to be fed on Day 301 However, on this day a Black Swan event occurs for the turkey! They are let down by a lack of knowledge and the assumption that the state of affairs will continue for the foreseeable future. Likewise management s predictions are similarly based on straight line projections or normal distribution patterns and can result in the same outcome.

6 Black Swans and the modern world Most business professionals assume we live in a world of mild randomness, where events don t stray far from the mean. However Taleb argues that, because of tightly integrated markets, we live in periods of wild randomness where small probability events carry major consequences. Intertwined networks energy, transport, financial, ICT and human mean that the consequences of failure in one can be critical and unforeseen. Central London bombings were an example this had implications for bus, tube, cellphone, IT networks which spread and brought down the transport network across the South East of England.

7 Black Swan Events in Supply Chains Modern supply chains have the following attributes: Lean inventory Centralised Just in time Remote production Use of developing countries Multiple tiers of suppliers They are designed to keep labour and inventory costs to a minimum, but also create SYSTEMIC VULNERABILITY Bob Lutz, former vice chairman of General Motors says it best; Running your procurement purely on a short term, point in time, cost minimization model is like shopping for rock bottom home insurance. It looks real smart until your house burns down.

8 Evolution of risk Over the years, internal risks have fallen as supply chain strategies have developed JIT, Lean Inventory, Quick Response etc However external risks from disruption whether natural disaster, terrorism, economic shocks etc have increased.

9 Internal versus external risk When people talk about supply chain risk, they usually mean external threats. However the relation between external and internal risk is very close. For example, increasing inventory levels increases internal risks (redundancy, wastage, financing etc) but mitigates external risks (the impact of a disruptive event on supply). Supply Chain Characteristic Internal Risk External Risk High Stock Levels High Low Lean Supply Chains Low High Bundled in-house production High Low Unbundled out-sourced production Low High Globalised sourcing Low High

10 Sectors most at risk The high tech sector being most globalised and with largely outsourced production is the most exposed to external shocks

11 How resilient are modern supply chains? A small supply chain with a single production facility is highly vulnerable to external events whereas a large, complex supply chain with multiple supplier options has the potential to be much more robust through a greater number of sourcing options. Each option may have higher supply chain risk attached although and this is the key point the probability of overall network disruption is less than in a small supply chain. Global Supply Chain Risk Probability of Disruption Source: Transport Intelligence

12 Lack of supply chain visibility Ford, once famous for offering any colour you like, as long as it s black could no longer deliver its tuxedo black cars as the pigment was produced only by a single producer; which was based near the Fukushima nuclear plant Unknown to each other Chrysler, GM and a number of German car companies also used the pigment in their paints; but as they sourced their paints from different suppliers none were aware that they relied on this sole producer. Manufacturers should share more information and go for transparency to ensure that a single third or fourth tier of supplier s failure could not have such a big impact on their supply chain.

13 High Tech Supply Chain Complexity

14 Point of disruption One other interesting factor which impacts significantly on the extent of disruption is the location of the event within the supply chain. The further upstream it occurs, the longer the disruption to supply. The reason for this is that down-stream processing locations act as bottlenecks and take time to fulfil back-orders once up-stream supply is switched back on.

15 Unknown unknowns Just because Black Swan events cannot be predicted, does not mean that you cannot prepare. Rather than look at past events in order to gain some insight into the future, the best defence is to identify weaknesses in your supply chains instead. Addressing vulnerability is the best way to mitigate the impact of a disruption. Future supply chains will be about resilience not just lean

16 Mitigating supply chain risk Manufacturers usually adopt one of three strategies when dealing with risk: Inventory management build up buffer stock Sourcing developing contingency strategies for specific suppliers or supply chain links Acceptance doing nothing as costs of mitigation outweigh benefits of lean supply chain strategy Deciding on which strategy to adopt relies on understanding the cost implications of each approach.

17 Technology friend or foe? The development of information technologies will play an important role in the mitigation of supply chain threats. There is little prospect that these risks will diminish some may even increase. Therefore the ability to react to events will become the key competitive differentiator, and technologies which enable an enhanced level of supply chain agility will become highly sought after. However the adoption of more technology will also play a role in increasing risks. Increasing reliance on technology will leave supply chains open to cyber attacks or even accidental outages. Whilst technology will lead to greater levels of efficiency, it will also mean that maintaining robust networks will be ever more critical.

18 Event 1: Icelandic volcano 2010 Ash cloud shut down much of European air space Cost to European economy - 1.9bn Cost European airline industry $200m per day Inadequate response by administrators and freight operators lack of contingency planning

19 Event 2: Japanese Tsunami 2011 Direct cost 133bn in Japan alone Cost to global supply chains much greater Japanese electronics sector hardest hit, with many consequences for the automotive sector. Chemicals also affected Honda s and Toyota's plants in the UK shut down production due to interruptions to component supply

20 Event 3: Thai Floods Thai Floods ,000 factories were forced to close Automotive and high tech (especially hard disk drive production) again hardest hit Dell and Intel profits hit Total cost $15-20bn

21 How does Cisco manage risk? Supply chain resilience has become a core business challenge across the enterprise, not just a logistics problem.

22 Cisco s timeline response to the tsunami Within 30 minutes of the initial alert of the earthquake, the supply chain incident manager was made aware of the event, alerted both the SCRM team lead, team members and the Supply Chain Operations senior leadership team. Within 12 hours, the primary supply chain incident management team was activated. This team consists of an extended group of operations functional leaders that represent their functional organizations during an incident. Utilizing Business Continuity data and processes, all direct suppliers, their associated sites and components and other critical supply chain nodes in the impacted area were identified within 12 hours of the initial earthquake. Cisco established a Supply Chain Incident Management Team War Room within 2 days of the initial earthquake to provide a central management point and decision making forum for all Supply Chain Operations personnel involved in the mitigation effort.

23 Cisco s response to the tsunami In the first few days following the incident Cisco s incident management team was able to: Establish contact with suppliers to assess the impact of the incident on site capacity Develop a prognosis of their ability to continue to produce Identify their ability to distribute components. The incident management team was then able to develop a snapshot of the supplier impact and status over the entire region. This snapshot was refreshed on a daily basis based on the evolution of the crisis circumstances (e.g. addition of the nuclear exclusion zone around the Fukushima nuclear facility, changing electrical power capacity projections, etc.) and facilitated faster, more informed executive decision making on mitigation activities and prioritization.

24 Business Continuity speed and data Cisco managers were also able to profile each supplier site from various resiliency perspectives. These included: the expected time-to-recover (TTR) for the site, back-up power generation capabilities and whether the supplier s components were single sourced or had alternate sites available.

25 Cisco s War Room Cisco s Supply Chain Incident Management Team War Room approach, structure and operations were based on the SCRM Incident Management playbooks. These playbooks create a predefined reference for bringing together the Customer Value Chain Management (CVCM) organizational leaders to assess, mitigate and resolve a disruptive supply chain incident. The playbooks define a functional track structure, key contacts related to various types of incidents, templates and other collateral to assist in running and managing an incident response.

26 Cisco s response to the tsunami Bottom Line: In a very short period, the crisis management system was able to assess more than 300 Tier 1 Tier 5 suppliers including site inspections and more than 7,000 part numbers and complete a risk rating and mitigation plan. According to management, the largest supply chain disruption in modern times created virtually no revenue impact for the company. Key to Cisco s response was being able to identify the lack of visibility into sub-tier supply chain (suppliers that supply Tier 1 component manufacturers). Having this as a known unknown was critical to quickly resourcing a team to investigate key impacts and ramifications in this area and to mitigate where possible.

27 Final remark - Reducing the element of luck "Seagate owes its return to market leadership to a fortuitous accident in geography: Its HDD manufacturing plant in Thailand is located on high ground," says IHS isuppli.

28 For more information on the subject of supply chain risk, contact: John Manners-Bell Ken Lyon