Taking a Strategic Approach to Supply Chain Risk Management

Taking a Strategic Approach to Supply Chain Risk Management Aligning Supplier and Customer Strategies Sean Culey - Supply Chain Council 22 November 2011 Hilton Metropole Hotel Birmingham, UK

Sean Culey CEO / SCC Leadership Team CEO and founder of SEVEN SAP Value Realisation experts Member of Supply Chain Council s European Leadership team Proven track record in helping companies align strategic goals with operational activities and metrics and realising business value of their SAP investments Extensive end-to-end supply chain experience in Australia, America, Africa and Europe with many different companies, in many different industries such as FMCG, CPG, A&D, Pharma & Metals Frequent speaker and article writer on SCOR, Organisational Greatness, Supply Chain Excellence, Customer Value Chains, Risk and SAP value realisation ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 2 22 NOVEMBER 2011

AGENDA The Supply Chain Council and SCOR Risky business? Risks and the Supply Chain Define your Supply Chains From Supply Chains to Value Chains Understand the Impact on your Supply Chains and Value at Risk 7 Points to take home Supply Chain Risk Management (SCRM) Tools - SAP Barriers to SCRM ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 3 22 NOVEMBER 2011

About Supply Chain Council Formed in 1996 to create and evolve a standard industry process reference model of the supply chain for the benefit of helping companies rapidly and dramatically improve supply chain operations SCC has established the supply chain world s most widely accepted framework the SCOR process reference model for evaluating and comparing supply chain activities and their performance It can be used to describe supply chains that are very simple or very complex using a common set of definitions and enabling a common understanding It lets companies quickly determine and compare the performance of supply chain and related operations within their company or against other companies SCC continually advances its tools and educates members about how companies are capitalizing on those tools With membership open to all interested organizations Global presence, volunteer driven ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 5 22 NOVEMBER 2011

Approximately 1,000 Member Organisations Australia/New Zealand China South Africa Latin America Southeast Asia North America Japan Member Affiliation Europe Government SME End User Also developing chapters in India and the Middle East Enabling Technology Consultant Non-Profit/Academic 0% 10% 20% 30% 40% 50% ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 6 22 NOVEMBER 2011

From Supply Chains to Value Chains Supply-chain generally accounts for between 60% and 90% of all company costs1 Fortune-10 Company Supply-Chain Cost % Total Costs 2 GM Ford Conoco Wal-Mart Chevron IBM Exxon GE Citi 1 AIG 1 94% 93% 90% 90% 88% 77% 75% 63% 0% 0% ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 8 22 NOVEMBER 2011

Supplier processes Reference Models from SCC Product/Portfolio Product/Portfolio Management Management Product & Sales & Product Design Sales & Support Process Design Support DCOR CCOR DCOR CCOR Supply Chain SCOR Customer processes ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 9 22 NOVEMBER 2011

What is Risk? The biggest risk is not taking time to think about the risks ISO 31000 defines Risk as The effect of uncertainty on objectives Anything that holds me back from delivering to the customer is classified as a risk ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 11 22 NOVEMBER 2011

The Environment we face in 2011 and Beyond Harsh economic realities and uncertain times Globalisation new markets but also new competitors Overriding focus on cost reduction - Lowest Cost mindset Reduction in demand for traditional manufacturing Consumer confidence at all time low Retail sales struggling Heavy job losses globally Companies in survival mode! Credit crisis has seriously impaired cash availability across the supply chain Driving bad behavior by some Challenging customer/supplier relationships and collaboration efforts ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 13 22 NOVEMBER 2011

Impact of Globalisation on Supply Chain Risk Traditionally, supply chains were internally controlled However, we now live in a global economy Organisations have looked at ways to lower costs, and have outsourced and off-shored key functions Managing this outsourced, global, Supply Chain has created new challenges and levels of complexity This increased complexity has dramatically increased the volume and nature of external and internal risks that the business is exposed to and which need to be managed Many companies have changed their supply chain design without identifying the impact this may have on their business if issues arise Many strategic actions taken to drive costs out of Supply Chains have generated greater levels of risk! ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 15 22 NOVEMBER 2011

The Future? Availability of downstream data will force trading partners to re-think value creation In 2011 to 2012, developed markets like the UK and US will experience a shortfall of talent and budget 30% of the outsourced manufacturing to low cost countries will return China is already outsourcing manufacturing to Vietnam! 2015 Gartner Predictions ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 19 22 NOVEMBER 2011

What Keeps You Up at Night? Stock Market Volatility, Oil Prices, Labor, Political Instability, Security, Currency Fluctuations Reducing Inventory/ Working Capital/ Asset Management Reducing Total Supply Chain Costs Supply Chain Resiliency & Sustainability: Risk Management & Green Competing in a Global Market Providing Superior & Consistent Customer Service While Increasing Revenue & Margin What is in control, what is not? What risks will cause a crisis if left unmitigated? ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 20 22 NOVEMBER 2011

Separate risks within your circle of influence and circle of concern Circle of Concern Economic Recession Currency Devaluation Natural disasters Circle of Influence Computer Virus Labour Disputes Social Disputes Fuel Prices Disease or Infestation Product Tampering or Counterfeit Fires or Explosions Earthquakes or Tsunamis Civil Unrest or Terrorism ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 21 22 NOVEMBER 2011

Separate risks within your circle of influence and circle of concern Circle of Concern Design Change Poor Product Quality Excess Inventory Transportation carrier failure Spike in RM costs Failure of major software system Circle of Influence RM supplier failure Machinery Breakdown Uneconomic T&C s Cash flow Crisis Executive misdeeds New competitors New competing product Tighter Supplier Terms Employee theft Sudden Sudden drop drop in in Demand Demand ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 22 22 NOVEMBER 2011

Frequency of Internal vs External Risks Internal Risks nearly twice as likely as External Risks Never Rarely Yearly Which Risks are most important to your Supply chain? ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 23 22 NOVEMBER 2011 Source: MIT CTL Global Differences in SC Risk Frequencies and Priorities

Survival of the fittest? It is not the strongest of the species that survives, nor the most intelligent. NEED TO EVOLVE TO ADAPT TO OUR CHANGING ENVIRONMENT It is the one that is the most adaptable to change Charles Darwin ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 24 22 NOVEMBER 2011

VALUE OF ORGANISATION Risk Event Detection and Response Start of risk event Early detection of risk event Rapid response to risk event Late detection of risk event Delayed response to risk event Delayed response to risk event T0 T1 T2 T3 T4 T5 ELAPSED TIME ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 25 22 NOVEMBER 2011

1 st DAY on the job as Supply Chain Risk Manager! Where do our raw materials come from? What does our SC look like? You may know and trust your supplier but do you know their suppliers? Or their supplier s supplier? Good luck with that! If there is a crisis, I need to know yesterday! ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 27 22 NOVEMBER 2011

End-to-End Supply Chain Processes The five distinct management processes link the supply chain together seamlessly from supplier to customer Plan Deliver Source Make Deliver Source Make Deliver Source Make Deliver Source Return Return Return Return Return Return Return Return Suppliers Supplier Supplier Internal or External Your Company Customer Internal or External Customer s Customer SCOR Model represents information, material & cash flow Control the internal supply chain first, then the end-to-end. Map, plan and control everything from product design to reverse logistics ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 28 22 NOVEMBER 2011

Define the key supply chain in your business Customer Segmentation (Columns) Product Segmentation (Rows) MTS vs. MTO vs. ETO ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 29 22 NOVEMBER 2011

Geographically map your supply chain Retail, Inc ss1, sp2 Component Supplier sd1, sp1, sp4 RM Supplier sd1, sp1, sp4 HQ sp1, sp2, sd2, ss2 Factory sp3, ss1, sm1, sd1 ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 31 22 NOVEMBER 2011

Understand external risks to your supply chain Retail, Inc ss1, sp2 Component Supplier sd1, sp1, sp4 RM Supplier sd1, sp1, sp4 HQ sp1, sp2, sd2, ss2 Factory sp3, ss1, sm1, sd1 ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 32 22 NOVEMBER 2011

How does your Supply Chain Compete? Different Supply Chains have different drivers Understand your different Supply Chains, then understand their drivers Work from the Customer back put customer value first Understand the SERVE and COST-TO-SERVE equation Understand how to best SERVE your customers Understand how to optimise the COST-TO-SERVE ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 33 22 NOVEMBER 2011

How does your Supply Chain Compete? Different Supply Chains have different drivers Make-To-Stock (MTS) Reliability could be key, followed by Asset (working capital) management. Any lack of reliability in forecast, supplier performance, schedule adherence (etc) can have a major impact Make-To- Order (MTO) Responsiveness usual key. Responsive suppliers and sub-contractors, responsive to RFQ s etc Engineer-To- Order (ETO)...... ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 34 22 NOVEMBER 2011

Internal Customer Define your supply chain competitive differentiator Competitive Requirements For each channel prioritize strategic performance using 1x Superior, 2x Advantage and 2x Parity SC1 MTS SC2 MTO SC3 ETO Reliability Superior Parity Parity Responsiveness Parity Parity Superior Agility Advantage Advantage Advantage Cost Advantage Superior Advantage Asset Management Efficiency Parity Advantage Parity Do I have a different tolerance of risk if my strategy is to compete on Cost versus Reliability, Responsiveness or Agility? ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 35 22 NOVEMBER 2011

Cost to Serve Internal Serve Customer SCOR Level-1 Metrics (KPIs) Attribute Strategic metric Reliability RL.1.1 Perfect Order Fulfillment Responsiveness RS.1.1 Order Fulfillment Cycle Time Agility AG.1.1 Upside Supply Chain Flexibility AG.1.2 Supply Chain Upside Adaptability AG.1.3 Supply Chain Downside Adaptability AG.1.4 Overall Value at Risk (VaR) Cost CO.1.1 Supply Chain Management Cost CO.1.2 Cost of Goods Sold Assets AM.1.1 Cash-to-Cash Cycle Time AM.1.2 Return on Supply Chain Fixed Assets AM.1.3 Return on Working Capital ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 36 22 NOVEMBER 2011

Competitive strategies help define risk tolerance Strategies that focus on customer service (e.g., reliable delivery) or where the cost of late or lost deliveries are high, generally have a low risk tolerance Strategies that focus on cost reduction or where the cost of late deliveries are low, generally have a higher risk tolerance Ultimately, the tolerance for risk will determine how much the enterprise will invest in mitigation measures vs. reactive efforts. What is the business impact of a broken supply chain? How much are you willing to risk? ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 37 22 NOVEMBER 2011 Source: SCC Risk SIG

From Supply Chains to Value Chains Understanding Your Supply Chain is the best Risk Mitigation GET CONTROL! Develop Customer Value Teams focused on the end-to-end Supply Chain Control Tower mindset strategy you can make! Build Trust! Internally and externally ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 39 22 NOVEMBER 2011

From Supply Chains to Value Chains End-to-End Supply Chain Visibility is Key Information management is the new competitive battleground data ownership is key ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 40 22 NOVEMBER 2011

Align Risk strategies to Competitive Strategies If my SC strategy is Reliability. Do we have reliable suppliers? Do we reward reliability? Do we measure Reliability? How do our Supply Chain risks impact my ability to be reliable? Do my risk mitigation actions increase, or decrease, my reliability? ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 43 22 NOVEMBER 2011

Align Risk Strategies to Competitive Strategies Focus on identifying and mitigating risks that will cause the biggest impact to your Supply Chain s competitive strategy Performance Attribute SC1 MTS Supply Chain SC2 MTO SC3 ETO Reliability S P P Quality Issues Risks Poor planning & control Insufficient Production Capacity Forecast Inaccuracy Responsiveness P P S Agility A A A Cost A S A Assets P A P Poor 3PL performance Poor system performance control Poor SOURCE control Political issues Poor Inventory Management Economic crisis ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 44 22 NOVEMBER 2011

Impact of Risk on Supply Chain strategy Projected estimated Impact Year 1 ATTRIBUTES RELIABILITY RESPONSIVENESS AGILITY COST ASSETS SCOR METRIC Perfect Order Fulfillment Order Fulfillment Cycle Time Supply Chain Flexibility Supply Chain Mgmt Cost Cash-to-Cash Cycle Time Scorecard Baseline 75.0% 7 (days) 62 (days) 10.1% 22 (days) Risk Cat 1-2.5% 0.5 2.0 0.05% 3 Risk Cat 2-3.5% 0.01% 1 Risk Cat 3-2.2% 0.5 1.0 0.01% 3 Risk Cat 4-2.0% 1.0 0.3 0.02% 1 Risk Cat 5-1.3% 0.02% Risk Cat 6-3.5% 0.01% NET IMPACT -15.0% 2.0 3.3 0.12% 8 Total 60.0% 9.0 65.3 10.22% 30 ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 45 22 NOVEMBER 2011

Impact Value-based Mitigation Probability and Impact should be understood High VAR= Impact * Probability Prioritise those with highest score High Choose appropriate risk response Probability Acceptance - Accept that it could happen, and be aware of that fact Avoidance - No longer do the thing that causes the risk Transference - Transfer the risk to a third party (insurance for example) Mitigation - Reduce the impact or probability by taking an appropriate action (e.g. safety stock, contingency planning, multi-sourcing, training) ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 46 22 NOVEMBER 2011

Aligned and Integrated Metrics RELIABILITY: RELIABILITY: POF by Supply Chain POF by Supply Chain PLAN: Forecast Error SOURCE: Supplier OTIF MAKE: Schedule Adherence DELIVER: Sales Order OTIF SOURCE: Overdue PO s by Vendor SOURCE: Overdue PO s by Buyer ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 47 22 NOVEMBER 2011

Top Mitigation Strategies Collaboration Postponement Delayed differentiation Modularity Component commonality Process standardisation Redundancy Extra inventory Buffer capacity Dual/Multi-Sourcing Production flexibility Performance-based Contracts IT Investment ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 48 22 NOVEMBER 2011

Example of Risk Management Project Summary Risk Improvement Project 1 Risk Improvement Project 4 Risk Improvement Project 3 Risk Improvement Project 2 Risk Improvement Project 5 Risk Improvement Project 6

Opportunity Analysis Project Projected Annualized Benefit Year 1 ATTRIBUTES RELIABILITY RESPONSIVENESS AGILITY COST ASSETS SCOR METRIC Perfect Order Fulfillment Order Fulfillment Cycle Time Supply Chain Flexibility Supply Chain Mgmt Cost Cash-to-Cash Cycle Time Scorecard Baseline 75.0% 7 (days) 62 (days) 10.1% 22 (days) Risk Project 1 2.5% 0.5 2.0-0.05% 3 Risk Project 2 3.5% -0.01% 1 Risk Project 3 2.2% 0.5 1.0-0.01% 3 Risk Project 4 2.0% 1.0 0.3-0.02% 1 Risk Project 5 1.3% -0.02% Risk Project 6 3.5% -0.01% NET IMPACT 15.0% 2.0 3.3-0.12% 8 Total 90.0% 5.0 58.7 9.98% 14 50

SCRM requires Growth Mindset Growth Mindset Confront brutal facts of current situation Develop sense and respond processes and roles Focus on identifying weak-spots to continuously improve Increase focus on collaboration (customer and supplier) Focus on relationship management through joint metrics focused on customer value Improve visibility across the End-to-End Supply Chain Develop a resilient, flexible organisation Focus on innovation throughout the end-to-end Supply Chain from product design to reverse logistics! ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 51 22 NOVEMBER 2011

Top 5 Concerns Amongst Executives Worldwide Cite challenge as being of 'Greatest Concern' Excellence in Execution 55.00% Consistent execution of Strategy by Top Speed, flexibility, adaptability to change Global economic performance 47.00% 46.60% 44.60% Financial risk, volitility and credit risk ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 52 22 NOVEMBER 2011 43.80% 0% 20% 40% 60% Source: The Conference Board Note: The global top 5 list is weighted by regional representation in global GDP as established by the International Monetary Fund

7 Take Away Points Best form of Risk Mitigation is to be in control control of data, people, processes and partners Define the key supply chains in your business and clarify your supply chain competitive driver(s) Focus on identifying the risks to each supply chain Separate risks into your circles of influence and concern - control what you can influence, understand the impact and probability of what you cannot Determine the impact on your key strategic drivers and value at risk Create end-to-end, customer value chain teams focused on the key competitive drivers Develop Risk Mitigation strategies that support your competitive drivers and an implementation plan ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 53 22 NOVEMBER 2011

Clueless Risk awareness Risk awareness with some mitigation Full risk mitigation Integrated with scorecard Risk Management Continuum Full mitigation with integrated KPIs Risk/Cost trade -off ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 56 22 NOVEMBER 2011

CISCO Risk management approach 4 main capabilities Product resiliency Supply chain resiliency Business continuity planning (BCP) Crisis management Time to Recover (TTR) is Cisco s primary KPI and is Measured across multiple functions ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 57 22 NOVEMBER 2011

BMW Motorcycles BMW is moving from procurement to total quality management Moving from China to Easter Europe (Cheaper, less risky, lower transportation costs) Focus on high quality and motivate/collaborate with supply partners ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 58 22 NOVEMBER 2011

Supplier Risk Management Collaboration Collaborate with Suppliers to cost-effectively identify and reduce the frequency and severity of unwanted events in the inbound supply chain Identify and understand the drivers that increase supplier risk Track supplier s financial and delivery performance (on-time, cycle time, and quality) Map supplier s geographic locations of the factory determine geopolitical and natural risks for the regions Analyse suppliers by high, medium, or low risk Proactively manage and mitigate supply chain risk Develop alternate sourcing plans Ask suppliers for their business continuity plans ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 60 22 NOVEMBER 2011

Supplier Risk Management Software to minimise supplier disruption and predict risk Supplier Infonet Solution from SAP A cloud-based analytic tool that helps to improve the performance of the organisation supply base and proactively manage both risks and opportunities in an extended value chain. Alerts: Collect historical & current operational performance and combine with external content that might indicate operational disruption Benchmark analysis: Compare & assess supplier performance with peers Ability to predict supplier risks: Provide predictions of future performance along with root causes to proactively mitigate any disruptions Insight into n-tier supply base: A unique business social network that allows participants to see relationships and determine weaknesses multiple tiers down in Supply Chains Access to an information network: Using the social networking concepts embedded to provide visibility of external issues to help mitigate risk of disruption at any level. ALL RIGHTS RESERVED UK & Ireland SAP User Group 2011 Conference 62 22 NOVEMBER 2011