DRK Confidential Do not Distribute without Permission 1 Supply Chain Risk Assessment Model Logic and Measures Dr. Kevin McCormack August 2007

DRK ConfidentialDo not Distribute without Permission

1

Supply Chain Risk Assessment

Model Logic and MeasuresDr. Kevin McCormack

August 2007


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PerformancePerformance

CAUSES (Categories of Predictive

Measures)DisruptionEVENTS

CONSEQUENCES (Impacts)

Human ResourcesHuman Resources

Supply Chain Disruption


Financial HealthFinancial Health

EnvironmentalEnvironmental

RelationshipRelationship

Quality, Delivery, Service ProblemsQuality, Delivery, Service Problems

Supplier Union Strike,Ownership Change, Workforce Disruption


Supplier LockedTier II StoppageSupplier LockedTier II Stoppage

Supplier Bankruptcy (or financial distress)Supplier Bankruptcy (or financial distress)

Disasters (Weather, Earthquake, Terrorists)Disasters (Weather,

Earthquake, Terrorists)

Misalignment of Interests


Finished Goods Shipments Stopped Finished Goods

Shipments Stopped

Locate and Ramp Up Back up Supplier


Emergency Buy and Shipments


ReputationReputation

Market Share LossMarket Share Loss

EFFECTSRevenueLosses

and Recovery Expenses

OTHERIMPACTSForgoneIncome

Emergency Rework and

Rushed FG Shipments


Rushed FG Shipments

Recall for Quality Issues


Sudden Loss of Supplier


Structuring the Relationships of Supply Chain Risk

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Highest and AverageProb. X Risk Score

SupplierSurveys

Risk Indicators

Risk Events

InternalAnalysts

EnvironmentalAnalysts

Risk Indicators by event

Risk Indicators by entity

Internal Analysts and SMEs

Risk Event

Probability

Combine andCalculate

Supplier Risk Event Impact

By entity

Supplier Risk Score

Risk EventImpact

Supplier Risk Score (probability)

Total Impact by Entity

Supply Chain Network

Diagnostics

Risk Management

Analyst’s Modifier

Risk Matrix

100000

1000000

10000000

100000000

1000000000

10000000000

16 17 18 19 20 21 22 23 24 25 26 27

Scaled Risk Probability

Rev

enu

e at

Ris

k

Overall Data Flow


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Supplier 1

Part A

Part B

Part C

Finished Good 1

Revenue - $5 mil

Finished Good 3

Revenue - $50 mil

Finished Good 2

Revenue - $20 mil

Revenue Impact Part A - $75 milRevenue Impact Part B - $20 milRevenue Impact Part C - $70 mil

Total Supplier Impact - $165 mil

Objective: Find the FG revenue impact on a part basis if a supplier disruption occurs

Revenue Impact Calculation


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Re

ven

ue

Imp

act

Supplier F

Supplier I

Supplier C

Supplier D

Supplier E

Supplier K

Supplier L

Supplier G

Supplier H

Supplier K

Supplier A

Supplier B

Supplier M

Supplier N

Risk Probability Index (RPI)

Supplier Risk Index


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Risk Wheel

DiagnosticAnalytical


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Risk Index (RI)

(Diagnostic Mode)


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SC Risk AssessmentUnits of Analysis

s

s

s

s

s

s

s

SC NetworkOrganizer

Commodity Category

Interactions and Relationship

Supplier Attributes

Supplier Environment


9

PerformancePerformance

CAUSES (Categories of Predictive

Measures)DisruptionEVENTS

CONSEQUENCES (Impacts)

Human ResourcesHuman Resources



Financial HealthFinancial Health

EnvironmentalEnvironmental

RelationshipRelationship

Quality, Delivery, Service ProblemsQuality, Delivery, Service Problems



Supplier LockedTier II StoppageSupplier LockedTier II Stoppage

Supplier Bankruptcy (or financial distress)Supplier Bankruptcy (or financial distress)

Disasters (Weather, Earthquake, Terrorists)Disasters (Weather,

Earthquake, Terrorists)



Finished Goods Shipments Stopped Finished Goods

Shipments Stopped





ReputationReputation

Market Share LossMarket Share Loss

EFFECTSRevenueLosses

and Recovery Expenses

OTHERIMPACTSForgoneIncome


Rushed FG Shipments


Rushed FG Shipments





Structuring the Relationships of Supply Chain Risk

Copyright© 2006 Supply Chain Redesign, LLC

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Relationships 1 2 3 4 5On a corporate basis, please select the expected percentage of revenue you plan to come from the xxx industry segment in 2006.

>90% 65%-90% 15%-65% 5%-15% <5%

On a facility basis, what percentage of your total revenue is from Co.X? >75% 50 – 75% 25 – 50% 5 – 25% <5%

Taking into account the importance of the following metric when evaluating a partnership, how would you rank Co.X relative to your other customers? – Annual revenue, Profit Margin, Growth Potential, Cooperation, Data SharingHow often do you share the following information with Co.X? - Cost structure (price drivers), Process /Material Change Notification, Production Schedule, Inventory Status, Accreditation information, EPA violations and EPHS validation history (* EPHS – Essential Public Health Service), 2nd tier supplier information, New product/tech opportunity, Proof of insurance, Financial ratio data, Order fulfillment / process results, Performance data.

Share regularly

Share when asked

Don’t share and prefer not to share

Bottom 20%

Top 20% 20% - 40% 40% - 60% 60% - 80%


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Performance 1 2 3 4 5Please select the accreditations your facility has (check all that apply). 3 or 4

checked1 or 2 checked

0 checked

ISO900x, ISO13485/13488, ISO14000, FDA registered

(new with each network)

How many of your engineers directly support the manufacturing of this subcategory?

>10 5 – 10 3 – 5 2 – 3 0 -1

What is your facility’s current capacity utilization in this sub category? <50% 50% - 70% 70% - 80% 80% - 90% >90%

In the coming year, do you plan changes to your facility’s capacity in manufacturing for this sub category?

Increase around 20%

Increase around 10%

No change Decrease around 10%

Decrease around 20%

With 3 weeks advanced notification, how much of a demand increase can you satisfy in your next order for this subcategory for Co.X (assuming an average order)?

>50% 20% - 50% 10% - 20% 1% - 10% 0%

Excluding engineers, how many employees are involved in the manufacturing process for this sub category (including assemblers, inspectors, shipping, etc.)?

> 100 50 - 100 25 - 50 25-May <5

On average, how quickly you respond to a technical issue from Co.X? <2 hours 2 hours – 12 hours

12 hours – 24 hours

24 hours – 48 hours

>48 hours

What is the Material Reject Rate (percentage of material rejected out of all deliveries) for the supplier?

>99.5% >99% <=99.5%

>98% <=99%

>97% <=98%

<=97%

What is the Supplier Corrective Action Receipt percentage (percentage of CAR out of all deliveries)?

0% >0% <=.25%

>.25% <=.75%

>.75% <=1%

>1%

When was the last on-site audit or mail-in quality survey? <1 yr good Q rep 1-2 yrs >2 yrs No audit

What is the latest Audit Score of the supplier ( percentage of audit result score divided by maximum possible scores)?

>99% >98% <=99%

>80% <=98%

>65% <=80%

<=65%

What is the supplier’s latest on-time delivery percentage (no early or late, based upon contract, percentage of on-time delivery out of all deliveries)?

>99% >98% <=99%

>97% <=98%

>95% <=97%

<=95%


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Financial Health 1 2 3 4 5Please rank your company’s business growth in 2005 in the industry for this sub category.

Top 20% 20% - 40% 40% - 60% 60% - 80% Bottom 20%

What is the risk level of supplier's financial status (3rd Party report)? Low Low to Medium

Medium Medium to High

High

Excellent Above Average

Average Below Average

Poor

Please rate the overall performance of your company last year.Please rate the overall performance of the company last yearrelative to major competitors.Please rate the overall performance of the business unit serving $Company$ last year.Please rate the overall Customer Satisfaction level of this business unit last year.Please rate the overall profitability of the business unit last year

Please rate your accounts recievable cycle time (collection time).Please rate your accounts payable cycle time (paying suppliers)


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Environmental Indicators 1 2 3 4 5What is the potential of a major supply chain disruption due to market dynamics?

Minimum Below Average

Average Above Average

High

What is the potential of a major supply chain disruption due to merger and acquisition issues?



High

What is the potential of a major supply chain disruption due to regulatory issues?



High

What is the potential of a major supply chain disruption due to a disaster (natural disaster, political, terrorist, etc.)?



High

What is the potential of a major supply chain disruption due to a transportation disruption (accident, transportation union strike, etc.)?



High


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Risk Probability Index (RPI)

(Analytical Mode)


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Relationship


Human Resources

Performance

FinancialHealth

EnvironmentalIndicators

Supplier Risk Probability Index (RPI)

Supply Chain Risk Categories v. Events 1

2

3

4

5

6

Misalignment of interest

Supplier Bankruptcy

Supplier Locked

(Regulatory)

Supplier Union Strike

Tier 2Stoppage

Supplier Ownership

Change

QualityProblem

Delivery Problem

Disasters

Service Problem

Categories Events

WorkforceDisruption


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Misalignment of Interests 1 2 3 4 5On a corporate basis, please select the expected percentage of revenue you plan to come from the xxx industry segment in 2006.

>90% 65%-90% 15%-65% 5%-15% <5%

On a facility basis, what percentage of your total revenue is from Co.X? >75% 50 – 75% 25 – 50% 5 – 25% <5%

Taking into account the importance of the following metric when evaluating a partnership, how would you rank Co.X relative to your other customers? – Annual revenue, Profit Margin, Growth Potential, Cooperation, Data SharingWhat is the potential of a major supply chain disruption due to market dynamics?



High

Bottom 20%

Top 20% 20% - 40% 40% - 60% 60% - 80%


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Quality Problem 1 2 3 4 5What is the likelihood of the following disruptions in your supply chain that could impact BSC? - Process Change

Once every five years or more

Once every three years

Once every other year

Once every year

More than once every year

What is the Material Reject Rate (percentage of material reject out of all deliveries) for the supplier?

>99.5% >99% <=99.5%

>98% <=99%

>97% <=98%

<=97%

What is the Supplier Corrective Action Receipt percentage (percentage of CAR out of all deliveries)?

0% >0% <=.25%

>.25% <=.75%

>.75% <=1%

>1%

When was the last on-site audit or mail-in quality survey? <1 yr No audit good rep

1-2 yrs >2 yrs No audit

What is the latest Audit Score of the supplier ( percentage of audit result score divided by maximum possible scores)?

>99% >98% <=99%

>80% <=98%

>65% <=80%

<=65%

On average, how often do you monitor and review your suppliers’ performance?

Monthly Quarterly Annually Only if issues arise

Never

What is the likelihood of the following disruptions in your supply chain that could impact Co.X? - Quality Problem

Once every five years or more

Once every three years

Once every other year

Once every year

More than once every year

Excluding engineers, how many employees are involved in the manufacturing process for this sub category (including assemblers, inspectors, shipping, etc.)?

> 100 50 - 100 25 - 50 25-May <5

Please select the accreditations your facility has (check all that apply). 3 or 4 checked

1 or 2 checked

0 checked

ISO900x, ISO13485/13488, ISO14000, FDA registered


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Delivery Problem 1 2 3 4 5How often do you share the following information with Co.X? - Performance data

Share regularly

Share when asked

Don’t share

What is the supplier’s latest on-time delivery percentage (no early or late, based upon contract, percentage of on-time delivery out of all deliveries)?

>99% >98% <=99%

>97% <=98%

>95% <=97%

<=95%

What is your facility’s current capacity utilization in this sub category? <50% 50% - 70% 70% - 80% 80% - 90% >90%

Do you share the forecast and scheduling information with your suppliers? Share regularly

Share when asked

Don’t share

With 3 weeks advanced notification, how much of a demand increase can you satisfy in your next order for this subcategory for Co.X (assuming an average order)?

>50% 20% - 50% 10% - 20% 1% - 10% 0%

What is the likelihood of the following disruptions in your supply chain that could impact Co.X? - Capacity Shortage

Once >5 Once =3yrs Once =2 yrs

Once per yr.

>1 per yr

Excluding engineers, how many employees are involved in the manufacturing process for this sub category?

> 100 50 - 100 25 - 50 25-May <5

In the coming year, do you plan changes to your facility’s capacity in manufacturing for this sub category?

Increase around 20%

Increase around 10%

No change Decrease around 10%

Decrease around 20%

How often do you share the following information with Co.X? - Inventory Status

Share regularly

Share when asked

Don’t share

How often do you share the following information with Co.X? - Order fulfillment / process results

Share regularly

Share when asked

Don’t share

How often do you share the following information with Co.X? - Production schedule

Share regularly

Share when asked

Don’t share


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Examples of Risk Management Actions

Risk Probability Index

RevenueImpact ($)

L

HL

H

Profile 1No Risk

Management

Profile 2 With Risk

Management

Equal Revenue Impact and lower risk With Risk

Management

(Event Probability x Score)


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RevenueImpact ($)

L

HL

H

Supplier 1No Risk

Management

Supplier 2

Distributing Spend (and reducing Revenue Impact) to several equal and lower risk suppliers.

Overall Revenue / RPI is reduced


Supplier 3

Supplier 2


21



RevenueImpact ($)

L

HL

H

Supplier 1No Risk

Management

Distributing Spend (and reducing Revenue Impact) to several equal and lower risk suppliers.

Overall Revenue / RPI is reduced


Supplier 1With risk reduction

actions

Supplier 1With spend reduction

actions

Supplier 1With combination

actions


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Week 0 Week 1-2 Week 3-4 Week 5-6 Week 7 Week 7 Week 8

Data Collection

Follow up

Preparation Analyze MitigateReport

4.0Analyze

Survey Data

Collection

Validate 6.0

Mitigate

Supplier Information Set UpInternal Information Set Up

Report

Note:Cycle Time – 6-8 weeks1 Category = 30 suppliers

- Manual Process

- IT Enabled Process - Combination

Ass

essm

ent

Tea

m

1.0 Kick off

2.0 Preparation

5.0 Report

Kick Off

Rev

iew

Tea

m

Provide Set up information

Category Manager and Suppliers

Set up Survey Internal Data

3.0 Data Collection

Survey Review & Event

Probability

Subject Matter Experts and Suppliers

Review/ Validate

Preliminary Data

Category Manager and Risk Manager

ID and Begin Mitigation

Category Manager and Risk Manager

Supply Chain Risk Assessment Process


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Case 1


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Supplier Risk Wheel: Supplier Example

Delivery Risks1 Planned capacity decrease 2 Relatively low number of production employees assigned to company parts3 Inventory status information is not shared with company4 Medium to low ability to satisfy demand fluctuations with 5 week notice

Service Risk1 Low number of engineers assigned to company parts

Quality Risk1 Relatively low number of production employees in the process for company2 Six month supplier rating is medium3 Medium likelihood of quality problems affecting company

Union Strike Risk1 Highly unionized production facilities

Disaster Risk1 Transportation mode and route may cause disruption

Case 1


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Case 2

0010.8aMonitor and Manage Program

Technology

Supply Risk Management

Risk ProgramMGMNT

VPSCM

0010.1DevelopProgram and Plan

Risk Analyst

BI/MI

Commodity Manager

Supplier

Assign RiskManagement

Strategy and Guidelines

0010.3Define TargetValue Chain Plan Assessment

0010.5aSet up andDistribute Survey

0010.6 aInterview Suppliers andID Part No.

0010.7Gather Spend,Perf Data and Rev impact

0010.9Analyze Results,Validate,

0010.10bDevelopRisk MitigationActions

0010.11bProposeRisk MitigationActions

0010.6 bComplete Interview

Data Collection

Implement&

Sustain0010.13bReview, ReviseReassess

Planning

0010.2Set PrioritiesAssign Resources

0010.4aGather contactInfo and pre-survey Feedback

0010.4bProvide pre-survey Feedback

Preparation

0010.5bCompleteSurvey

0010.4bProvide pre-survey Feedback

0010.3DefineValue Chain Plan Assessment

0010.7Gather SpendData and Rev impact

0010.8bReview and Adjust Strategy and Program

SAP NTNT NT

0010.9ReviewValidateResults

0010.10aDevelopRisk MitigationActions

NT

Phase III

0010.11dReview/ApproveRisk MitigationActions

0010.11cReview/AdjustRisk MitigationActions

0010.11aProposeRisk MitigationActions

Mitigation Planning

0010.12aRollout,Implement &Sustain

0010.12cMonitor Rollout, Adjust

0010.11aProposeRisk MitigationActions

NT

0010.13aReview, ReviseReassess

NT

0010.12aImplement And Sustain

Analysis and Reporting


26

Case 2 Mitigation


RevenueImpact ($)

L

HL

H

Profile 1No Risk

Management

Profile 2 With Risk

Management

Equal Revenue Impact and lower risk With Risk

Management



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Case 2


28

Case 2

Documents

DRK Confidential Do not Distribute without Permission 1 Supply Chain Risk Assessment Model Logic and Measures Dr. Kevin McCormack August 2007