Planning for Supply Chain Disruptions
Yossi SheffiMIT, Cambridge MA
December 5th, 2002
Outline
The threatPast disastersSupply chain preparednesspreliminary research findings
Terror Threats:
Physical
Chemical/biological
Nuclear/”dirty”
Cyber attack
The Economic Targets: Infrastructure
Agriculture Tourism Transportation Electric grid Banking & finance systems Oil and gas Communications Continuity of government Medical services delivery Water supply Food supply
Learn From Past DisastersKobe Earthquake -- Jan 16 1995, >6,300 killed, 100K buildings destroyed, 80K damaged. Total damage: ~$250B
Bhopal -- Dec 2nd, 1984, Union carbide factory, 2500 dead, 50,000 hospitalized.
Chernobyl – April 26, 1986, 15M people affected, Belarus still affected
Learn From Past DisastersInfluenza 1918 – 675,000 dead in the US alone; Started in army barracks and prisons in the US; 30 – 50 million worldwide (“the Spanish Flu…”)
The Mont Blanc -- Dec. 6, 1917 the Mont Blanc explodes in Halifax port (400,000 lbs. Of TNT, 2,300 ton of Citric Acid, 10 tons of gun cotton, 35 tons of Benzol). 2500 dead; 9,000 injured; shock wave felt in Cape Bretton (270 miles away).
Foot and Mouth Disease (FMD) and Mad Cow Disease – UK, 2001, quarantines and slaughter of suspected animals; $3B - $5B hit.
Danger – Government ResponseOn 9/11:
Ford idled several production lines intermittently due to delays at the Canadian border
Toyota came within hours of halting production since a supplier was waiting for steering wheels shipped by air from Germany
After Flight 587 crashed, Nov. 12, 2001 Bridges to NY were closed for several hours
In UK FMD – Farmers’ costs <$1B Tourism costs (after the government issued a ban) $2B -
$4B
Japanese government bankrupted many private hospitals in the Kobe area
Preparing for Another Disruption
Supplier relationships Core suppliers vs. public auctions Use of off-shore suppliers Dual supply relationships
Inventory management The vulnerability of JIT manufacturing Advantages of JIT manufacturing Strategic Inventory (SoSo management)
Knowledge backup Developing backup processes Backing up the company’s knowledge Standardization and cross-training CRM and customer relationships
Supply Chains under Uncertainty
Better visibility Transportation visibility involves multiple handoffs Need for full supply chain visibility, including detailed handling Independent data acquisition sources
Better collaboration Last decade: VMI, CMI, EDR, QR, JIT, JIT II, CPD, CPFR… Now:
implementation New: joint emergency planning (alternate shipping methods; alternate
suppliers…) Also: security knowledge sharing
Better forecasting Postponement Build-to-order Product variability reductions Centralized inventory management
Industry-Government partnerships
Clear role for cooperation – happening already Industry participation in Free and Secure
Trade (FAST) and Customs Trade Partnership Against Terrorism (C-TPAT)
“Known shipper” and “known carrier” programs
Difficult to get terrorism insurance – role of government as insurer of last resortInsurance companies are only starting to model terrorism threats.
Efficiency vs. redundancy (who pays for cells, electricity, medicines, etc.)Collaboration Vs. Secrecy (example: hazmat placards)Centralization vs. dispersion (physical vs. I/T attack)Lowest bidder vs. known supplier (what’s in the container…)Security vs. privacy (vs. efficiency of search)
New Business Trade-offs:
When Disaster StrikesCrisis Impact Prepared
ManagementUnprepared management
Hurricane Mitch(Nov. 1998)
Floods destroyed banana plantations
Chiquita leveraged existing alternative sources
Dole took time to find alternatives and lost sales and
Taiwan Earthquake(Sep. 21 1999)
Component supplies to PC OEMs disrupted
Dell priced to steer customers to available components
Apple could not change config.- faced backlogs and lost sales
Mad Cow & FMD(Spring 2001)
Shortage of hides for leather manufacturers
Gucci, Wilson – supply contracts; Naturalizer, Danier - inventories
Etienne-Agner suffered cost increases
9/11 Closed borders Daimler-Chrysler Alt. modes based on contingency plans
Ford idled several plants
Preliminary Research DataTwo responses: active and “do nothing”Active: Past bad experience Corporate culture (defense business, work in
dangerous places around the world, etc.) Security departments staffed with experience
“Do nothing”: Believe 9/11 is a one-time event Cannot find a way to pay Believe government will help
All companies – most concerned about government response to terrorist attacksAll companies – report a large increase in cyber attacks
Preliminary Research Data(Active Respondent)
Build redundanciesTighten collaboration with partnersWork with government to understand and influence security initiativesLook for technology to help (RFID, GPS, e-cargo seals, biometrics, sensors, etc.)Education Awareness Contingency planning (including drills with
supply chain partners)
Summary
A long term adjustmentIn past incidents: the economic impact was a lot less than initially feared“collateral benefits” of preparedness: Better collaboration Better supply chain operations Better controls (less theft, IP loss, better
standards) Participation in communities