Supply Chain Security & Disruptions

Overview

The supply chain network is inherently vulnerable to disruptions, the failure of any one element could cause the whole network to fail

Sources of Supply Chain Disruptions

• Extraneous disruptions – Natural disasters– Terrorist attacks– Strikes– Economic factors

• Internal disruptions– Supply Chain partner problems– Changes in product requirements– Problems in product quality

IT Sources • Errors/Omissions

– Human– Software/Programming– Accidental Data Entry/Destruction of Data– Protocol/routing Errors

• Misuse/Sabotage– Sabotage/Vandalism– Abuse/Misuse of Resources– Insiders– Unauthorized Changes

• IT Specific Disruptions– Malware, Virus, Worm, Trojans, Logic/Time Bombs– Hacking, Denial of Service Attacks– Password Sniffing– Espionage/Eavesdropping

Factors to Consider

• Geographic location– Infrastructure– Security– Natural Disaster Zones

• Sourcing strategies– Location– Number of partners– Viability of partners– Long-term relationship– Dominance of partners– Single vs Multiple Sourcing

• Distribution Strategies– Intermediate Stocking Points

• 3PL vs. Owned• Location• Number

– Shipping Modes/Routes• Water, Rail, Road, Air• Intermodal operations• Viability of Routes

– Panamax, Super-Panamax Issues– Deepwater Port Solutions

Factors to Consider

• Dealing with disruptions– Liability and Insurance• International Shipping Contracts must follow

UCC/Incoterms

– Three Main Aspects• Presence/Extent of Contingency Plans• Response Time to Disruptions• Response Time for Recovery

Factors to Consider

1. Who pays the carrier2. When legal title to goods being shipped passes to the

buyer3. Who is responsible for preparing and pursuing claims

with the carrier4. Who routes the freight

Since deregulation of the transport sector, purchasersare increasingly taking control of transport arrangements

as a means of controlling costs

Terms of Sale Selection of the FOB Point

Terms of Sale: Possible FOB Points

Title passesto buyer

Terms of Sale: F.O.B. Origin, Freight Collect

Freight charges paid by buyer

Seller Buyer

Buyer - Pays freight chargesBuyer - Bears freight chargesBuyer - Owns goods in transitBuyer - Files claims (if any)

Seller - Pays freight chargesSeller - Bears freight chargesBuyer - Owns goods in transitBuyer - Files claims (if any)

Terms of Sale: F.O.B. Origin, Freight Prepaid

Title passesto buyer

Freight charges paid by seller

Seller Buyer

Terms of Sale: F.O.B. Origin, Freight Prepaid and Charged Back

Title passesto buyer

Freight charges paid by seller

Seller Buyer

Seller - Pays freight chargesBuyer - Bears freight chargesBuyer - Owns goods in transitBuyer - Files claims (if any)

…then collected from buyer by adding amount to invoice

Terms of Sale: Possible FOB Points

Title passesto buyer

Terms of Sale: F.O.B. Destination, Freight Collect

Seller Buyer

Buyer - Pays freight chargesBuyer - Bears freight chargesSeller - Owns goods in transitSeller - Files claims (if any)

Terms of Sale: F.O.B. Destination, Freight Collect and Allowed

Title passesto buyer

Freight charges paid by buyer

Seller Buyer

Buyer - Pays freight chargesSeller - Bears freight chargesSeller - Owns goods in transitSeller - Files claims (if any)

Seller - Pays freight chargesSeller - Bears freight chargesSeller - Owns goods in transitSeller - Files claims (if any)

Terms of Sale: F.O.B. Destination, Freight Prepaid

Title passesto buyer

Freight charges paid by Seller

Seller Buyer

Freight charges paid by buyer

…then charged to seller by deducting amount from

invoice

The Fire that Changed an Industry

• March 17th, 2000 = Phillips Chip Mfg. plant in Albuquerque hit by a fire caused by power fluctuation. – Fire put out in about 10 minutes– 8 trays of silicone wafers destroyed Chips for

several thousand cell phones• Chip production needs a clean facility– <1 dust speck/cubic foot– Fire, smoke, water contaminated millions of chips

Immediate Actions• Phillips Actions

– Cleanup to take at least a week– 40% of shipments to Nokia and Ericsson– March 20th call to major customers

• Nokia Actions– Helsinki plant missed a routine input from Phillips– Information passed on to plant’s purchasing mgr. Nokia’s top component purchasing

mgr. Senior VP of Operations, Logistics and Sourcing Did not believe in Phillips’ one-week estimate Changed weekly monitoring to daily monitoring of five parts made in New Mexico Part of the enhanced monitoring process developed over 5 yrs.

• Ericsson Actions– No sense of any discrepancy in Phillips deliveries– No reason to disbelieve Phillips’ estimates

Follow-up Actions from Nokia

• Executive action with daily conversation with Phillips executives

• March 31st – Phillips revised estimate of 6 wks.• Eventual effect of several million mobile phones• Three teams

– 1st group focused on developing alternative plans at the CEO level – Phillips dedicated capacity from Eindhoven and Shanghai plants

– 2nd group focused on redesigning chips so they could be made at other Phillips and non-Phillips plants

– 3rd group focused on finding alternate manufacturers. Two suppliers responded within five days.

Phillips = Nokia Status

• Phillips Semiconductor Division– Several acquisitions from IBM– 40% boost in capacity over 1999– 17 plants, 80 million chips/day, worldwide sales of mobile

phones of 80%– Year 2000: Chip volume up by 33%, Revenue up by 50%,

Operating Income up by 119%• Cellphone makers– Annual growth of 40%– Same chips used for laptops and other devices– Multi-year projection of component shortage

Ericsson Status/Actions

• End of March– First appreciates the gravity of the situation– Still did not respond quick enough– Head of mobile phone division did not get

involved until early April

Financial Picture

• 3rd Quarter profits increased by 42%

• Global market share increased to 30%

• 2nd Quarter operating loss of $200m

• End of year divisional loss of $1.6B• 3% loss of market share• Outsourcing of cellphone mfg to

Flextronics.• Plants in Brazil, Malaysia, Sweden,

U.K., U.S. taken over• April 2001 – Sony Ericsson created.• Overall 2004

– Lower revenue 52%– Lower total assets 30%– Lesser employees 52%

Findings from multiple studies

• Higher security/less disruptions with – Risk Pooling strategies• Uncertain demand• Complementary demand

– Lesser product variety• Component/Part commonality• Bulk discounts• Better control• Fewer base components – Apple, Chipotle

Apple iPad = How Many SKUs?

Air2/Mini3 – 8 Components; 18 Choices• Three Colors – Silver, Gold, Space Grey• Three Storage Capacities – 16, 64, 128 GB• Two Connectivity – Wifi, Wifi + Cellular

Air/Mini2 – 9 Components; 20 Choices• Two Colors – Silver, Space Grey• Two Storage Capacities – 16, 32GB• Two Connectivity – Wifi, Wifi + Cellular (4

T-Mobile, Verizon, Sprint, AT&T)

Chipotle• 4 kinds of meat/tofu – Chicken, Steak, Carnitas, Sofritas• 2 kinds of rice• 3 types of Salsa• 2 types of Beans• Additional ingredients

– Lettuce– Cheese– Sour cream– Grilled Veggies – Onions, Peppers– Guacamole

• < 20 unique items• > 200 customizations

Post – 9/11 ScenariosCustoms-Trade Partnership Against Terrorism (C-TPAT)• U.S. Customs and Border Protection• Public-Private Partnership (PPP) • Voluntary yet incentive based system• Timeline

– Proposed November 2001– Implemented April 2002– 7400 partners November 2004– 10570 partners July 2013

• Domestic Importers• Carriers• Foreign Manufacturers• 3PL Logistics• Custom Brokers• Port Authorities and Terminal Operators

Benefits of C-TPAT Certification

• Reduced number of inspections/border waits• C-TPAT supply chain specialist liaison• Access to members thru Status Verification Interface• Self-policing, self-monitoring security activities• Attractive negotiation rates• Free and Secure Trade (FAST) lanes – Canadian and

Mexican borders• Lesser penalties for highway carriers• Attendance at supply chain security training seminars