c mit forum supply chain risk management report 2013

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In collaboration with

MIT and PwC Research Study

Supply Chain

and RiskManagement

Making the right decisions to strengthenoperations performance.

Study by MIT Forum for Supply Chain Innovation andPwC

MIT Forumor Supply Chain

nnovation

2013

Supply Chain andRisk Management



The Future of Risk: 5 Key Principles2

Authors

Prof. David Simchi-Levi, MIT

Department of Civil and Environmental Engineering and the EngineeringSystems Division, Massachusetts Institute of Technology

Ioannis M. KyratzoglouSystem Design and Management Fellow, Massachusetts Institute of Technology

Constantine G. VassiliadisPrincipal Manager, PwC, The Netherlands

Copyright Massachusetts Insti tute of Technology, 2013. All rights reserved.

For more information or permission to reprint, please contact the MIT Forum at:E-mail: [email protected] Phone: 1-617-852-2708




Table of Contents

INTRODUCTION 4

EXECUTIVE SUMMARY 5

WHEN MATURE RISK MANAGEMENT AND OPERATIONAL RESILIENCE PAY OFF 6

OBJECTIVES OF STUDY 7

THE CHALLENGES OF AN EXTENDED GLOBAL SUPPLY CHAIN 7

WHAT ARE THE DRIVERS OF SUPPLY CHAIN OPERATIONS COMPLEXITY? 8 WHAT ARE THE SOURCES OF SUPPLY CHAIN RISK? 9 WHAT PARAMETERS ARE SUPPLY CHAIN OPERATIONS MOST SENSITIVE TO? 10 HOW DO COMPANIES MITIGATE AGAINST DISRUPTIONS? 11

THE SUPPLY CHAIN AND RISK MANAGEMENT MATURITY FRAMEWORK 12

STRENGTHEN SUPPLY CHAIN AND RISK MANAGEMENT 12 FOUR LEVELS OF MATURITY IN SUPPLY CHAIN OPERATIONS AND RISK MANAGEMENT 13 HOW MATURE ARE COMPANY CAPABILITIES? 16

KEY INSIGHTS - MORE MATURE CAPABILITIES LEAD TO BETTER OPERATIONALPERFORMANCE 17

APPENDIX A: SURVEY DEMOGRAPHICS AND TRENDS 25

APPENDIX B: KEY PERFORMANCE INDICATOR DEFINITIONS 29

ABOUT THE PROJECT TEAM 31

ABOUT THE MIT FORUM FOR SUPPLY CHAIN INNOVATION 32



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The remaining 40% do invest in developing advanced risk reduction enabler capability andare classified as having mature processes. Our research validated that companies withmature risk processes perform operationally and financially better – something for CEOs andCFOs to note. Indeed, managing supply chain risk is good for all parts of the business -product design, development, operations and sales. Using the capability maturity model,companies can benchmark their ability to respond to risks, and then increase their capabilitymaturity to gain competitive advantage.

When mature risk management and operational resil ience pay off

On March 11, 20111, Nissan Motor Company Ltd and its suppliers experienced a 9.0-magnitide earthquake as it struck off the East coast of Japan. The quake was among the 5most powerful earthquakes on record. Tsunami waves in excess of 40 meters travelled up to10km inland causing a “Level 7” meltdown at three nuclear reactors at Fukushima Daiichi.The impact of this multi-headed disaster was devastating. 25,000 people died, went missingor were injured. 125,000 buildings were damaged and economic losses were estimated at$200 billion.In the weeks following the catastrophic earthquake, 80% of the automotive plants in Japansuspended production. Nissan’s production capacity was perceived to have suffered mostfrom the disaster compared to its competitors. Six production facilities and fifty of the firm’scritical suppliers suffered severe damage. The result was a loss of production capacityequivalent to approximately 270,000 automobiles.Despite this devastation, Nissan’s recovery was remarkable. During the next six months,Nissan’s production in Japan decreased by only 3.8% compared to an industry widedecrease of 24.8%. Nissan ended 2011 with an increase in production of 9.3% compared to areduction of 9.3% industry wide.How was Nissan able to successfully navigate a disruption of this magnitude so successfully?

1. To begin with, Nissan responded by adhering to the principles of its risk management

philosophy. It focused on identifying risks as early as possible, actively analysing

these risks, planning countermeasures and rapidly implementing them.

2. The company had prepared a continuous readiness plan encompassing its suppliers

including: an earthquake emergency response plan; a business continuity plan; and

disaster simulation training. Nissan deployed these advanced capabilities throughout

risk management and along the supply chain.

3. Management was empowered to make decisions locally without lengthy analysis.

4. The supply chain model structure was flexible, meaning there was decentralisation

with strong central control when required. This was combined with simplified productlines.

5. There was visibility across the extended enterprise and good coordination between

internal and external business functions.

1 Nissan Motor Company Ltd: Building Operational Resiliency: William Schmidt, David Simchi-Levi, MIT SloanManagement: Case Number 13-150




These capabilities allowed the company to share information globally, allocate componentpart supplies on higher margin products and adjust production in a cost-efficient way.

Objectives of Study

Counter-intuitive stories such as the Nissan story are at the heart of this study. It illustrates

that companies such as Nissan with highly mature capabilities in both supply chainmanagement and risk management will be able to effectively address risks, outperform themarket and even gain competitive advantage.

We believe that linking the customer value proposition, sound supply chain operations, androbust risk management is key to success. Moreover, there are supply chain and riskmanagement principles, frameworks, and processes that enable companies to addresscomplex market challenges and achieve superior performance.

The MIT Forum for Supply Chain Innovation and PwC launched the Supply Chain RiskManagement Survey to assess how global organisations address these challenges

and their impact on business operations. The survey was distr ibuted to members ofthe MIT Forum for Supply Chain Innovation and world-wide clients of PwC.

In total, 209 companies completed the survey. Appendix A characterizes theparticipant population.

The challenges of an extended global supply chain

When a company expands from a local or regional presence to a more global one, theoperations strategy needs to be adjusted to align with the changes. The economic crisis in

Europe is a good example of this. Due to the decrease in demand for many products andservices in the continent, companies are changing strategies, seeking alternate globalmarkets. That’s when operations become more complex. Transportation and logisticsbecome more challenging, lead times lengthen, costs increase and end customer service cansuffer. With a more a global footprint, different products are directed to more diversecustomers via different distribution channels, which require different supply chains.

To address the challenge successfully, there are a number of questions companies need toconsider as their operations globalise:

1. What are the drivers of supply chain complexity for a company with global operations

and how have they evolved over the recent past?2. What are the sources of supply chain risk?

3. How can vulnerability and exposure to high impact supply chain disruptions be

properly assessed and managed?

4. How can supply chain resilience be improved?

5. What supply chain operations and risk principles will guide the improvement of the

company’s bottom line: the operations and financial performance?



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The supply chain and risk management maturi ty framework

Strengthen supply chain and r isk management

As Nissan illustrated, to reduce vulnerability and exposure to high impact supply chaindisruptions, companies need advanced capabilities along two dimensions: supply chain

management and risk management. But how can they understand the maturity level of theircapabilities in these areas before designing ways to strengthen them?

The seven supply chain and risk enablers of maturity

There are seven factors that enable stronger capabilities in both supply chain managementand risk management. By matching their practices against these seven “enablers” companiescan assess how mature or immature their capabilities are. This is the basis of our SupplyChain and Risk Management Maturity Model – an empirical framework that applies setquestions across the seven enablers.

For each of the seven enabling areas, we asked survey respondents to answer questionsconcerning the extent to which they have implemented gradually advancing practices. Themore developed the practices are, the more advanced the capabilities.

The seven enablers are:

1. Risk Governance - the presence of appropriate risk management structures,

processes and culture.

2. Flexibility and redundancy in product, network and process architectures –

having the right levels of flexibility and redundancy across the value chain to be able to

absorb disruptions and adapt to change.

3. Al ignment between partners in the supply chain – strategic alignment on key value

dimensions, identification of emerging patterns and advancement towards higher value

propositions.

4. Upstream and downstream supply chain integration –information sharing, visibility

and collaboration with upstream and downstream supply chain partners.

5. Al ignment between internal business funct ions – alignment and the integration of

activities between company value chain functions on a strategic, tactical and

operational level.

6. Complexity management/rationalisation – ability to standardise and simplify

networks and processes, interfaces, product architectures and product portfolios andoperating models.

7. Data, models and analytics – development and use of intelligence and analytical

capabilities to support supply chain and risk management functions.

According to our survey, companies consider alignment between partners in the supply chainas the most important factor in enabling risk reduction (60%), see Figure 5.



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Level II: Internal supply chain integration and positioning of planned buffers to absorbdisruptions. Supply chains are cross-functionally organized. Internal processes areintegrated, information is shared and visibility is provided between functions in a structuredway. Resources are jointly managed and there is a higher level of alignment betweenperformance objectives. Integrated planning is performed at strategic, tactical and operational

levels – that leads to a single company plan. Risk management processes are documentedand internally integrated. Basic threats and vulnerabilities are analysed. Scenariosconcerning the base integrated plan are conducted to position targeted buffers of capacityand inventory to absorb disruptions. Postponement or delayed differentiation product designprinciples are explored to improve response to changing demand patterns. There is minimumvisibility, however, into emerging changes and patterns outside the company.

Level III: External supply chain co llaboration and proactive risk response. Supplychains feature collaboration across the extended enterprise. Information sharing is extensiveand visibility is high. Key activities such as product design or inventory management areintegrated between supply chain partners. External input is incorporated into internal planning

activities. Interfaces are standardised and products and processes are rationalised to reducecomplexity. Information sharing and visibility outside the company domain is exploited to setup sensors and predictors of change and variability to proactively position responsemechanisms. Formal quantitative methodologies for risk management are introduced andsensitivity analysis is conducted. Suppliers and partners are monitored for resilience levelsand business continuity plans are created.

Level IV: Dynamic supply chain adaptation and ful ly flexible response to risk. Companies are fully aligned with their supply chain partners on the key value dimensionsacross the extended enterprise. Their individual strategies and operations are guided bycommon objectives and fitness schemas. Their supply chain is fully flexible to interact and

adapt to complex dynamic environments. Emerging value chain patterns resulting from thisinteraction are probed and identified and higher value equilibrium points are achieved. At thislevel, the supply chain is often segmented to match multiple customer value propositions.Risk sensors and predictors are supported by real-time monitoring and analytics. Riskgovernance is formal but flexible. Full flexibility in the supply chain product, network andprocess architecture and short supply chain transformation lead-times allow quick responseand adaptability. Supplier segmentation is performed. Risk strategies are segmented basedon supplier profiles and market-product combination characteristics.




Table 1 summarizes the criteria used as a basis for the questions and the maturity levels.

Su p p l y c h a i n m a n a g em en t R i sk m a n a g em e n t

L e v e l I

Functional

Internally and externally disconnected plans

and processes

Lack of visibility into supplier/partner

operations and business data

Resources are locally owned and managed

Performance is measured separately based on

functional key performance parameter (KPIs)

Ad‐hoc

Ad‐hoc risk management processes

Product design is performed independently

Absence of common standards and

processes

No planning of redundancy buffers towards

potential disruptions

Can absorb only limited volatility around

standard functional input parameters

L e s s m a t u r e

L e v e l I I

Integrated

Internally

aligned

and

integrated

functions

Information sharing and planning activities

between internal functions

Postponement strategy used

Supply chain performance measured

Buffer planning

Anticipatory

risk

planning

Build capacity/invest in inventory

Position redundancy buffers based on a

common cross‐functional plan

Basic risk governance processes

L e v e l I I I

Collaborative

External and internal collaboration

Visibility and information sharing between

supply chain partners

Full integration of key functions

Incorporation of external input into internal

planning activities

Supply chain rationalisation

Performance measured and forecasted

Proactive

Proactive risk management

Quantitative risk management

Business continuity plans – Partner resilience

monitoring

Use of sensors and predictors to proactively

position response mechanisms M o r e m a t u r e

L e v e l I V

Dynamic

Dynamic supply chain adaptation to value

chain change

Full enterprise integration

Full upstream and downstream visibility

Complete alignment on key customer value

dimensions across the enterprise

Sophisticated operations models in use

Supply chain segmentation matches multiple

customer value

propositions

Flexible

Invest in flexibility (processes, products,

plants, capacity)

Manage risk pressure away from weak

suppliers

Common standards and processes

Timely supply chain bottlenecks

management

Table 1. Capability maturity classification model



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Appendix B: Key performance indicator definitions

The key operations 4 and financial performance indicators used in this study are describedbelow:

Market value:

The current market value of a company is the total number of shares outstanding multipliedby the current price of its shares. Recent research has shown that shareholder value can besignificantly impacted by severe supply chain disruptions. An example is Mattel, the world’slargest toymaker, who had to issue a major product recall due to quality issues. Mattel’sstock-price suffered a steep fall when the recall was announced in Q3 2007 and did notrecover for many months after.

Sales revenue:The revenues a company makes after the sale of its products. Supply chain disruptions orstructural market shifts can impact a company’s ability to deliver the value proposition andlead to loss of sales volume and sales revenue.

Market share:The company's sales over the period divided by the total sales of the industry over the sameperiod. Loss of delivery capability or damaged brand image can lead to market-share loss,especially, when the impact of a supply chain disruption is long-lasting.

Earnings before income and taxes (EBIT) marginThe earnings before interest and tax (EBIT) divided by total revenue. EBIT margin canprovide an investor with a clearer view of a company's core profitability

Total supply chain cost:The sum of fixed and variable costs to perform the plan, source, make and deliver functions

for company products. Supply chain disruptions have an impact on total supply chain cost asa number of activities need to be expedited or redesigned across the various functions.

Supply chain asset utilisation:Supply chain asset utilisation is a measure of actual use of supply chain assets divided by theavailable use of these assets. Assets include both fixed and moving assets. Fixed assetsenable direct product development, transformation, and delivery of a company’s products orservices, as well as indirect support, and, typically, have greater than one year of service life.

A disruption can directly impact the usability of assets and resources or cause their re-positioning in order to recover. As a result, the utilisation of key assets and resources maydeviate significantly from the set targets.

Inventory turns:Inventory turnover ratio measures the efficiency of inventory management. It reflects howmany times average inventory was produced and sold during the period. A disruption orchange may impact inventory efficiency either by introducing increased obsolescence or bychanging inventory positioning and consumption plans.

4 David Simchi-Levi, Phil Kminsky, Edith Simchi-Levi (2008). Designing and Managing The Supply Chain: Concepts,

Strategies and Case Studies,3rd Edition. McGraw-Hill Irwin




Customer service levels:The probability that a customer demand is met. The loss of delivery, customercommunication or customer service capability due to a supply chain disruption can impactcustomer service levels.

Order fulfilment lead-time:

The average actual lead times consistently achieved, from order receipt to order entrycomplete, order entry complete to start build, start build to order ready for shipment, orderready for shipment to customer receipt of order.

Total supply chain lead-time:Total supply chain lead-time in supply chain management is the time from the moment thecustomer places an order (the moment you learn of the requirement) to the moment it isreceived by the customer. In the absence of finished goods or intermediate (work in progress)inventory, it is the time it takes to actually manufacture the order without any inventory otherthan raw materials. Supply chain disruptions can introduce significant delays across allstages of the supply chain.

Total supply chain lead-time variability:Total supply chain lead-time variability is the time variation around the total supply chain leadtime mean. Exposure to incident disruptions introduces variability and fluctuations in thestandard lead-time levels within the supply chain.



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About The MIT Forum for Supply Chain Innovation

MIT Forum for Supply Chain Innovation

The MIT Forum for Supply Chain Innovation is a community composed of academics andindustry members whose support allows forum researchers to provide customer-focusedsolutions to design and manage the new supply chain. The Forum has pioneered a deeperunderstanding of the supply chain and its relationship to corporate strategy and has broadsupport from a wide cross-section of industry.

http://supplychain.mit.edu/

MIT Forum Manufacturing Technology Advisory Board

In June 2012, the MIT Forum launched the Manufacturing Technology Advisory Board inresponse to Forum members’ request for technology transformation guidance. The boardconsists of MIT academic and research leaders with major technology providers and industryleaders to collaborate on key issues around U.S. manufacturing.

http://supplychain.mit.edu/news-events

For more information, please contact:

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c mit forum supply chain risk management report 2013

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