Supply Chain Risk Management

1. Supply Chain Risk Management Discussion Document

2. Table of Contents • Introductions • Today’s Business Environment – risk drivers • Types of Risks • Negative Impacts on Business (examples) • Best Practices / Maturity Model • Transformation Journey – client examples of how the risks are mitigated • Open Discussion / Next Steps Confidential | 27-Oct-14

3. Table of Contents • Introduction • Today’s Business Environment – risk drivers • Types of Risks • Negative Impacts on Business (examples) • Best Practices / Maturity Model • Transformation Journey – client examples of how the risks are mitigated • Open Discussion / Next Steps Confidential | 27-Oct-14

4. The supply chain has become increasingly more global and complex which presents greater challenges and risks Environment • Geopolitical instability • Natural disasters • Technology security Supplier Customer • Global sourcing of supply • Suppliers with 50 to 100% revenue from the same OEM • Move to outsourced manufacturing • Supply shortage and rising cost • Ever changing customer tastes • Volatile demand patterns • Customers exercising their pricing power Manufacturer • Global manufacturing and capacity constraints • Distributed information • Increased Product Complexity Confidential | 27-Oct-14

5. If not managed right, these risks have cumulative effects on the supply chain operations Opportunity Risks Business Risks Technology Risks Regulatory Risks Political Risks Terrorist Attacks Event Risks Organizational Risks Operational Risks Supply & Economy Risk Brand and Reputation Risks Companies need to make critical decisions in the face of uncertain events Confidential | 27-Oct-14

6. Table of Contents • Introductions • Today’s Business Environment – risk drivers • Types of Risks • Negative Impacts on Business (examples) • Best Practices / Maturity Model • Transformation Journey – client examples of how the risks are mitigated • Open Discussion / Next Steps Confidential | 27-Oct-14

7. Services A typical company need to make decisions faced with uncertainties at all levels of supply chain management Reputation Risk: “If we lost critical customer shipments, what will happen to our reputation? How will that affect sales?” Business Risk: “What if the competitor offers a competitive offering that goes head-to-head with one of ours and drives down prices?” STRATEGY Forecasting Planning Strategic Performance Management MANAGEMENT Operational Risk: What if the supplier is out of service and we need to find an alternative? Reporting Process Performance Management Budgeting OPERATIONS Regulatory Risk:“If the government enacts new requirements for carbon limit, how will it affect our total cost of our operations?” Financial Customer Supply Chain HR Event Risk:“How might a fire damage to one of our distribution centers affect our supply chain? Business Activity Monitoring Events, transactions Confidential | 27-Oct-14

8. Different types of supply chain risks are major part of the risks enterprise face every day ENTERPRISE RISK Operational Risk Financial Risk Strategic Risk Environmental Event Risk Regulatory Risk • Demand / Supply Balancing • Demand • Supply • Product • Geopolitical • Natural disaster • Terrorist attacks • Economy • Opportunity • Business • Technology • Brand & Reputation Examples Risks than impact supply chain Confidential | 27-Oct-14

9. Table of Contents • Introductions • Today’s Business Environment – risk drivers • Types of Risks • Negative Impacts on Business (examples) • Best Practices / Maturity Model • Transformation Journey – client examples of how the risks are mitigated • Open Discussion / Next Steps Confidential | 27-Oct-14

10. Strategic and operational risks often have greater negative impact on stock price than financial risks Market Capitalization Decline Drivers Top 20% of Fortune 1000 (1988-2002) Strategic Risks = 65% Operational Risks = 13% Financial Risks = 7% Legal & Compliance = 15% Responses = 98 Note: Market capitalization declines represent a drop in company share price of 30% or greater relative to peer group Source: “Organizing for Risk Management: Key Decisions Guiding Risk Management Activities”, Corporate Executive Board, 2005 Confidential | 27-Oct-14

11. The importance of Supply Chain Risk Management has been magnified over the past five years as a result of several significant natural and man-made disasters Growth of Risks Natural Disasters Reported1 Technological Disasters Reported2 1 Natural Disasters include: Avalanches/landslides, Droughts/famines, Earthquakes, Epidemics, Floods, Volcanos, Wind storms, Other 2 Technological Disasters include: Industrial (chemical spill/gas leak, collapse, explosion/fire, radiation/other), Miscellaneous (collapse, explosion/fire, other), Transport (air, road, rail, water) Source: Centre for Research on the Epidemiology of Disasters Confidential | 27-Oct-14

12. Poor Supply Chain Risk Management has huge impacts which may take a long time to recover Confidential | 27-Oct-14

13. In the past, companies developed good business plans but failed to manage the risks to deliver results reliably Revenue Enhancement Risk Reduction Financial Goal Cost Savings Strategy & Operations Risk Management Vision Execution In the past, poor Risk Management led to execution issues and wide swings in financial results Confidential | 27-Oct-14

14. Used appropriately, Supply Chain Risk Management can reduce the impact and shorten recovery time after risk event Amplified by Globalization and Complexity Without Supply Chain Risk Management … Impact Time Event Value of SC Risk Management With Supply Chain Risk Management … Impact Time Event Confidential | 27-Oct-14

15. Table of Contents • Introductions • Today’s Business Environment – risk drivers • Types of Risks • Negative Impacts on Business (examples) • Best Practices / Maturity Model • Transformation Journey – client examples of how the risks are mitigated • Open Discussion / Next Steps Confidential | 27-Oct-14

16. Supply Chain Risk Management is becoming an increasingly critical area of focus for companies Best Practice Organizations are incorporating supply chain risk management capabilities into their sales and operations planning processes to address the major supply chain disruptions. As firms race to incorporate global sourcing strategies, integrate contract manufacturing relationships, and deal with increasing number of events that can cause supply chain disruption, managing risk in the supply network is an increasingly critical capacity. To cope with largely unpredictable events like hurricanes and terrorist attacks, leading companies are making supply chain investments to ensure that goods continue to flow through major interruptions With more and more manufacturers sending parts of their supply chains to Asia, ….. Trying to manage the risk associated with global supply-chains has emerged as a considerable challenge. Confidential | 27-Oct-14

17. According to AMR SCRM survey, companies are ill-prepared for dealing with supply chain risks Confidential | 27-Oct-14

18. Companies are at different maturity state of Supply Chain Risk Management “A cookbook recipe for implementing Supply Chain Risk management is not feasible because so much depends on the culture of the company and the change agents who lead the effort.”* Potential starting points include: Basic SCRM Elements • BUs have determined supply chain risk mitigation strategies • Established a supply chain risk inventory • Aligned BU supply chain risks with objectives • Have common language for risk exposures, control activities, and monitoring efforts • Communicated expectations for SC risk taking with senior managers Medium SCRM Elements • Quantified key supply chain risk to best extent possible • Identified key metrics to report on supply chain risk • Written risk policy and procedure manuals consistent across major risk types • BUs analyze supply chain risks’ root cause and impact • Process to integrate effects of supply chain risk types Advanced SCRM • Sense and respond to risk events • Stakeholder communications • Supply chain risk management scorecards • Real time supply chain visibility • SC risk management integrated into operations Confidential | 27-Oct-14

19.    Moving up the maturity continuum of Supply Chain Risk Management will help companies to improve financial return VALUE TRANSFORM “Leverage for Competitive Advantage” Drivers: • Enhanced Decision Making • Increasedvisibility & speed • Process robustness • Risk mitigation • Streamlined reporting • Increased accountability Advanced IMPROVE MATURITY CONTINUUM “Optimize and Sustain” Medium COMPLY Basic “Penalty Avoidance” COST STAKEHOLDER VALUE Confidential | 27-Oct-14

20. Effective risk mitigation is critical to eliminate or reduce risks, more importantly use risk as an opportunity for gains Deflect Avoid Reduce Transfer Total Risk Residual Risk Opportunity Trade-offs Confidential | 27-Oct-14

21. Effective Supply Chain Risk Management strategies can help companies address specific risks Sample Strategies Supply / Demand Risk • Supply chain network design for responsiveness • S&OP to manage supply and demand balancing Supply Risk • Sourcing contract management • Manufacturing options planning • Hedging strategies Product Risk • Product complexity management • Design for supply chain Demand Risk • Customer rationalization • Revenue and price management • Best-estimate forecasting Confidential | 27-Oct-14

22. Supply Chain Risk Management needs to be linked with Performance Management to provide a holistic view and drive financial performance Business Performance Management (BPM) focuses on monitoring and managing the business performance of an enterprise but with only 25% of organizations leveraging predictive modeling the focus tends to be onhistorical performance1 Holistic view of past, present and future performance for decision-making + SCRM focuses on the potential future events and their classification into opportunities and risks. Analysis of risks allows forward-looking trend analysis and impact on possible future performance 1 IBM Business Consulting Services, The Global CFO Study 2005 Confidential | 27-Oct-14

23. Supply Chain Risk Management offers improved focus on risk and increased certainty to profitability Improved overall supply chain performance Reduced risks and more effective risk mitigation Elimination of potential and unexpected costs Reduced disruptions and time to recovery Competitive advantage and financial longevity Confidential | 27-Oct-14

24. Lessons learned helps increase probability of success in implementing Risk Management • Ensure risk issues are explicitly considered in decision making • Avoid negative surprises and “predictable” failures by predicting risk events • Align risk exposures and mitigation programs • Institute more rigorous risk management • Integrate risk strategy into other corporate practices like strategic planning Confidential | 27-Oct-14

25. Table of Contents • Introductions • Today’s Business Environment – risk drivers • Types of Risks • Negative Impacts on Business (examples) • Best Practices / Maturity Model • Transformation Journey – client examples of how the risks are mitigated • Open Discussion / Next Steps Confidential | 27-Oct-14

26. Supply Chain Risk Management addresses the challenges in Risk Assessment, Mitigation and Monitoring Risk Assessment • Probability based risk assessment • Likelihood, Severity, Ease of Detection for key risk factors • Roadmap for risk mitigation • Risk based financial impact analysis • Decision tree, sensitivity analysis • Real options Risk Mitigation • S&OP for contingency planning at strategic and tactical level • Resilient supply chain network design at strategic level • Risk based inventory optimization • Contract management and strategic sourcing Risk Monitoring and Control • Supply chain visibility and event management for operational level risk management and control • Risk visibility using predictive analytics Confidential | 27-Oct-14

27. Our SCRM offering begins with the identification of opportunities and continues through implementation to monitoring and control 1 2 3 Risk Monitoring and Control Supply Chain Risk Assessment Risk Mitigation • Select Partners for Risk Mitigation • Define Risk Champions • Implement Risk Mitigation Options • Process • Technology • Organization Alignment • Develop Contingency Plans for Residual Risks • Implement Change Management • Establish Value Realization based on Key Risk Indicators and Assign Responsibilities • Understand Risk Environment • Identify and Asses Current Risks • Quantify and Prioritize Risks • Develop Risk Mitigation Strategy and Prioritize Options • Develop Business Case • Develop Implementation Roadmap • Monitor Actual Performance (versus Expected) of Key Risk Indicators • Assess Out of Control Conditions and Identify Gaps • Develop Control Plans to Handle Out of Control conditions Confidential | 27-Oct-14

28. IBM Supply Chain Risk Management Engagement Experiences • Regional Mass Merchant realizes $3.5M in savings after IBM assesses and resolves risks related to demand growth • Major Electrical and Communication/Data Distributor realizes cost reductions and fill rate increases due to decentralization and increased visibility • Global Pharmaceuticals Firm resolves risks related to decentralized management as IBM implements centralized Global Logistics organization with integrated risk management processes spanning global markets • Global PetroChemical Firm manages merger risk as IBM coordinates the integration of a decentralized supply chain into a centralized supply chain and coaches new organization in S&OP and related processes Confidential | 27-Oct-14

29. Regional Mass MerchantSupply Chain Capacity Expansion Existing network may not handle year-on-year growth forecasts combined with seasonal demand spikes Challenge Labor, transportation, and customer service cost overruns due to inability of distribution network to adapt to demand Risk SC assessment led to $3.5M annual cost savings due to addition of eastern distribution hub Solution Confidential | 27-Oct-14

30. Major Electrical and Communication/Data DistributorDecentralization and Standardization SKU proliferation has led to loss of inventory visibility and strain on distribution network Challenge Decentralized management and control of inventory, procurement, and distribution leads to unhandled cost increases Risk Standardized distribution center size and reduced distribution costs combined with 30-40% fill rate improvement due to centralized planning and improved visibility Solution Confidential | 27-Oct-14

31. Global Pharmaceuticals FirmSupply Chain Transformation Advanced yet disparate supply chain operations and philosophies across legacy businesses restrict performance and growth opportunities Challenge Failure to leverage and track global supply chain operations may eliminate opportunity to maintain competitive cost and quality Risk Establishment of Global Logistics organization, including dedicated risk management processes, and successful integration of new organization across subsidiaries and markets Solution Confidential | 27-Oct-14

32. Global PetroChemical MergerSupply Chain Integration Centralized organization needed to integrate decentralized supply chain of newly-acquired organization Challenge Lack of trust and visibility between parent and acquired supply chains may lead to failed acquisition Risk Coaching to adopt best practices and collaborative S&OP across each organization leading to warehouse and inventory synergies Solution Confidential | 27-Oct-14

33. Table of Contents • Introductions • Today’s Business Environment – risk drivers • Types of Risks • Negative Impacts on Business (examples) • Best Practices / Maturity Model • Transformation Journey – client examples of how the risks are mitigated • Open Discussion / Next Steps Confidential | 27-Oct-14

34. Discussion Items and Next Steps • Questions? Confidential | 27-Oct-14

35. Chris Jones PartnerIBM Global Business Services jhchrist@us.ibm.comPhone: 1-972-672-3253 Contact Information If you would like more information, please contact: Henry Dao Associate Partner IBM Global Business Services henrydao@us.ibm.comPhone: 1-781-323-5166 Confidential | 27-Oct-14

36. Thank You Confidential | 27-Oct-14