Supply Chain Risk Management Framework Supply Chain Risk Leadership Council 6 June 2007

1. Supply Chain Risk Management FrameworkSupply Chain Risk Leadership Council6 June 2007

2. Overview • Scope • Develop a Supply Chain Risk Mgmt Framework that will allow SCLRC members to work from common terms of reference and that will help guide future SCLRC activities • Deliverables • This presentation • Others TBD

3. Team Members and Sources • Team Members • Ely Kahn and Andrew Cox, TSA • Tim Astley, Zurich • Brent Myers, FedEx • Craig Babcock, P&G • Sources • Committee of Sponsoring Organizations of the Treadway Commission (COSO), Enterprise Risk Management - Integrated Framework, 2004 • Supply Chain Risks and Risk Sharing Instruments, Robert Lindroth & Andreas Norrman, 2001

4. Definition of SCRM • Supply Chain Risk Management (SCRM) is the practice of managing the risk of any factor or event that can materially disrupt a supply chain whether within a single company or spread across multiple companies. The ultimate purpose of supply chain risk management is to enable cost avoidance, customer service, and market position. Supply chain risks can be grouped into 3 broad categories: physical, process, and institutional risks

5. Types of risk Risk management components Supply Chain Risk Framework PHYSICAL PROCESS INSTITUTIONAL Internal environment Objective setting GLOBAL SUPPLY CHAIN EXTERNAL SUPPLY CHAIN Event identification INTERNAL SUPPLY CHAIN Risk assessment UNIT/SITE OPERATIONS Risk response Control activities Information & communication Supply Chain Scope Monitoring

6. Risk Mgmt Components

7. Internal Environment Objective Setting Event Identification Risk Assessment Risk Response Control Activities Information & Communication Monitoring Risk Management Components Components of SCRM • Internal Environment • Objective Setting • Event Identification • Risk Assessment • Risk Response • Control Activities • Information & Communication • Monitoring The components should be looked at as being interrelated.

8. Internal Environment • Encompasses the tone of an organization • Influences the consciousness and awareness of its people • Basis for all other components • Provides discipline, structure and organization • Establishes a philosophy regarding risk management, including its risk appetite • Oversight by board of directors • Integrity, ethical values, competence • Assigning of authority and responsibility Internal Environment Objective Setting Event Identification Risk Assessment Risk Response Control Activities Information & Communication Monitoring

9. Internal Environment Objective Setting Event Identification Risk Assessment Risk Response Control Activities Information & Communication Monitoring Objective Setting • Set at the strategic level, establishing a basis for operations, reporting and compliance • Precondition for event identification, risk assessment and risk response • Aligned with the risk appetite (as defined in internal environment) • Risk tolerance

10. Internal Environment Objective Setting Event Identification Risk Assessment Risk Response Control Activities Information & Communication Monitoring Event Identification • Management identifies potential events • Differentiates risks and opportunities. • Events that may have a negative impact represent risks, which require management response • Events that may have a positive impact represent natural offsets (opportunities), which management channels back to strategy setting. • Involves identifying those incidents, occurring internally or externally, that could affect strategy and achievement of objectives. • Addresses how internal and external factors combine and interact to influence the risk profile.

11. Internal Environment Objective Setting Event Identification Risk Assessment Risk Response Control Activities Information & Communication Monitoring Event Identification Possible techniques • Event inventories • Scenario analysis • Internal analysis • Escalation or threshold triggers • Facilitated workshops and interviews • Process flow analysis • Leading event indicators • Loss event data methodologies • Interdependencies

12. Internal Environment Objective Setting Event Identification Risk Assessment Risk Response Control Activities Information & Communication Monitoring Event Identification Categorization of events (with reference to other framework axes), e.g. • External • Economic • Environment • Political • Social • Technological • Internal • Infrastructure • Personnel • Process • Technology

13. Internal Environment Objective Setting Event Identification Risk Assessment Risk Response Control Activities Information & Communication Monitoring Risk Assessment • Allows an entity to understand the extent to which potential events might impact objectives. • Assesses risks from two perspectives: • Likelihood • Impact • Employs a combination of both qualitative and quantitative risk assessment methodologies. • Relates time horizons to objective horizons. • Assesses risk on both an inherent and a residual basis. • Impact of events should be assessed individually or by category across the entity

14. Internal Environment Objective Setting Event Identification Risk Assessment Risk Response Control Activities Information & Communication Monitoring Risk Assessment • Assessment Techniques • Benchmarking • Probabilistic models • Non-probabilistic models

15. Internal Environment Objective Setting Event Identification Risk Assessment Risk Response Control Activities Information & Communication Monitoring Risk Response • Identifies and evaluates possible responses to risk. • Possible Responses: • Avoidance • Reduction • Sharing • Acceptance • Evaluates options in relation to risk appetite, cost vs. benefit of potential risk responses, and degree to which a response will reduce impact and/or likelihood. • Selects and executes response based on evaluation of the portfolio of risks and responses. • Examines, whether residual risk is within risk tolerance

16. Internal Environment Objective Setting Event Identification Risk Assessment Risk Response Control Activities Information & Communication Monitoring Control Activities • Policies and procedures that help ensure that the risk responses, as well as other entity directives, are carried out. • Occur throughout the organization, at all levels and in all functions. • Include approvals, authorizations, verifications, reconciliations, review of operating performance, security of assets and segregation of duties.

17. Internal Environment Objective Setting Event Identification Risk Assessment Risk Response Control Activities Information & Communication Monitoring Information & Communication • Management identifies, captures, and communicates pertinent information in a form and timeframe that enables people to carry out their responsibilities. • Communication occurs in a broader sense, flowing down, across, and up the organization. • Personnel receive a clear message from top management • Means for communicating upstream • Communication with external parties

18. Internal Environment Objective Setting Event Identification Risk Assessment Risk Response Control Activities Information & Communication Monitoring Monitoring • Monitoring shall assess presence and functioning of ERM over time • Effectiveness of the other ERM components is monitored through: • Ongoing monitoring activities. • Separate evaluations. • A combination of the two. • Serious matters reported to top management and the board

19. Issues to be aware of • Need to balance the audit approach (avoid or mitigate risk) vs. proactive approach (deal actively with risks) • Need to recognise role of risk management in realizing strategic objectives • Risk should be seen as a necessary component and factor in strategic opportunity. • There might be an economic benefit in accepting a particular risk, the focus should be on the risk-return tradeoff • Risk quantification needs to be included as well as the focus on risk mitigation. • Need to adequately reflected the external environment even though some risk-factors are beyond management’s control • Need to recognise correlation of risks – often difficult • Risk management is a coordinating function • Risk management is a dynamic process, not a check list approach • Need to recognise risk to reputation

20. Types of Risk

21. Types of Risk • Physical Disruptions: Destruction of critical infrastructure in the supply chain • Critical Infrastructure includes the material components or assets necessary for the continuous operation of the transportation system including equipment and personnel • Process Disruptions: Events that involve day-to-day operations of supply chain processes • Processes include the rules, actions, decisions, and information flows that give life to the physical level and are necessary for efficient and effective operation of the transportation system. Processes are what allow material components to work together—physically or virtually—as a system or supply chain • Institutional Disruptions: Events that involve changes in company or supply-network governance and strategy. • Institutional considerations include the policies, guidance, and organizations that empower and constrain the operation of the supply chain to meet large-scale company goals. Public sector examples of institutional disruptions include federal legislation, national policies, and state regulations. Private sector examples include company reorganizations, mergers, market shifts, and technology breakthroughs. Physical Process Institutional

22. Risk Categories • Physical Disruptions • Natural Disasters • Terrorist Attacks • Accidents • Process Disruptions • Cyber Attacks • Demand Forecasting Errors (Bullwhip effect) • Supplier Reliability • Missing or late shipments • Institutional Disruptions • New / Increased Regulations • Geopolitical Issues / War • Technology Step-Change

23. Supply Chain Scope

24. Supply Chain Scope • Unit/Site Operations: Source, make, deliver and return activities that are confined to a specific company unit or site • Internal Supply Chain: Source, make, deliver and return activities that are confined to internal customers and suppliers at a local or regional level • External Supply Chain: Source, make, deliver and return activities that include external customers and suppliers at a local or regional level • Global Supply Chain: Highly complex supply chains that span national boundaries and involve second and third order suppliers and customers Internal Supply Chain External Supply Chain Global Supply Chain Unit Operations

25. Supply Chain FrameworkInterdependencies Physical Movement Information Flow Information Flow Financial Flow

26. Supply Chain Scope Overlaid onto the Supply Chain Framework Unit/Site Operations Internal Supply Chain External Supply Chain Global Supply Chain

27. Next Steps • Discussion • Close out track? • How do we use this framework?