APICS Mission Peak – September 7, 2011

1. Risk management in supply chain: Risk based inventory classification Alex Rivlin APICS Mission Peak – September 7, 2011

2. Risk management in supply chain Agenda • Goals of risk management • Process, attention areas, best practices • Risk based inventory classification

3. Goals of risk management Goals of risk management Reduce loss of sales Reduce expenses Levels of risk management Maturity of risk management Drop in demand Expedite charge Management $$ E & O Expedite charge Management $$ Types of risks Missed Schedule Out of Stock Ability to grow

4. Risk management in supply chain Agenda • Goals of risk management • Process, attention areas, best practices • Risk based inventory classification

5. Supply Chain Risk Management – history and background Philips fire • Philips FAB in New Mexico manufactured RF chips for cell phones. • Ericsson and Nokia accounted for 40% of production. Philips realized that extent of the damage is higher than expected

6. Supply Chain Risk Management – history and background Cisco example Gartner, “Case Study: Cisco Addresses Supply Chain Risk Management”, 2010

7. Supply Chain Risk Management – takeaway Or you invent all of the above after the fact?.....

8. Risk management process ouch Management view: No problems Reporting to the management I MANAGE High risk process design, dependent on single person with no visibility Issues on the shop floor

9. Agenda Agenda • Goals of risk management • Process of risk management • Inventory risk management

10. Inventory related risks: Sample supply chain Inventory related risks: controls and prevention Lets consider simple supply chain and identify controls that are required to monitor and minimize inventory related risks Sample supply chain Spend NOTES: Raw materials RM-1 and RM-2 are converted to Item 1 via operation S1. Item1 is combined with subassembly PP-1 or PP-2 to produce Item1-1, Item1-2, Item1-3 via operation S2 The above items are converted to final items Item1-1-1 … Item1-3-4

11. Supplier side risk: sample supply chain Inventory related risks: controls and prevention Lets consider simple supply chain and identify controls that are required to monitor and minimize inventory related risks Sample supply chain Spend On sales side ABC is assigned by sales volume, on supplier side – by spent

12. Supplier side risk : sample supply chain Closer look Sample supply chain Spend Affects 95% Of sales Supplier side risk – PP-3 affects 95% of sales. If supplier delays/cancells/defaults on their commitment... Ensure healthy pipeline; establish second source.

13. Supplier side risk: sample supply chain Zoom in Sample supply chain We get healthy and reliable Profit. Supplier gets 0.1 And has to invest 1.9 Affects 95% Of sales . PP-2 costs $2. Supplier's fee is $0.01, and parts they need to buy are $1.99... Supplier may not carry enough Inventory to support volume, which affects $20 revenue for the company. Monitor supplier's inventory and ensure supplier has enough cash to deliver the goods.

14. Supplier side risk categorization Source: “Cisco addresses supply chain management” http://www.cisco.com/web/strategy/docs/manufacturing/Cisco_Case_Study_AMR_10-0917.pdf

15. Customer side risk : sample supply chain Zoom in Sample supply chain Spend Our highest runner is used By ONE customer and for ONE design only Used by one customer . Item 1-1-1 : If anything happens with customer's design, our entire WIP can become obsolete. Item 1-3-3 : If anything happens with [our relationships with ] the customer – back end wip will be obsolete

16. Customer side risk categorization

17. Summary Summary : Successful risk management is: Established practice • Supported by reliable process • Dedicated to direct attention to right risk areas • Includes teams from supplier, company, and customers • Well communicated and transparent • Has access to senior and executive level management