Planning for Supply Chain Disruptions

1. Planning for Supply Chain Disruptions Yossi Sheffi MIT, Cambridge MA December 5th, 2002

2. Outline • The threat • Past disasters • Supply chain preparedness • preliminary research findings

3. Terror Threats: • Physical • Chemical/biological • Nuclear/”dirty” • Cyber attack

4. The Economic Targets: Infrastructure • Agriculture • Tourism • Transportation • Electric grid • Banking & finance systems • Oil and gas • Communications • Continuity of government • Medical services delivery • Water supply • Food supply

5. Learn From Past Disasters • Kobe Earthquake -- Jan 16 1995, >6,300 killed, 100K buildings destroyed, 80K damaged. Total damage: ~$250B • Bhopal -- Dec 2nd, 1984, Union carbide factory, 2500 dead, 50,000 hospitalized. • Chernobyl– April 26, 1986, 15M people affected, Belarus still affected

6. Learn From Past Disasters • Influenza 1918– 675,000 dead in the US alone; Started in army barracks and prisons in the US; 30 – 50 million worldwide (“the Spanish Flu…”) • The Mont Blanc -- Dec. 6, 1917 the Mont Blanc explodes in Halifax port (400,000 lbs. Of TNT, 2,300 ton of Citric Acid, 10 tons of gun cotton, 35 tons of Benzol). 2500 dead; 9,000 injured; shock wave felt in Cape Bretton (270 miles away). • Foot and Mouth Disease (FMD) and Mad Cow Disease– UK, 2001, quarantines and slaughter of suspected animals; $3B - $5B hit.

7. Danger – Government Response • On 9/11: • Ford idled several production lines intermittently due to delays at the Canadian border • Toyota came within hours of halting production since a supplier was waiting for steering wheels shipped by air from Germany • After Flight 587 crashed, Nov. 12, 2001 • Bridges to NY were closed for several hours • In UK FMD – • Farmers’ costs <$1B • Tourism costs (after the government issued a ban) $2B - $4B • Japanese government bankrupted many private hospitals in the Kobe area

8. Preparing for Another Disruption • Supplier relationships • Core suppliers vs. public auctions • Use of off-shore suppliers • Dual supply relationships • Inventory management • The vulnerability of JIT manufacturing • Advantages of JIT manufacturing • Strategic Inventory (SoSo management) • Knowledge backup • Developing backup processes • Backing up the company’s knowledge • Standardization and cross-training • CRM and customer relationships

9. Supply Chains under Uncertainty • Better visibility • Transportation visibility involves multiple handoffs • Need for full supply chain visibility, including detailed handling • Independent data acquisition sources • Better collaboration • Last decade: VMI, CMI, EDR, QR, JIT, JIT II, CPD, CPFR… Now: implementation • New: joint emergency planning (alternate shipping methods; alternate suppliers…) • Also: security knowledge sharing • Better forecasting • Postponement • Build-to-order • Product variability reductions • Centralized inventory management

10. Industry-Government partnerships • Clear role for cooperation – happening already • Industry participation in Free and Secure Trade (FAST) and Customs Trade Partnership Against Terrorism (C-TPAT) • “Known shipper” and “known carrier” programs • Difficult to get terrorism insurance – role of government as insurer of last resort • Insurance companies are only starting to model terrorism threats.

11. New Business Trade-offs: • Efficiency vs. redundancy (who pays for cells, electricity, medicines, etc.) • Collaboration Vs. Secrecy (example: hazmat placards) • Centralization vs. dispersion (physical vs. I/T attack) • Lowest bidder vs. known supplier (what’s in the container…) • Security vs. privacy (vs. efficiency of search)

12. When Disaster Strikes

13. Preliminary Research Data • Two responses: active and “do nothing” • Active: • Past bad experience • Corporate culture (defense business, work in dangerous places around the world, etc.) • Security departments staffed with experience • “Do nothing”: • Believe 9/11 is a one-time event • Cannot find a way to pay • Believe government will help • All companies – most concerned about government response to terrorist attacks • All companies – report a large increase in cyber attacks

14. Preliminary Research Data(Active Respondent) • Build redundancies • Tighten collaboration with partners • Work with government to understand and influence security initiatives • Look for technology to help (RFID, GPS, e-cargo seals, biometrics, sensors, etc.) • Education • Awareness • Contingency planning (including drills with supply chain partners)

15. Summary • A long term adjustment • In past incidents: the economic impact was a lot less than initially feared • “collateral benefits” of preparedness: • Better collaboration • Better supply chain operations • Better controls (less theft, IP loss, better standards) • Participation in communities

16. Any Questions? ? ? ? ? ? Yossi Sheffi SHEFFI@MIT.EDU