Supply Chain Continuity Planning Mario Hegewald Director, Global - - PDF document

Supply Chain Continuity Planning

Mario Hegewald

Director, Global Logistics

An Unwelcome Call From The CEO

Illustrative

“This is a supplier issue. SCM had better have an answer…” “This is a supplier issue. SCM had better have an answer…” “The stock price is already down 6% over the last three days.” “The stock price is already down 6% over the last three days.” “Very few candidates came by our table at the M.B.A. career fair yesterday.” “Very few candidates came by our table at the M.B.A. career fair yesterday.” “Our core market is 13-18 year

• lds and we use

child labor!!!” “Our core market is 13-18 year

• lds and we use

child labor!!!” “They’ve already filed a lawsuit against us over this.” “They’ve already filed a lawsuit against us over this.” “My phone’s been ringing off the hook with calls from the press.” “My phone’s been ringing off the hook with calls from the press.” Supply Chain “…although apparently that wasn’t good enough “…although apparently that wasn’t good enough “Well, the supplier did sign

• ur code of conduct…”

“Well, the supplier did sign

• ur code of conduct…”

Enterprise Vulnerability Map

Transportation Link Disruption Single Port Closure

Low High Light Severe CONSEQUENCES DISRUPTION PROBABILITY

IT System Failure Accounting Irregularity Product Tampering Multiple Port Closure Technological Change Computer Virus Flood Workplace Violence Wind Damage Loss of Key Supplier Labor Unrest Visible Quality Problems Employee Sabotage Earthquake

P

= PANDEMIC Phases

P3 P4 P5 P6

Loss of many Suppliers Customs Dispute

Source: Yossi Sheffi – “The Resilient Enterprise”

SCM HR, OPS, SCM, IT Economist, Treasury, SCM SCM SCM Owner Owner

Conduct

Visits

and Communication Bus Cont Plan:

Sourcing Strategies

contingencies

Analysis

Sources

Statements

• Solvency

Analysis

Services

Mitigation Mitigation Toolkit Toolkit Unethical Unethical Supplier Behavior Supplier Behavior which Threatens which Threatens Eaton Eaton’ ’s s Reputation Reputation Natural or Manmade Natural or Manmade Disaster which Shuts Disaster which Shuts Down Suppliers Down Suppliers Rapidly Rising Rapidly Rising Commodity Commodity Price Price Sudden Sudden Deterioration in Deterioration in Supplier Supplier Performance Performance Loss of Supplier Loss of Supplier Viability due to Viability due to Financial Crisis Financial Crisis

Variety of Supply Chain Risks

SCM has to mitigate all kinds of Supply Chain Risks

Survey Results: Avian Flu Preparedness*

• Preventative vaccinations/Flu shots and surgical

masks for all employees at company’s expense.

• Build up supply of Tamiflu for all on site

employees.

• Follow CDC guidelines and rely on Government

plan.

• Education around how to prevent the spread of

disease/germ transfer.

Selected comments from suppliers

“How concerned are you that Avian Flu will affect your plant within the next 3 months?” 0% 10% 20% 30% 40% 50% 60% 70% 80% North America Western Europe Eastern Europe Asia Pacific Latin America

Not at all concerned Not very concerned Somewhat concerned Very concerned

Do you have a plan for Avian Flu Outbreak?

13% 13% 29% 49% 0% 87% 88% 71% 51% 100%

North America Western Europe Eastern Europe Asia Pacific Latin America Yes No

• Create antibacterial cleaning stations

throughout the facility.

• Directives of Italian Government are in place –

they have a stock of vaccines.

• Canadian Government has a plan in place.
• Travel restrictions and keep our people out of

China.

Concern and Preparedness, though low, are highest in APAC

Case Study: Penske and FedEx help in time of Crisis

Situation: Post-Katrina recovery requires huge volume of trucks to head to affected area, creating carriage shortages in the North. At the same time, Oracle implementation issues create delivery crisis for the Truck Group requiring expedited logistics services. Continuity Solution: Penske, FedEx and the Eaton Logistics Team work together to get trucks in the right place at the right time, and service our customers without disruption. Outcome: Successful. Learning: Relying on and facilitating coordination between world class logistics providers to assure continuity of operations works. Pre- defined roles and responsibilities would have helped.

Case Study: Mexican Government Shuts Down Natural Gas to SLP

Situation: To affect repairs to natural gas pipelines, the Mexican Government announces a 3-day shutdown. Continuity Solution: Substitute LNG or Propane. Outcome: Unsuccessful. Moving from natural gas to another fuel requires extensive testing of alternative burners and processes. This takes time and money. Learning: Anticipating this kind of a disruption and investigating and preparing contingencies is what BCP is all about. With more lead time, one of these solutions might have been implementable.

Case Study: Fuel for Jackson, Mississippi

Situation: Hurricane Katrina shuts down our Jackson, Mississippi, plant and devastates the homes of several

• employees. Employees can’t get around because of lack
• f gasoline in the area.

Continuity Solution: Set up temporary gasoline station inside plant with fuel trucked in from the North. Outcome: Successful. Though unanticipated, Team Indirect was able to locate equipment and fuel to place in Jackson, helping employees with personal recovery activities and in getting the plant back up. Learning: Continuity plans anticipating food, water, and fuel disruptions should be created for all of our plants.

With an extending global footprint, Eaton’s supply chain faces a number of risks …

Greater Exposure to Supply Chain Disruptions

Increasing Single Sourcing More Outsourcing Increasing Product Portfolio & Introductions Extending Global Supply Chain Increasing Manufacturing Footprint Demanding & Compressed Lead-Times Leaner Inventories

Eaton has established an Enterprise Risk Management (ERM) Strategy to identify, address and mitigate risks

“A strategy implemented at every level of the organization designed to identify potential events that will adversely affect the corporation and to manage risk to levels deemed acceptable by the World Business Team and Board of Directors.”

• Event-based risk considerations
• Eaton-Site Emergency / Crisis response
• Crisis Management

Pandemic Disruption

• HR Pandemic Preparedness Plan
• Communication protocols established
• Escalation process and partner

SOX 404

• Self-assessment and validation program
• Financial and IT improvements
• Process improvements being implemented

“Doing Business Right”

• Code of Ethics
• Ethics Training and Collateral Material
• Office of the Ombudsman

IT Disaster Recovery

• IT Disaster Recovery defined
• Central leadership, decentral execution
• Data center strategy
• Logistics risk considerations
• Supply Chain Emergency / Crisis response
• Alternative sourcing strategies

Supply Chain Continuity Integrated Contingency Planning

• Event-based risk considerations
• Eaton-Site Emergency / Crisis response
• Crisis Management

Pandemic Disruption

• HR Pandemic Preparedness Plan
• Communication protocols established
• Escalation process and partner

SOX 404

• Self-assessment and validation program
• Financial and IT improvements
• Process improvements being implemented

“Doing Business Right”

• Code of Ethics
• Ethics Training and Collateral Material
• Office of the Ombudsman

IT Disaster Recovery

• IT Disaster Recovery defined
• Central leadership, decentral execution
• Data center strategy
• Logistics risk considerations
• Supply Chain Emergency / Crisis response
• Alternative sourcing strategies

Supply Chain Continuity Integrated Contingency Planning

Global Logistics

Supply Chain Continuity Planning - Early Warning & Recovery

Action Plan / Key Strategies

A1 Develop approach to identify, prioritize, and mitigate supply chain disruptions A2 Publish emergency response and crisis management guidelines A3 Create risk mitigation approach that supports the global sourcing strategy A4 Work with suppliers to help them develop business continuity programs that assure continuation of supply A5 Strengthen logistics continuity plans with global logistics partners

Impact Summary Expected Outcomes

• Emergency Response & Crisis Management Guidelines to minimize effects of supply

chain disruptions

• Pandemic Preparedness Plan
• Supply continuity plan for suppliers of critical parts
• Warehousing & inventory positioning strategy that buffers supply disruptions
• Risk exposure database that provides early warning indicators of supply disruption

Damage to Financial Results, Reputation and Key Relationships Lost Time and Productivity With Continuity Planning Without Continuity Planning Process

• Monitoring
• Risk avoidance
• Prepare operational,

and functional, continuity plans Time

Risk avoidance, constant monitoring, and business continuity planning are elements of Eaton’s ERM Pre-event Event Post-event

Damage to Financial Results, Reputation and Key Relationships Lost Time and Productivity Lost Time and Productivity With Continuity Planning Without Continuity Planning Process

• Monitoring
• Risk avoidance
• Prepare operational,

and functional, continuity plans Time

Risk avoidance, constant monitoring, and business continuity planning are elements of Eaton’s ERM Pre-event Event Post-event

More Severe Impact 11

Supply Chain Continuity (SCC) is a key ERM program that focuses on the external supply chain

Eaton Board Mission Statement: “Make Eaton’s supply chain more capable to identify, withstand and recover from disruptions”

Risk Categories

Supplier Financial Viability Supplier Performance Commodity Price Escalation Ethical Issues External Supply Continuity

Eaton Processes & Systems

Regular Review of Financial Statements Open Ratings Scorecards WISPER Hedging, LTA's, Global Market Analysis Codes of Conduct, Periodic Visits, Annual Ethics Letter, Image Ranking Supply Chain Continuity Plan:

• 1. Logistics Risk

Mitigation Strategies

• 2. Emergency

Response & Crisis Management

• 3. Alternative

Sourcing Strategies

• 4. Organization

Development

Leading Supporting Functions

Ops,Treasury, Finance, IT, Supply Chain Leaders

Prevention and Early Warning Focus Business Resumption Focus

• Protect the reputation, credibility and

image of Eaton

• Protect and sustain Eaton’s supply

chain to support business operations and achieve strategic objectives

• Reduce the potential impact duration
• f the supply chain disruption
• Reduce total cost of the issue,

incident or crisis

• Maintain positive relationships with

key stakeholders, customers and suppliers

• Communicate quickly and accurately

with key audiences

All of Eaton’s ERM Strategy programs focus on the following three key elements …

Pre-Disruption Prep

• Risk Detection, Assessment,

and Mitigation

Functional Regulatory Operational

• Business and/or Supply Chain

Continuity Planning

Emergency Response Crisis Management Business Recovery

• Incident/Crisis Management

Safety Assets Reputation Brand

• Rapid Business and/or Supply

Chain Recovery

• Product/Customer Recovery
• Technology Recovery
• Data Recovery
• Processing Recovery

Disruption Response Post Disruption

• Repair
• Return to Pre-Incident State

Business Recovery Functional Recovery

• Lessons Learned

Update Risk Detection,

Assessment, and Mitigation Plans

Update Business or

Supply Chain Continuity Plans Focus on Focus on materiel materiel

Supply Chain Continuity Management Three Important Distinctions

Crisis Management Business Recovery Emergency Response

Incident Recovery

Protect life, secure assets; Primary responsibility resides with the local incident response teams Protect brand, public image, reputation; Primary responsibility resides at the local level with regional

• r WHQ participation as necessary

Ensure ability to serve customers; Requires ability to establish substitute or replacement parts, raw materials, manufacturing capability, etc. Pre- planning is the key to success.

Minutes Hours Weeks Days

Supply Chain continuity requires part-level risk analysis and mitigation

Supply Chain Emergency Response / Crisis Management Requirements Guideline

Established an emergency response / crisis management requirements guideline which addresses:

Stratification of response (from

plant to division to group to corporate) based on impact of event

Supply Chain Communication

guidelines

People, process and technology

requirements to address emergencies

Crisis Management Business Recovery Emergency Response

Protect life, secure assets; Primary responsibility resides with the local incident response teams Protect brand, public image, reputation; Primary responsibility resides at the local level with regional

• r WHQ participation as necessary

Ensure ability to serve customers; Requires ability to establish substitute or replacement parts, raw materials, manufacturing capability,

• etc. Pre-planning is the key to success.

SC Emergency Response & Crisis Mgt.

Escalation Communication Tree

Crisis Management Coordinator

• CEO or CFO
• r Designee -

Crisis Incident Issue Decision Committee

Crisis Management Team Incident Management Coordinator

• VP, Director,

GM or Designee - Incident Management Team On-Site Management Coordinator

• Plant Mgr
• r Designee -

On-Site Response Team

Crisis Communication Team

• External Communications Coordinator -

Supply Chain Continuity Team

• Leader of Supply Chain Continuity -

… help our suppliers with business continuity planning (BCP) …

Segmentation Process

• Supplier Spend
• Supplier Performance
• Critical Parts

Joint BIA ’s & TTX ’s

Do on

• site training

sessions and audit suppliers using SQEs Request and review supplier continuity plans and hold web based training Generally educate suppliers about continuity planning requirements; review supplier health through open ratings, supplier performance through WISPER and country risk indices

Strictly Illustrative

Joint BIA ’s & TTX ’s

Do on-site training sessions and audit suppliers using SQEs Request and review supplier continuity plans and hold web based training Generally educate suppliers about continuity planning requirements; review supplier health through open ratings, supplier performance through WISPER and country risk indices

50% Reduction of the Right Suppliers Critical

International Trade Logistics risks

Event Risks Operational Risks

• Regulatory
• Political
• Reputation
• Supply continuation
• Inventory access
• Systems support
• Process continuation
• Human capital

availability

Events

• Loss of Right to Operate
• Loss of Trade preferred status
• Shipment loss
• Shipment delay
• Port closure – labor
• Port closure – physical

Mitigation Mitigation Monitoring Monitoring Intervention Intervention Resumption Resumption Crisis Management Crisis Management

Risk Management

Preemptive actions and mitigation to ensure our right to operate

• Leveraged control and

influence over activities

• Operational flexibility
• Strategic buffer

supplies closer to demand points

• Fewer visibility portals

Tactics:

• Resilient global supply

chain technology and support

• Recognition and

preferential treatment as a secure and compliant trader

Current Benefits: Gaps to close 2006-2007:

Limit number of international logistics business partners Leverage relationships for influencing decisions and prioritized handling Utilize flexible carrier and port selection processes Design local stock VMI programs Participate in Trade Initiatives – C-TPAT, ISA Align international logistics with LLP strategy (ongoing through Q4 2007) Enhance and improve border crossing processes (Q3 2006) Develop technology interfaces with partners (ongoing) Define common VMI strategies and programs (Q1 2007) Full ISA roll-out to remaining 3 groups (Q4 2006) C-TPAT validation and Mexico development (Q4 2006)

Note: * ISA – Importer Self Assessment, CTPAT – Customs-Trade Partnership against Terrorism, VMI – Vendor Managed Inventory & LLP – Lead Logistics Provider

Lead Logistics Providers (LLP) are key to our logistics risk mitigation strategy

Our LLP strategy provides:

• Assets: Size and scale necessary to secure

transportation resources during times of crisis

• Systems/Information:
• Ability to “see” inventory in transit
• Access to early warning indicators
• Global event management from North

America

• People: Geographically diverse resource footprint

and on-the-ground help

Supply Chain Finance IT EHS Communications I&RM Human Resources Legal

Pandemic Preparation

Risk Management Processes (Prepared By Functions to ensure functional resilience) Event Peril Plans (Cross Functional Response Required)

Political Unrest Terrorist Attack Plant Shutdown

SCCP Requires Coordination and Collaboration

Etc.

Questions