Confidential and Proprietary to DRK Research and Consulting LLC All rights reserved Freightliner Standard Template.ppt Environmental Risk Assessment Overview

Copyright © DRK Research and Consulting L.L.C Environmental Risk Analysis The purpose of the environmental indicators is to measure the risk contribution of the supplier specific environment (See Figure). This includes market dynamics (customers and competitors), mergers, acquisition, divestitures, regulatory dynamics, disasters (natural and man-made), and transportation dynamics (routes, borders, types). Other measures in the risk assessment focus on the supplier attributes, interactions and relationship factors.

Copyright © DRK Research and Consulting L.L.C Environmental Risk Analysis There are five environmental indicator questions for the analyst. 1.Market Dynamics 2.Merger, Divestiture and Acquisition 3.Regulatory Issues 4.Disasters 5.Transportation Disruptions  Each indicator has a scale of 1-5 reflected below. The scores are determined by the Risk Analysts based upon the analysis of the factors discussed in each section below Minimum Below Average Average Above Average High

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5 Environmental Average Results

Copyright © DRK Research and Consulting L.L.C Environmental Risk Analysis What is the potential of a major supply chain disruption due to market dynamics?  This question looks at the customers of the supplier and their influence on potential SC disruptions for the SC network organizer. If the other customers demand a large share of the volume and these customers are in a different market dynamic (more profitable, higher growth, more strategic for the supplier, etc.) then there is a higher risk of disruption to the SC network organizer under review.  This question also looks at the supplier’s competitors and their impact on the flow of goods from the supplier. For example, if there are a lot of competitors in the market this suggests a high level of competition, potentially low margins and possible sudden exit from this business due to lose of a large account. This also suggests a low level of investment due to low returns. Cash flow issues can also occur. On the other hand, if there are only a few competitors in the supplier’s market and there is a downward trend in the number (consolidation), this suggests a possibly shrinking market and the potential of a sudden exit from the business and the reduction of investments in capacity. Suppliers in this position often put extreme pressures on maintenance and plant equipment resulting in capacity and quality issues and a decrease in delivery reliability.

Copyright © DRK Research and Consulting L.L.C Environmental Risk Analysis What is the potential of a major supply chain disruption due to merger and acquisition issues?  These questions measure the risk of disruption due to specific actions in the supplier’s environment. The supplier under review can be a high probability acquisition target in a consolidating market. They can also be a division of a large company that no longer “fits” the strategy of the parent company and therefore be a high probability divestiture candidate. These changes are very disruptive to supplier performance and would likely result in delivery or quality problems. They might also result in a supplier dropping lines of business or customers that no longer “fit”. Mergers can also be disruptive since leadership changes and downsizing frequently occur after a merger.

Copyright © DRK Research and Consulting L.L.C Environmental Risk Analysis What is the potential of a major supply chain disruption due to regulatory issues?  This question addresses the disruption risks posed by the regulatory environment. This includes unions, government, customs, tariffs, local content, taxes, contract law and ownership. For example, a supplier in New York City has a very different regulatory environment than a supplier in South Carolina. NYC has unions, wage controls, higher taxes and laws controlling plant shut downs. SC is an open shop state (no union requirement), lower taxes, no wage controls and liberal laws regarding plant shut downs.  Environmental and working condition regulations can also pose a two sided risk when they are very stringent or when they are lacking (some low cost countries) such as in the case of the chemical disaster in Bhopal with Union Carbide.

Copyright © DRK Research and Consulting L.L.C Environmental Risk Analysis What is the potential of a major supply chain disruption due to a disaster (natural disaster, political, terrorist, etc.)?  This question is very driven by location of the supplier’s operations. For example, a supplier plant in New Orleans has a high risk of disruption due to hurricanes and a plant in some areas can have a high risk of earthquakes. A company located in Pakistan can have a higher risk of terrorism while a plant in Mexico has a medium risk of terrorism issues. Political instability, such as is occurring in Venezuela, can also pose a disruption risk. Suppliers in this environment have trouble getting loans or credit from their suppliers. Often incoming shipments of parts and suppliers are disrupted due to political disputes.

Copyright © DRK Research and Consulting L.L.C Disaster Risk Methodology Tornado Risk Hurricane Risk Within 60 miles of coast miles of coast - 4 Earthquake Risk

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Copyright © DRK Research and Consulting L.L.C Environmental Risk Analysis What is the potential of a major supply chain disruption due to a transportation disruption (accident, transportation union strike, etc.)?  The transportation route and duration can increase the disruption risk. A three month lead time has more potential issues than a 3 day lead time. The deviation can also have more impact (weeks late v. hours). Ocean freight presents special disruption and damage risks from ports (loading and unloading) as well as weather and shipping accidents.  Truck transportation in many countries is very difficult and disruption prone. Rail transportation in many countries is also unreliable and subject to strikes and accidents. Even within the US, a long transportation route presents more of a risk than a short one. Coast to coast routes are historically hit with weather (snow, ice, floods) and experience frequent issues. A supplier’s inbound materials’ routes and methods should also be examined for risks. This question attempts to cover all of those issues concerning a particular supplier’s transportation situation. <>

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Copyright © DRK Research and Consulting L.L.C Employment Levels v Wage Rate

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Exercise Teams Commodity Teams Risk Management Supplier Improvement Strategic Sourcing Supplier Teams Supplier 1 Supplier 2 Supplier 3 Supplier 4 Supplier 5 Supplier 6 Supplier 7 User: supplier 1 Password: freightliner User: simulator Password: results

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