1. Planning for Supply Chain Disruptions Yossi Sheffi MIT, Cambridge MA December 5 th, 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 2 nd, 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. 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) New Business Trade-offs:

12. When Disaster Strikes CrisisImpactPrepared Management Unprepared management Hurricane Mitch (Nov. 1998) Floods destroyed banana plantations Chiquita leveraged existing alternative sources Dole took time to find alternatives and lost sales and Taiwan Earthquake (Sep. 21 1999) Component supplies to PC OEMs disrupted Dell priced to steer customers to available components Apple could not change config.- faced backlogs and lost sales Mad Cow & FMD (Spring 2001) Shortage of hides for leather manufacturers Gucci, Wilson – supply contracts; Naturalizer, Danier - inventories Etienne-Agner suffered cost increases 9/11Closed bordersDaimler-Chrysler Alt. modes based on contingency plans Ford idled several plants

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 ? ?