Dr Grant Foster
Aon Global Risk Consulting

Resilience
Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)
Proprietary & Confidential (Optional) | Date (Optional) 1

Supply Chain Drivers
Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)
Proprietary & Confidential (Optional) | Date (Optional)
2

Three Steps To Improving Supply Chain Resilience
(Know when the elastic band will break)
1
2
11
2.0 Irons Supply Chain
Weeks
External
2.1 Component
Supplier
China
Japan
Korea (until 1st wk Dec 09)
XXX Supply Chain
2
2.2 Product assembly at xxx factory
QC Batch
Testing
Notes On Threats
Third party could persuade component supplier (Korea) to send poor quality components
Third party could attempt BI event at xxu (e.g. fire, damaging ingress/egress, power supply etc)
2.3 Warehouse
(limited storage)
Third party could attempt BI event at warehouse (e.g. fire, damaging ingress/egress, etc)
6
2.5a Retail Box
Manufacture (xxx)
2
2
2.4 Products freighted (Sea &
Air)
QC
Logisitics
Retail packs to USA SA NZ & Australia
Bulk packs to Europe
2.5b xxx packages irons into retail packs
QC Batch
Testing
Third party could allege problems with customs either at shipping point or destination
Third party could attempt BI event with xxx
Third party could interfere with QC process by coercion of employees
Third party could attempt BI event with xxx
2.6 Retail Packs sent to xxx (Internet distribution)
2.7 Retail Packs sent to other markets
2.8 Retail Packs sent to large clients
(Stop the band breaking – or have something else in place)
Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)
Proprietary & Confidential (Optional) | Date (Optional) 3

What is in the model?
Production capacity
Inventory at various stages
Raw Materials
Manufacturing
Manufacturing
Manufacturing
Packaging
Packaging
Packaging Distribution
Bill Of
Materials
Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)
Proprietary & Confidential (Optional) | Date (Optional)
This all relates (eventually) to time
4

What does a link in the chain look like?
Operating modes
Flow rate
Storage Capacity
Manufacturing
Call off rate
Bill Of
Materials
Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)
Proprietary & Confidential (Optional) | Date (Optional) 5

So what do we calculate?
Production capacity
Inventory at various stages
Raw Materials Manufacturing Packaging Distribution
Consider the loss of production from a particular Manufacturing site.
Several types of risk event may lead to this outcome. Some insurable (e.g. fire, flood etc) some non insurable (Strike,
Government restrictions etc).
1. Reduction of production capacity (e.g. if it is the only site -> 0%, if there are multiple sites we assume the others can go to maximum capacity which may make up some of the capacity shortfall)
2. Recovery time for the site
3. The supply chain can still operate for a certain length of time depending on the inventory in the downstream chain
4. The following components give us a critical buffer time ( i.e. how long we can keep going before BI really starts): the stock buffer time (from 3), the production achieved in this buffer time (from 1)
5. Business Interruption occurs if recovery time (from 2) is larger than the Critical Outage Time (from 4)
Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)
Proprietary & Confidential (Optional) | Date (Optional) 6

So what do we calculate?
Production capacity
Inventory at various stages
Raw Materials Manufacturing Packaging Distribution
Bill Of
Materials
Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)
Proprietary & Confidential (Optional) | Date (Optional)
Consider the loss of production from a particular supplier.
1. There is a certain amount of inventory at the Manufacturing site
2. Recovery time to find an alternative supplier – this may be small if there are other suppliers available
3. The supply chain can still operate for a certain length of time depending on the inventory in the downstream chain
4. The following components give us a possible outage time is : the inventory buffer time (from 1), the recovery time (from 2)
5. Business Interruption occurs if possible outage time (from 4) exceeds the critical buffer time for the Manufacturing site
7

So what do we calculate?
Production capacity
Inventory at various stages
Raw Materials Manufacturing Packaging Distribution
Consider the loss of a Distribution Centre site.
1. Reduction of production capacity – may be zero if at the end of the chain and if we can meet demand by directly shipping from production
2. Recovery time for the site
3. The supply chain can still operate at full production capacity
4. The following components give us a critical buffer time ( i.e. how long we can keep going before BI really starts): the time to put in place alternative logistics arrangements
5. Business Interruption occurs if recovery time (from 2) is larger than the Critical Outage Time (from 4)
Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)
Proprietary & Confidential (Optional) | Date (Optional) 8

2. Quantify The ‘What If’s’
$600,000,000
$500,000,000
$400,000,000
$300,000,000
$110,300,000
Supply Chain BI Exposures
Loss Market Share
Loss Of Profit
Recovery Time
Downstream Buffer Time
Total Loss
8
$200,000,000
$100,000,000
7
7 7
$0
$0
Boehringer Ingelheim
AXR
$0
Cambrex AXR
$407,400,000
5
DSM AXR
7 7
$164,200,000
5
$70,500,000
3
$93,700,000
3
2
$0 $0
Sharp AXR Packaging DSM AXR Packaging
$0
0 $0
Canada UPS
Supply
Chain BI graph
6
4
2
0
16
14
12
10
8
20
18
$1
$1
$1
$1
$1
$1
$0
$0
$0
151
122
$0
$0
$0
0
A Corp
Commodity A
BI Loss
Buffer Time
Possible Outage Time
Critical Buffer Time
151
133
$0
67
B Corp
Commodity B
151
126
74
$0
C Corp
Commodity C
151
81
120
151
84
$0
D Corp
Commodity D
$0
0
E Corp
Commodity E
Product X Manufacturing Suppliers
301
350
$25,000,000
300
$20,000,000
250
224
151
$0
0
151
$0
0
150
$10,000,000
100
$5,000,000
50
0
$0 ng
Suppliers
BI graph
Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)
Proprietary & Confidential (Optional) | Date (Optional)
0
$0
0
Company X
Label
BI Loss
Possible Outage Time
Critical Buffer Time
9
84
0
$0
0
Company Y
Bottle
160
PRODUCT X Packaging Suppliers
$21,396,114
130
140
120
100
80
60
40
20
0
11
0
Company Z
Lids
Packaging
Suppliers
BI graph

Production Optimisation
UK
Be
The Excel model estimates the following:
NL
Turkey
Production cost delta – i.e. difference in cost of production given a
BI event
Additional transport costs – arising from supplying from stock
Shortfall production costs – production costs to bring stock up to pre BI event level
Loss profit costs – loss of profit when demand cannot be met
Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)
Proprietary & Confidential (Optional) | Date (Optional)
A production model has been developed for white goods manufacture across the four European sites.
Notable features include:
• A production optimiser that gives the minimum cost production distribution based on manufacture and transportation costs
• Optimiser works between minimum and maximum levels of production at sites
• Variable costs due to increased shift work
• Business interruption exposures based upon a demand profile across a year
• Consideration of stock levels on actual BI numbers
£10,000,000
£9,000,000
Loss of profit
Extra transport costs
Production Cost
Baseline Production Costs
£8,000,000
£7,000,000
£6,000,000
£6,648,445
£5,946,579
£5,000,000
£6,885,094
£5,916,826
£6,475,514
£7,719,167
£7,831,649
£8,498,190
£8,195,875
£8,594,023
£8,011,194
£4,850,024
£4,000,000
£3,000,000
£2,000,000
£1,000,000
£0
Jan ua ry
Feb rua ry
Ma rc h
A pr il
May Jun e
Jul y
A ugu st
S epte mb er
£2,273,867
O ctob er
Nov em be r
Dec em be
10
Rec ov er y

3. Respond Appropriately
Response
• Incident Management
• Crisis Communications
Prevention &
Preparedness
• Impact Evaluation
• Risk Management
• Risk Control
• Testing
• Audit
Strategy
• Governance
• Objective Setting
• Stakeholder Management
Recovery
• Continuity Plans
• Workflow Management
• Evaluation and Lessons Learned
Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)
Proprietary & Confidential (Optional) | Date (Optional) 11

Response Example – Supplier Support
Simplified Process
Supplier
Monitoring
1. Do Nothing
2. Work with Supplier to identify corrective actions and monitor implementation
Product
Procurement
Team
Red Flag Raised
Red Flag Criteria should include:
• Likely time scales
• Supplier Profile
• Impact on Product Portfolio
Supplier
Management
Team
Supplier Support
Tactics
Recommendation
3. Initiate Dual Supplier
Arrangement
4. Improve Payment Terms
For Supplier
5. Arrange Loans or other financial assistance to
Supplier
6. Joint Venture With
Supplier
Escalation as appropriate
Committee
Endorsement
7. Purchase Supplier
Action
8. Buy controlling interest in company competing for similar resource
Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)
Proprietary & Confidential (Optional) | Date (Optional)
Optimistic: Situation will resolve itself
Most likely: Cat 3 impact on product X
Pessimistic: Cat 1 impact on product X
Optimistic:
Most likely:
Pessimistic:
Optimistic:
Most likely:
Pessimistic:
Optimistic:
Most likely:
Pessimistic:
Optimistic:
Most likely:
Pessimistic:
Optimistic:
Most likely:
Pessimistic:
Optimistic:
Most likely:
Pessimistic:
Optimistic:
Most likely:
Pessimistic:
12

Summary – Some ideas to increase Supply Chain resilience

Companies may accept different supply chain risks depending on the stage of the production lifecycle
 Supply Chain risks are closely related to business interruption and product recall risks.
 Resilience depends on having alternatives and creativity. Companies need to make time to nurture this.
 A multi discipline approach is required to address supply chain risk. including Procurement,
Production, Logistics, Insurance, Loss Control, Legal, Finance, Planning etc.
 A simple approach for resilience is based upon the following:
– Preparedness
– Response
– Recovery
– Strategy
 Create a model to allow you to test scenarios
 Test your assumptions on the response to ‘what ifs’ particularly;
– Contractual arrangements
– Business Continuity Management
– What is possible

Know your inventory strategy
 Be clear on trends
– when are they going to be reviewed?
 Know what your organisation is comfortable with
Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)
Proprietary & Confidential (Optional) | Date (Optional) 13

Fin
Dr Grant Foster
Aon Global Risk Consulting

What are Supply Chain Managers Worried About?
 Unfavourable exchange rate movements
 Input price increases
 Energy price increases
 Declining customer confidence
 Protectionism
 Insolvency of suppliers
39%
34%
33%
24%
23%
21%
Trends
Negotiated lower prices from suppliers
Increased efficiency of logistics
Increased use of outsourcing
Reduced inventory levels
Increased number of suppliers
Reduced number of suppliers
Moved production to lower-cost countries
Reduced headcount in supply chain function
Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)
Proprietary & Confidential (Optional) | Date (Optional) 15
58%
35%
30%
29%
23%
20%
19%
19%

Supply Chain Basics
Upstream
Tier n
Tier 2
Tertiary
Supplier
Supplier
Supplier
Tier 1
Supplier
‘Our
Company’
Downstream
Customers
Value Generating Activities
Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)
Proprietary & Confidential (Optional) | Date (Optional) 16

Case Study #1 – ‘We Messed Up’
Tier 2
Supplier
Tier 1
Supplier
Change Management
Loss Control Contract Risk
‘Our
Company’
Customers
Background
A drug manufacturing facility was taken in house due to regulatory issues
Supply chain in place with a ‘make it & take it’ agreement with supplier
Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)
Proprietary & Confidential (Optional) | Date (Optional)
What Happened?
Serious fire at the facility
Supply Chain Interruption
Forced to take the stock from the supplier, and then dispose of it as it had a limited shelf life
17

Case Study #2 – ‘Face the music’
Tier 2
Supplier
Tier 1
Supplier
Contract Risk
‘Our
Company’
BCM
Customers
Background
EUK was the most profitable arm of
Woolworths Group
Major supplier of CDs and DVDs to UK market
Winner of several awards for supply chain management
Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)
Proprietary & Confidential (Optional) | Date (Optional)
What Happened?
Woolworths Group and hence EUK put into administration in 2008
Zavvi (Virgin Megastores) had an exclusive supply deal.
Unable to get favourable terms from other suppliers Zavvi also forced into administration
18

Case Study – Wessex Foods July 2010
BCM
Prioritised
Customer?
Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)
Proprietary & Confidential (Optional) | Date (Optional) 19

Case Study #3 – ‘Two becomes one’
Tier 2
Supplier
Tier 1
Supplier A
Tier 1
Supplier B
Background
Manufacturer of rubber stoppers for phials
Rubber sourced from a Tier 1 supplier
Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)
Proprietary & Confidential (Optional) | Date (Optional)
Inventory Control
‘Our
Company’
BCM
Customers
What Happened?
Tier 2 supplier had a fire
Alternative Tier 1 suppliers were in place.
Unfortunately they both sourced rubber from the same Tier 2 supplier.
20

Case Study #4 – Downstream Problem
Tier 2
Supplier
Stock / Inventory Control Contract Risk
Tier 1
Supplier
‘Our
Company’
BCM
Customers
Background
Large scale industrial chemical company
‘Fixed supply chain’ in that customers take output directly from a shared pipeline
Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)
Proprietary & Confidential (Optional) | Date (Optional)
What Happened?
Unplanned shutdown of customer site
Sufficient output storage available (Site production policy was to run with minimum storage)
Arrangements in place with other customers to receive extra output in short term
21

Supply Chain risk profile across lifecycle
Dual sourcing
Reduce stock
Establish back-up capacity & stock as appropriate
Consider:risk in supply chain design capacity provision ahead of demand line as back-up
Uncertainty of forecasts
Increase range
Accept greater BI risk - lean Free-up in-house capability by outsourcing
Line extensions
Competition, price
Range rationalisation
Simplification
Single sourced?
Divestment
Launch
New product introductions rapid launches
Growth Maturity Saturation Decline
Product
Withdrawal
Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)
Proprietary & Confidential (Optional) | Date (Optional)

How to improve resilience
Response
• Incident Management
• Crisis Communications
Prevention &
Preparedness
• Impact Evaluation
• Risk Management
• Risk Control
• Testing
• Audit
Strategy
• Governance
• Objective Setting
• Stakeholder Management
Business Unit/Tier 2 (Mandatory) | Market/Division/Tier 3 (Optional) | Practice Group/Tier 4 (Optional)
Proprietary & Confidential (Optional) | Date (Optional)
Recovery
• Continuity Plans
• Workflow Management
• Evaluation and Lessons Learned
23