WhitePaper. SupplyChainManagement WHATYOU DON'TSEE CAN HURTYOU ... How tomitigaterisksofpotentialsupplychaindisruptions.

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1 SupplyChainManagement WHATYOU DON'TSEE CAN HURTYOU... How tomitigaterisksofpotentialsupplychaindisruptions Deliveredby:

2 TheJapaneseearthquakeandsubsequenttsunamiofMay2011underscoredthefragilityofthe worldwideautomotivesupplychain. SupplyChainManagement WHATYOU DON'TSEE CAN HURTYOU Thedisasterstemporarilyclosedplantsthat produced17ofthetop20modelsofjapanese vehiclessoldintheu.s.andpromptedgeneral MotorstocloseaplantinLouisianaanda PeugeotplantinEurope,accordingtoa CongressionalResearchServicestudy. Whatmakestheautomotivesupplychainso vulnerabletodisruptionscomparedtoother industriesisitscomplexity.atypicalmotorvehicle hasmorethan15,000parts,manyofthem comingtotheu.s.from countriesontheother sideoftheworld.anoutage,shortageordelayof anyessentialcomponentcancauseaproduction slowdownoracompletestoppageofassembly slowdownoracompletestoppageofassembly lines. Curently,theglobalautomotivesupplychainis stretchedtightly broughtonbyarecovering economythatisfuelingconsumerdemand,and anincreasingnumberofnewmodelsslatedfor production. AccordingtotheDetroitFreePress,2013car salesareexpectedtoexceed15milionintheu.s. andasmuchas85milionworldwide.arecord 500vehiclelaunchesareexpectedby2016. Addingtotheproblem isthefactthat,duringthe 2008downturn,manysmalersuppliersclosedor laid-offworkersandreducedcapacity. SupplyChainManagement:Whatyoudon'tseecanhurtyou 1 Manyarenowreluctanttoincrease productioncapacitywhiletheyenjoyrising profits.others,fearingaseconddownturn, arehesitanttoincreasecapitalexpenditures. Astheautoindustrysnapsback,the remainingsuppliersstruggletofilorders. Alofthisleaveslitleroom forsupplychain disruptions.theautomotivesupplychainis moredelicatethanithasbeeninrecent memory.preventingormitigatingdisruptions hasbecomeevenmorecrucialtothe industry'swel-being. AnAPQC(AmericanProductivityandQuality Center)studyconductedinApril2013 revealedthat196largecompaniessurveyed werehitbyanunexpectedsupplydisruption duringthelasttwoyears.thesurveyshowed thatthemostcommoncauseswerenatural disasters,suchastsunamisandfloods, extremeweathersuchasdroughts,andsocial extremeweathersuchasdroughts,andsocial turmoilsuchasriotsandcivilwars. Whilecompaniescanprepareforsuch situations,otherdisruptorsmaynotfalso neatlyintothe'expected'categorybutcanbe justasdevastating.

3 Thiswhitepaperwildiscussfive out-of-the-ordinaryscenariosandwhatcanbe donetoprepareforthem whenpossibleor mitigatetheireffectsaftertheevent. Disrupter1:Asmalsupplierclosesor experiencesaslowdown Intoday'scomplexsupplychainenvironments, somemanagersmayoverlooktheimportance thatsmalsuppliersplayuntilsomethinghappens tothem.ifasmalsupplierclosesorexperiences ashutdown,itsabsencesurelywilbefeltdespite itsseeminglytinycontribution. Inoneparticularcase,alower-tieredsupplier whoproducedfabricsforautomotiveseatswas closedbyfloodingduetosevereweather.the larger-tiersuppliercouldnotproduceseats,and thesupplychainwasdisrupted. Fortunately,thesmalsuppliercouldcalupon oneofitscompetitors,anothertextilecompany, tomeetthequotasandneedsoftheend customer. TheOEM learnedtwolessonsfrom this incident.first,theoem realizedthatitwas vulnerabletothevagariesofeventhesmalest suppliers especialythoselowerdowninthe chain.second,theoem learnedthatitneededto havecontingencyplansinplaceforevery supplier,eventhesmalestones.oem understoodthatitshouldidentifypartnershipsof understoodthatitshouldidentifypartnershipsof itssuppliersandlearnabouttheircompetitorsas welincasetheyneededtobecaledupon. OEMsshouldneverunderestimatetheabilityor interestofasuppliertopartnerwitha competitor. SupplyChainManagement:Whatyoudon'tseecanhurtyou 2 Whilesomecompaniesmayshyawayfrom doingbusinesswith(oraiding)competitors, otherswilbendtherulesandhelpeachother outintimesofemergency.evenstaunch competitorscanbecomealiesiftheyknow beforehandthattheycancountoneachother duringcrises. Furthermore,itisimportanttofind alternativesourcesthatarenotinthesame geographicarea.thisservesasasafeguard againstcontingencysuppliersbeingknocked outbythesameweathereventasregular suppliers. Disrupter2:Unexpecteddemand Unexpectedspikesindemandcanplay havocwithsupplychains.evenifsupplierscan produceenoughproductsforcustomers,the logisticssystem inplacecannotalwaysdeliver them.often,last-minutetransportation,such asaircraftchartersorexpress-airfreight services,canbeexpensive. Oneviableansweristohavealogistics backstopthatisavailableatshortnoticeand atareasonablecost. Inoneinstance,alargemanufacturerwas facedwithspikesinproductionanddemand. Normaly,thesupplierwouldcalanairfreight forwarder.however,thatsolutionwas deemedtobeineffectivegiventhe unpredictabilityofcommercialairlift.ups offeredanewproductcaledupsworldwide ExpressFreight,aservicethat ExpressFreight,aservicethat time-guaranteesfreightonupsflights, ensuringtimelydeliveryatamoderatefee.

4 Thisincidentshowedtheimportanceofhaving alogisticspartnerwithmultipleserviceofferings tohelpscaleuporscaledown,basedon productiondemand.whendemandspikes unexpectedly,it'simportanttohaveback-up logisticsplansthatwon'tbreaktransportation budgets.obviously,thetimetoresearchback-up modesisbeforeasupply-chaineventoccurs. OEMscansolicithelpfrom theirlogistics companiestogetaheadofanypotential qualityissues.forexample,upsmanagesa warantyreturnsoperationforalargeoem. UPSreceiveswarantyreturns,takespictures andcategorizesthepartsthatarereturned.if particularpartsneedtobeputasideand seenbyengineers,upswildothataswel.by catalogingthereturneditems whicharenot yetpartofarecal theoem canseepaterns inreturneditems,alowingthem togetahead oftheissueandputinplacerequired contingencyplanstomitigatearecal campaign. Disruptor3:RecalCampaigns Recalcampaignscanbeverycomplicated, requiringspecificstepstobefolowedinorderto ensurecompliance.whilethesestepscanbevery chalenging,ensuringfulfilmentofthe replacementpartsandpotentialreturnand inspectionofthefailedpartscanbejustas daunting.itiscriticaltohaveopenlinesof communicationwithyourlogisticsproviderto ensurethatserviceexpectationsarediscussed, andtheappropriateplanisputintoplace. Whenarecaloccurs,acompanymustfirstlook from thepointofmanufacturing,andthen considerwhatisneededandbywhen. Intheeventofarecal,itisimportantto workside-by-sidewithyourlogisticspartners todeterminethebestapproachtohandling theevent.inoneparticularsituation,ups workedwithanotheroem tobringin replacementpartsviaairfreight.thisincluded specialoperatingprocedurestoensuretimely pickupanddeliveryduringnon-standard hours.onceintheu.s.,thefreightwas deconsolidatedandsentdirectlytothe dealer,bypassingthepartsdistribution center,thusensuringresponsivenesstothe dealernetwork.eachsituationmaybe differentandrequireauniqueoperatingplan. Thekeypointistohaverelationshipswith providerswhocanworkwithyoutodevelop anoperatingprocedurethatcanaddress specificrequirementsofthatcampaign. Thesedecisionsmayinvolveavarietyof approaches,includingimportsfrom Mexicointoa partsdistributioncenterorairfreightfrom Japan dis-aggregatedandsentdirecttoadealer. SupplyChainManagement:Whatyoudon'tseecanhurtyou 3

5 Disrupter4 Vesselbreakdown InJune2013,thecontainershipMOLComfort brokeintotwopartsaftersufferingstructural damageduetobadweatherabout200nautical milesoffthecoastofyemen.theshipcaried about4,000containers,someofwhichheld automotiveproducts.theaftsectionsankfirst, andthebowsectionsankseveralweekslater whileitwasbeingtowed.thesinkingcost whileitwasbeingtowed.thesinkingcost insurersbetween$300and$400milionin claims. Thisincidentstressedtheneedforproper cargoinsurance.self-insuranceisonechoice, althoughrisky,particularlywhenashipbreaksin half.anotheroptionisbuyinginsurancefrom a licensedinsurancebroker/agency.however,not alinsuranceprovidersareequal.thecompany thatofferslife,auto,businessandhomeowners insuranceislikelynotadroitatdevelopingthe insuranceislikelynotadroitatdevelopingthe mathematicalmodelsrequiredtounderstand, underwriteandmitigatetherisksthatcanbefal today ssupplychains. Therefore,aligningwithalogisticspartner,such asups,iscritical.aupsbusinessunit,ups Capital,hasexpertswhoquantifythemassive amountsofupslogisticsdatatounderwrite comprehensivepoliciesneededtoinsure complexsupplychainsfrom mishaps. SupplyChainManagement:Whatyoudon'tseecanhurtyou 4 Manycompaniesdonotrealizethatin shipping,amaritimeruleknownasthe GeneralLawofAverages exists.underthe lawofgeneralaverages,ifcargoisjetisoned from ashiptohelprefloatagroundedvessel ortosaveashipfrom sinking,theother shippers(whosecargoisnotjetisoned)are requiredtoabsorbaportionoftheshared requiredtoabsorbaportionoftheshared loss.this rule isdesignedtocompensatethe ownersofthe sacrificed goodsfortheirloss. Inotherwords,it s oneforalandalforone. Manyinsurancepoliciesdonotcoverthe salesvalueofitemsthatarelost,damagedor jetisoned.theycoveronlythewholesaleor manufacturedvalueanddonotincludethe liabilityofthe GeneralLawofAverages. This simplyreinforcestheneedtousealogistics providerwhopossessesa360-degreeviewof abusiness supplychainandthemishapsthat abusiness supplychainandthemishapsthat couldbewaitinginthedepthsofthe deep-bluesea. Disrupter5 Unexpectedpoliticalor socialunrest Whenmanagersthinkofsupplychain disruptionsfrom politicalorsocialunrest,they focusoncivilwarsormassdemonstrations. Whiletheseeventsareimportantandcanbe quitedisruptive,theyarenottheonly situationsthatcanresultfrom socialturmoil. Someturbulencecantakealessviolentform butcanbejustasdisruptive. butcanbejustasdisruptive. Forexample,manysupply-chainobservers pointtotensionsbetweencountriessuchas ChinaandJapan,bothofwhichclaim sovereigntyoveragroupofislandslocatedin theeastchinasea.theseuninhabitedislands aremainlyusedasfishinggrounds.

6 InSeptember2012,Japaneseautomotive companies Toyota,Nissan,HondaandMazda wereforcedtoclosetheirchinesefactoriesfor severaldaysbecausemanagementfearedfor workers'safetyduetobrewinganti-japanese sentiment.thisclosuredisruptedjapanese automotiveandconsumerelectronicssupply chains. chains. Whilesomesocialorpoliticaldisruptionsmay appeartocomeoutoftheblue,warningsigns wereavailabletothosewhoknewwheretolook. Inthisexample,ChineseandJapanese newspapershadbeenpublishingstoriesabout escalatingtensionsonacontinuingbasis,and OEMswhosubscribedtoforeignlanguagenews alertswereawareofthepotentialforsupplychain alertswereawareofthepotentialforsupplychain disruptions.evenu.s.mediacoveredthese issues. AutomotivefactoriesinChinaalsoare susceptibletolabordisputes,includingstrikes andshutdownsasworkersdemandhigherwages, fewerhoursandbeterworkingconditions.while companyresponseshaveincludedconcessionsto someworkers,theoveralsituationisexpectedto remainvolatileforsometime. SupplyChainManagement:Whatyoudon'tseecanhurtyou 5 Aloftheseconditionscalforresiliencyin supplychainsandtheabilitytomovequickly withcontingencyplanswhenapossible disruptionispredicted.thekeytoforecasting isusinginteligenceservicesanddatamining, whichcanrangefrom simpleon-linesearch alertstosophisticatedcountryinteligence servicesrunbymultinationalsecurity servicesrunbymultinationalsecurity corporations. How UPSCanHelp Tomitigatesupplychaindisruptions,UPS canhelpcompaniesanticipate,flex,compete andsustainintoday scompetitive marketplace. Anticipate: Astheprecedingexamplesshow,the importanceofriskmanagementand mitigationthroughouttheentiresupplychain iscriticaltobusinesssuccess.sourcingfrom multiplesuppliersandassemblyprocessesis dependentuponthetimelymovementof goodsbecauseofleanmanufacturing operations.automotivecompanies,in operations.automotivecompanies,in particular,feelgreatpressuretoadapttheir supplychainsandoperationstoeventsthat cancausedisruption. UPSsupplychainconsultingservicesthat focusonsupplychainriskmanagementand businesscontinuityplanningcanserveasa defenseagainstpossibledisruptionsthatmay havealong-term impactonbusinessand operations.

7 Flex: Becauseoftheenormousgrowthpotentialfor overseasmarketsinthecomingdecades,many industrialmanufacturingandautomotive companieswilhavetolookoutsidetheu.s.to growtheirbusinesses.navigatingthisunfamiliar teritoryanddevelopingsupplychainsdesigned toservethesemarketswilbeoneofthegreatest chalengesforcustomerstryingtocapitalizeon chalengesforcustomerstryingtocapitalizeon theseopportunities. UPS sglobalfootprint,aswelascustoms brokerageandcontractwarehousingand distributionservices,canassistcustomersby providingregulatoryinsightsandaccessto overseassupplychainassetsastheyenternew globalmarkets. Compete: Automotivemanufacturersconstantlystriveto increasetheefficiencyoftheiroperationsby incorporatingsixsigmaprocessesandlean operationswhereverpossible.however,atruly leanmanufacturingprocessalsorequireslean supplychainsolutionsthatcanspeedthroughput, increasevisibilityandreduceoverflowand/or downtime.whetheroff-shoringtheirsuppliersor downtime.whetheroff-shoringtheirsuppliersor assemblyoperationstolow-costoverseas marketsornear-shoringtoreducetransportation costsandeasilymeetdemand,noone-size-fits-al modelexistswhenitcomestosourcing. SupplyChainManagement:Whatyoudon'tseecanhurtyou 6 Inadditiontoprovidingshippingand visibilitytechnologies,upssupplychainand consultingservicescanassistmanufacturers in leaning theirmanufacturingandsupply chainoperations.upshastheexpertise, assetsandtechnologytomanageand streamlineglobalinboundsupplychainsthat originatefrom nearlyanywhere. originatefrom nearlyanywhere. Sustain: Thecostofmanufacturingmodernization andtechnologicaladvancementsincreases demandonmanufacturerstostreamline operations,automateprocessesandraise throughput.alarge-scaleshiftinthemodern manufacturingmodelwilrequireanequaly large-scaleshiftintheirsupply-chainmodels inordertokeeppace. inordertokeeppace. UPShasthetechnologyandglobalsupply chainandtransportationassetstohelp manufacturersadjusttheirsupplychainsto handlethespeed,efficiencyandautomation ofmodernmanufacturingmethods. Formoreinformation,goto