Managing Operational Risk in the Global Supply Chain Feb 15, 2008 - PowerPoint PPT Presentation

Managing Operational Risk in the Global Supply Chain Feb 15, 2008 Doug Sunkel Director – Americas Parts Distribution

Key Points  Elements of Risk in the Supply Chain  Mitigation Strategies  Performance – “Your Best Bet” 2

Elements of Risk in the Supply Chain  Origin of risk:  Internal • Process &/or systems capability • Resource capacity &/or availability  External: • Competition Regulations . • Labor disruptions Logistics providers .  Type of risk:  Controllable vs uncontrollable  Severity – major vs minor  Awareness of risk:  Known vs unknown  Ability to detect 3

Mitigation Strategies  Elimination  Avoidance  Redundancy  Detection  Contingency / back-up plans  Documentation  Preparation  Communication  Business Continuity Plan 4

Tools for Managing Risk FMEA = Failure Mode & Effects Analysis S O D R Process Actions Potential Failure Mode Potential Failure Effects E Potential Causes C Current Controls E P Step/Input Recommended V C T N How How How Bad? Often? well? 0 0 0 0 What 0 0 0 0 What is can go What are How are What the Effect What can 0 0 0 0 is the wrong the these found on the be done? with the Causes? or Input 0 0 0 0 Outputs? Input? prevented? 0 0 0 0 5

RPN = Risk Priority Number  The output of an FMEA  A calculated number based on: • Potential failure modes • Effects • Ability to detect failures before reaching the customer  Calculated as the product of three quantitative ratings, each one related to the effects, causes, and controls: RPN = Severity X Occurrence X Detection Effects Causes Controls 6

Examples  Global sourcing • Risks – longer supply chain, quality, transportation • Mitigation – domestic WH’s, SMI agreements, inventory visibility, local SQI/supplier development resources, terms of sale  Parts Distribution Center relocation • Risks – facility preparation, learning curve, customer disruption • Mitigation – dedicated project team/management, phased ramp up, duplication of resources  Warehouse Management System implementation • Risks – loss of functionality, “invisible factory”, IT infrastructure, bottlenecks/reduced throughput • Mitigation – experienced project team, unit & integration testing, capacity testing, operational walk-thru’s, cutover rehearsal 7

Performance – “Your Best Bet” Joe Loughrey – Cummins Inc. President & COO  Many risks in our global operating environment: • Will US carmakers enter the diesel market? • What will our competition do? • Will fuel costs drive governments to take actions? • Will energy be available?  The actions CMI has taken in the last 3 years have made the company stronger & more resilient to these potential threats  The most prudent strategy for managing risk is to perform consistently well 8

Cummins Operating System 1. Put the 2. Synchronize 3. Design 4. Involve 5. Ensure customer first flows (material, quality in every people and equipment and tools and provide physical and step of the promote are available and real value information) process teamwork capable 7. Establish 6. Create 8. Treat preferred 9. Follow 10. Use Six Sigma as functional the right suppliers as common problem the primary process excellence environment partners solving improvement method techniques 9

Outperformed our Peers 1450 1250 1050 Stock Price Index 850 650 450 250 50 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 CMI S&P 500 Peer Avg. 10

Don’t think it can’t happen February 5, 2008 – Memphis, TN 200 yards from Cummins MDC All employees safe Operations restored within 12 hours Ran 3 full days on Cummins generator power No customer impact 11

Recap - Key Points  Elements of Risk  Mitigation Strategies  Performance – “Your Best Bet” 12

Thank You Doug Sunkel Director – Americas Parts Distribution doug.a.sunkel@cummins.com