1 Global Supply Chain Resilience

2 Speakers Introduction: Why Resilience Matters for a Global EnterpriseDarrell J. Zavitz, Vice President, Supply Chain and Customer Services, The Dow Chemical Company A Business Process for Managing Resilience: The Dow Chemical/Ohio State Collaboration Joseph Fiksel, Executive Director, Center for Resilience at OSU SCRAM: A Framework for Supply Chain Resilience Assessment and Management Lieutenant Colonel Timothy Pettit, Assistant Professor Air Force Institute of Technology Evaluating Supply Chain Resilience Improvement Options Through Dynamic Simulation Martin Fernandes, Supply Chain Technology Consultant Supply Chain Technical Center, The Dow Chemical Company

3 Why Resilience Matters to a Global EnterpriseDarrell Zavitz Vice President, Supply Chain and Customer Services, Business Process Services September 27, 2010

4 Our Definition of SustainabilitySustainability requires making every decision with the future in mind. It is our relationship with the world around us – creating economic prosperity and social value while contributing to the protection of our planet. Why Resilience Matters to a Global Enterprise September 27, 2010

5 Driving the Next Generation of ChangeOur Sustainability Goals Why Resilience Matters to a Global Enterprise September 27, 2010

6 Supply Chain Function Dow is the largest bulk chemical shipper in North America by truck and by rail More than percent of Dow’s hazardous materials shipments reach their destination without incident Over 20% of Dow’s shipments involve international border crossings Dow was awarded Tier Three status in the US Customs-Trade Partnership Against Terrorism (C-TPAT) security initiative Allows Dow expedited border clearance, reduced inspection times

7 Supply Chain Function Over 3,000 Employees Globally2.5 mm shipments each year, totaling 130 billion lbs of product 600,000 Orders Each Quarter Shipping Sites In 200 Countries 45,000 Customer Ship-To Locations 300 Warehouses and over 100 Terminals 25,000 Railcars – Largest Private Fleet In The World 60% Base Plastics & Chemicals 40% Performance Plastics & Chemicals

8 Supply Chain VariabilityThe Chemical Industry Is Experiencing A Significant Shift In Both Demand/Market And Supply Side Dynamics Requiring TRANSFORMATION Supply risks Deliberate threats Market Change Internal change Supply Security is a risk Increased regulations Railroads have a monopoly Raw material supply can be a gamble/Pervasive inventory destocking Vessel space, then port congestion, then container shortages impact trade to other world regions Strikes impact our ability to supply Hurricanes and other natural disasters impact our ability to supply Deliberate threats are a risk: Cargo Theft / Hijacking Counterfeit Products Chemical Diversion Maritime Piracy Terrorism Smuggling (People and Contraband) Product Tampering / Contamination Social / Political Unrest Vandalism Market change is a risk: Rapidly Developing Economies (China, India, Eastern Europe) with immature industry infrastructure and transportation limitations Aging industry infrastructure in the US and Europe External threats challenging the safety and security of our operations Managing the dynamics of the regulatory environment Limited capability and geographic presence of service providers Cost increases driven by supply/demand and hydrocarbon and energy creating inflationary pressures New Competitors – New Dynamics Currency Dynamics EH&S/Sustainability Why Resilience Matters to a Global Enterprise September 27, 2010

9 Why Resilience? Resilience is the capacity of a business to survive, adapt and grow in the face of turbulent change and complexity. It can be seen at different time scales – from short-term day-to-day business continuity to long-term strategic sustainability. Resilience is particularly important for supply chain management, due to the pressures and uncertainties associated with global procurement, manufacturing and distribution. Resilience will enable Dow supply chains to be inherently resistant to such factors Resilience implementation can enable businesses to increase their profitability, improve their cost competitiveness and remain competitive in a global market by becoming inherently resilient to complexities and turbulent changes. Practiced at Dow: Dow developed a Resilience Work Process as part of the Design and Modify SC function. The process can be used to assess a business’ current operations and to identify resilience strategies that will enhance business performance Related to Risk Management: Conventional risk management relies on risk identification and assessment to prevent disruptions. But unfamiliar risks may be hard to anticipate and still harder to quantify. By improving the resilience of its supply chain operations, a business can increase its chances of coping with disruptions and prospering during times of upheaval. Related to Sustainability: Resilience is Sustainability in real time. By sensing and responding to external forces, a business can adapt to changes in economic, environmental and social conditions and thus remain competitive over the long run. Sustainability is not a guarantee of survival. Why Resilience Matters to a Global Enterprise September 27, 2010

10 Birth of Dow / OSU CollaborationDow / OSU Framework for Resilience: Vulnerabilities Capabilities Zone of balanced resilience Dow has adopted a framework for supply chain resilience developed by The Ohio State University, based on the following key concepts: Vulnerabilities – fundamental factors that make an enterprise susceptible to disruptions e.g. external threats, sensitivities, linkages and resource limitations. Capabilities – attributes that enable an enterprise to anticipate and overcome disruptions e.g. flexibility, adaptability, capacity, visibility, and anticipation. Zone of balanced resilience – the region where the enterprise has deployed the right portfolio of capabilities to match its pattern of vulnerabilities. If capabilities are too low the enterprise may be exposed to excessive risk, and if capabilities are too high the enterprise may be eroding its profits. Why Resilience Matters to a Global Enterprise September 27, 2010

11 Thank you Why Resilience Matters to a Global EnterpriseSeptember 27, 2010

12 A Business Process for Managing Resilience:The Dow Chemical/Ohio State Collaboration Joseph Fiksel Executive Director, Center for Resilience The Ohio State University September 27, 2010

13 Warning: Turbulence Ahead“The world is becoming turbulent faster than most companies are becoming resilient… Few companies seem prepared for a world that is all punctuation and no equilibrium” Gary Hamel

14 Caution: Wicked ComplexityInterdependence of the United Kingdom Line thickness denotes quantity of imports Source: New Economic Foundation Networks are both more fragile and more robust than isolated systems

15 Top Supply Chain Concerns for 2011Disruption type Source: Eye for Transport survey of 650 supply chain managers, 2010

16 Limitations of Enterprise Risk ManagementObjective Setting Risks cannot always be anticipated Event Identification Risks may be hard to quantify Risk Assessment Risk Response Adaptation may be necessary to remain competitive Control Activities Source: Committee of Sponsoring Organizations of the Treadway Commission, Enterprise Risk Management Framework, 2003

17 Enterprise Resilience…the capacity of an enterprise to survive, adapt, and grow in the face of turbulent change Day-to-Day Business Continuity Long-Term Strategic Sustainability

18 Key Performance IndicatorsLeading indicators Reliability (e.g., perfect orders, fill rate) Responsiveness (e.g., cycle time, back-orders) Agility (e.g., upside & downside flexibility) Tangible outcome indicators Cost (e.g., profitability, total cost to serve) Asset Management (e.g., cash-to-cash time, return on capital) Sustainability (e.g., incidents, footprint) Strategic value indicators Human Capital (e.g., satisfaction, retention) Business Growth (e.g., integration of acquisitions, customer loyalty)

19 Resilience Case Study Ford vs. ToyotaAugust 2009 fatal accident prompts safety recall of Toyota floor mats February 2010 Toyota issues broader recall for accelerator pedal repair June 2009 Ford posts a record quarterly loss of $8.6 billion September 2008 global economic recession begins July 2009 Ford posts first sales increase among U.S. automakers

20 Design for Resilience What is our global supply network structure?What are the scenarios of potential concern? Supply Network Mapping SCRAM Analysis What are our important vulnerabilities and capabilities? Which capability areas should we consider improving? Supply Network Simulation What are the likely impacts of potential disruptions? What are the projected benefits of resilience improvement? Strategy Selection What are the most cost- effective strategies for improving our resilience?

21 The views expressed in this presentation are those of the authors and do not necessarily reflect the official policy or position of the Air Force, the Department of Defense, or the U.S. Government. SCRAM: A Framework for Supply Chain Resilience Assessment and Management Lt Col Tim Pettit, PhD Assistant Professor of Logistics and Supply Chain Management Air Force Institute of Technology September 27, 2010

22 Supply Chain ResilienceYou can’t manage…what you can’t measure! SCRAM Supply Chain Resilience Assessment and Management - SCRAM assesses a firm's current Portfolio of Capabilities and facilitates matching of capabilities to the enterprise’s Pattern of Vulnerabilities

23 Methodology Theory building Survey assessmentLiterature review Focus Group categorization in stages Survey assessment Development and Qualitative Validation Identification of relationships Mixed-methods Triangulation of Linkages

24 Literature Review Hamel and Välikangas (2003), "The Quest for Resilience," Harvard Bus Rev Rice and Caniato (2003), "Building a Secure and Resilient Supply Network," Supply Chain Mgt Rev Fiksel (2003), “Designing Resilient, Sustainable Systems,” Env Science & Tech Christopher and Peck (2004), "Building the Resilient Supply Chain," Int Jrnl of Log Mgt Kleindorfer and Saad (2005), "Managing Disruption Risks in Supply Chains," Prod & Ops Mgt Sheffi (2005), The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage, MIT Press Tang (2006), “Robust Strategies for Mitigating Supply Chain Disruptions,” Int Jrnl of Log: Research and Applications Wisdomnet White Paper (2006), “Managing Supply Chain Risk: Building in Resilience and Preparing for Disruption” Council on Competitiveness (2007), “The Resilient Economy: Integrating Competitiveness and Security” Ponomarov and Holcomb (2009), “Understanding the concept of supply chain resilience,” Int Jrnl of Log Mgt Pettit, Fiksel and Croxton (2010), “Supply Chain Resilience: Development of a Conceptual Framework,” Jrnl of Business Logistics

25 Data Collection – Phase ICenter VS BBW Engineering Compliance Operations Beauty Avenues MAST 8 Focus Groups 24 individuals 6 functions 6 divisions Reported 44 separate disruptions

26 Resilience Factors Capabilities Vulnerabilities AnticipationFlexibility Recovery Security Efficiency Visibility Adaptability Collaboration etc.. Turbulence Deliberate threats External pressures Resource limits Connectivity Sensitivity Pettit, Fiksel, Croxton, Journal of Business Logistics, 2010

27 The SCRAM Framework Balance Balanced Resilience ImprovedForces of Change Management Controls Vulnerabilities Capabilities Balance Fundamental factors that make an enterprise susceptible to disruptions Attributes that enable an enterprise to anticipate and overcome disruptions Balanced Resilience Improved Performance!!!

28 Zone of Balanced ResilienceThe SCRAM Framework Erosion of Profits Zone of Balanced Resilience Increasing Capabilities Exposure to Risk Increasing Vulnerabilities

29 Step 1 - SCRAM Assessment Step 2 - Disruption ReviewData Collection – Phase II Step 1 - SCRAM Assessment 7 Global Supply Chains Clothing Consumer electronics Medical supplies and equip Petroleum products Beauty care products Construction materials Chemical products Participants: 170 Survey length: 30 min Questions: 111 sub-factors 21 importance Step 2 - Disruption Review 14 Focus Groups - 5 Supply-side disruptions - 3 Operational disruptions - 5 Demand-side disruptions - 1 Communication disruption Participants: 56 Focus groups: 2 hours Items: 1,369

30 Three-way ComparisonsTriangulation – sub-factor level A = Theoretical Linkages (590) B = Survey Correlations (414) C = Focus Group Connections (232) One-way Comparisons Two-way Comparisons Three-way Comparisons Number of Linkages*, ** A or B or C 1,021 A and B 95 A and C 232 B and C 36 A and B and C * Maximum possible linkages = 40 vulnerabilities x 70 capabilities = 2,840. ** a = 0.10 for correlations. Unique 2- or 3-way = 311

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32 Resilience Analysis

33 Resilience Gaps

34 Does Resilience Affect Performance?90% Confidence Interval

35 Glycol Ethers P-series PilotEvaluating Supply Chain Resilience Improvement Options Through Dynamic Simulation Glycol Ethers P-series Pilot Martin Fernandes Supply Chain Technology Consultant Supply Chain Technical Center The Dow Chemical Company September 27, 2010

36 P-Series Product ApplicationCoatings Cleaners Electronic Applications Additional end-use products Intermediates in production for functional products

37 Modeling Resilience Approach and Process Steps Network Mapping SCRAM™What is our global supply network structure? What are the scenarios of potential concern? Network Mapping SCRAM™ Assessment What are our important vulnerabilities and capabilities? Which capability areas should we consider improving? Performance Simulation What are the likely impacts of potential disruptions? What are the projected benefits of resilience improvement? Modeling Other business applications: reduce working capital: we looked at the necessary levers to reduce inventory from 27 mm lbs to 17 mm lbs. Strategy Selection What are the most cost-effective strategies for improving our resilience? Other Business Applications What other business improvement opportunities can be analyzed using the resilience simulation tool?

38 P-Series SCRAM™ Evaluation“too resilient”

39 Model Objectives To simulate and understand the material flow of the North America P-series supply chain system Modeling Stage I: Developing a realistic business system model Testing and understanding its vulnerabilities and capabilities Modeling Stage II: Scenario planning Opportunity identification a model that validated the current system behavior and was used to get everyone in the business on the same page of the vulnerabilities and capabilities in the system Developing a realistic model of the business’ system, and testing its vulnerabilities and capabilities Tests conducted: (break down vulnerabilities and capabilities) Supplier disruptions: raw material on allocation, extended lead times, alternate sourcing Manufacturing: unplanned shutdowns, shutdowns due to raw material outages Tolling: campaigning sizes

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41 Model Based Resilience EvaluationVulnerabilities “too resilient”

42 Resilience Modeled BenefitsBusiness-shared reference point Data-based Process-based Risk-free cross-functional ideation and testing Qualitative Results: Unified understanding of the business system Enriched scenario testing Quick Quantitative Results: 2 million lbs reduced inventory Annual cost avoidance of $200,000

43 Looking Forward Model Expansion: GlobalOther business groups within Dow are conducting similar Resilience studies and opportunities

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