trends in supply chain risk management -...

Copyright © 2012 BSI. All rights reserved.

Trends in Supply Chain Risk Management

Dan PurtellSenior VPBSI Supply Chain Solutions

The Health and Personal Care Logistics ConferenceApril 2nd, 2014

4/18/2014

Copyright © 2012 BSI. All rights reserved. 2

BSI – Over 110 Years of Innovation

• World’s first National Standards Body• Founding member of International

Standards Organization (ISO)• BSI authors over 2,000 standards

each year• 57 offices worldwide

• 70,000 customer locations

• 150,000 audit days performed each year

• More than 65,000 students trained in 2013

• Revenue: £254.6m (+4%)• Operating Profit: £32m (+11%)• Gross profit margin: 49.3% (+0%)• BSI is debt free and all profits are

reinvested in the company under our Royal Charter Status

BSI, a Royal Charter Company


SCREEN Intelligence Portal:

• Supply Chain Risk Analysis• Global Risk Maps• Incident Reporting• Country Risk Reports

Supplier Compliance Manager:

• Automated Global Supplier Vetting Solution• Customizable Assessments

• Government Supply Chain Security Programs (C-TPAT, AEO, PIP)• Corporate Social Responsibility• Business Continuity Planning

• Customizable Corrective and Preventative Actions • Individualized Supplier Risk Ratings • Detailed Supplier Risk Reports • Global Supplier Mapping

BSI Supplier Verification Audits:

• Assessing and completing the BSI Verified Company Profile• Supply Chain Security• Government Compliance (C-TPAT, PIP, AEO)• Corporate Social Responsibility Quality

BSI Supply Chain Solutions Offerings

BSI SCS Advisory Services:

• C-TPAT Program Prep & Validation Assistance• Gap Analysis• Cargo Theft ROI Analysis• Security & Threat Awareness Training


Presentation Objectives

1. Supply Chain Risk is Predictable• Where are you most likely to get burned and what type of incident

will it be

2. Supply Chain Risk Can be Mitigated• You can have a low risk supplier and supply chain in a high risk

region/country

3. You can demonstrate the value of supply chain security and compliance

4/18/2014


Trends in Supply Chain Risk Management

The Compliance World is growing:

• GMP• GDP• C-TPAT• PIP• AEO• FDA Supply Chain Security• Traceability and serialization• Dodd-Frank• FCPA and Anti-Bribery• OFAC & Restricted Party Screening

Supply Chain Trends:

Positive Trends -• Pharma and FDA regulated firms view

compliance as self-regulate or be regulated• Associations are forming standards and

pooling supplier audits• Audit requirements are being consolidated:

• Example GMP & C-TPAT

Challenging Trends -• Decentralized logistics and security

operations• Cost Pressure:

• Transportation cost pressures shifts to low cost providers

• Security funding cuts

4/18/2014


SCAN – Audit Sharing Concept• Similar association and

strategy to Rx-360• BSI selected to be third

party administrator, audit firm and solutions provider

• Formed in January 2014 Scottsdale AZ

• Annual Revenue of members more than $1.5 Trillion a year (8% of US GDP)

• Process endorsed by US Customs and C-TPAT office

• Security focused with possibility to extend to Social Responsibility and Business Continuity

18/04/2014

Copyright © 2012 BSI. All rights reserved. 7Copyright © 2012 BSI. All rights reserved.

Supply Chain Risk

4/18/2014


IBM Supply Chain Risk Study

Do you feel risk in your supply chain is flat, increasing or decreasing?

• 494 Senior Supply Chain Managers participate

• 77% indicated their supply chain exposure is increasing

• 0 respondents indicated their exposure is decreasing!


IBM Supply Chain Risk Study


BSI Supply Chain Risk Study

41.4%

56.1%

48.8%

68.3%

53.7%

36.6%

46.3%

2.4%0.0%

50.0%

100.0%

SocialResponsibilities

Brand protectionincluding

counterfeiting,intellectual property

rights &unmanifested cargo

Governmentcompliance

including C-TPAT,AEO, PIP

Supplier riskassessment

Business continuity(including naturaldisasters, labor

strikes/portoutages)

Political Instability Financial risksincluding cargo

thefts, counterfeits,insurance increasesas well as transport

security costs

Other (specify)

What Are Your Top Supply Chain Concerns?

Survey of 310 C-TPAT Certified Companies


BSI Strategy - a Risk Based Approach

A holistic intelligence based approach to supply chain risk management, leveraging standards, verification, and supply chain tools to provide transparency of supplier risk thereby instilling confidence, trust and objectivity.


• Cargo Disruption• Cargo Theft • Hijacking Exposure • Unmanifested Cargo• UMC - Drugs • UMC - Arms and Weapons • UMC - WMD• UMC - Human Smuggling • Counterfeiting • Sea Piracy • Anti-Western Terrorism • Supply Chain Terrorism• Political Stability• Economic and Financial Stability • Supply Chain Corruption• Export Controls

• CSR - Human Rights • CSR - Environmental• CSR - Child Labor • CSR - Women's Rights • CSR - Working Conditions • BCM - Natural Disaster Exposure • BCM - Business Impact of Natural Disasters • BCM - Man-Made Disruption and Disasters

• Additional Categories…

Proprietary IntelligenceSupply Chain Specific Risk

Covering Over 200 Countries


2013Annual C-TPAT Conference General Session

“We rely solely on BSI Supply Chain to quantify supply chain risk for my team globally…it’s also the data we use to assess your

supply chain risk”

Dan BaldwinDirector Cargo Conveyance SecurityC-TPAT Program Manager

CBP, DHS and C-TPAT Use of Intelligence


AUTO/AEROSPACECounterfeitingITAR Violations

Electronic EspionageSmuggling

AGRICULTURE & PREPARED PRODUCTS

Agro-TerrorismChain of Custody

Supplier TraceabilityInvasive Species

Smuggling

ELECTRONICSCounterfeiting

Theft & DiversionElectronic EspionageHijacking Exposure

PHARMA, HEALTH & CHEMICALS

Product AuthenticationCounterfeiting

Chain of CustodyTheft & Diversion

Hijacking ExposureHealth & Safety

Quality

APPAREL, FOOTWEAR & TEXTILES

Corporate Social ResponsibilityBrand ExposureCounterfeiting

PETROLEUM, NATURAL GAS & MINERALSSupply Chain Terrorism

Sea Piracy Theft & DiversionEco-Systems Risks

CONSUMER PRODUCT &MASS MERCHANDISINGCorporate Social Responsibility

Brand ExposureCounterfeiting

Anti-western Terrorism &

Supply Chain Terrorism

Product Counterfeiting

& Product Integrity

Commodity Targeting by

Risk

Cargo Disruption

Chain of Custody Exposure

Risks


Indonesia Audit Report Taiwan Audit Report

= Risk

Traditional Risk Assessment Model


Threats to Air Cargo Security in Africa and the Middle East

4/18/2014

Copyright BSI 2014


Pollution

Hazardous Material & Waste Management

Should we be Surprised

Copyright © 2012 BSI. All rights reserved. 194/18/2014

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Reputational Risks

POLLUTION

Copyright © 2012 BSI. All rights reserved. 21Copyright © 2012 BSI. All rights reserved.

Predictive Modelinga Cargo Theft Review

4/18/2014


Supply Chain Risk - Trends

• The Good:• Global adoption of C-TPAT Minimum Security

Criteria is reducing cargo theft loss levels and ‘crimes of opportunity’

• Force Multiplier with Cargo Security programs• Incorporation of Security into 3rd party

assessment schemes (Social & Quality)• Some country risk levels dropped in 2013

• The Bad• Due to competition, firms are forced to source

materials and manufacturing in high risk regions• Political Instability on the rise in several key

countries (Egypt)• Economic downturn in some countries & EMEA

have impacted cargo disruption rates• The Ugly

• Organized crime is shifting from white to blue collar crime in many countries

• Sophistication of supply chain attacks on the supply chain

• Countermeasures are being defeated

4/18/2014


Pharma Cargo Theft and Supply Chain Risk Summary

• Biggest growth opportunities represent significant risk:• BRIC: Brazil, Russia, India China• South Africa and South Sahara • Turkey

• Top threats and challenges facing industry:• Globalization of Manufacturing• Counterfeiting• Illicit Trade / Product Diversion• Cargo Theft• Chain of Custody

• Pharma Supply Chain Conundrum ‘Self Regulate or be Regulated’

4/18/2014


Disruption Vulnerability by Mode of Transportation

Control and level of security

Leve

l of

disr

upt

ion

High

Low

Elevated Low

Hig

h

Factories; DCs

Less-than-fulltruck load

Full truck load

Elev

ated

Rail

Air

Sea

85% of incidents occur once cargo

leaves the factory

Copyright © 2012 BSI. All rights reserved. 254/18/2014

BSI 2014 Global Loss Forecast

$23.5 Billion

Copyright BSI 2014


Cargo Theft – United States

4/18/2014

Concentration of Cargo Theft in the United States 2013

Copyright BSI 2014


Cargo theft in the United States• Heavily concentrated in five states

o 65 percent of all cargo theft incidents recorded by BSI in 2013 occurred in these five states

• Thieves continued to target parked, unattended cargo trucks at parking and drop lots, both secured and unsecured

o 41 percent of all thefts recorded by BSI occurred at one of these types of lots

o 25 percent of all theft in the United States took place at a truck or rest stop or gas station

o 17 percent of all theft occurred at a factory, distribution center, or logistics facility

• Thieves in the United States primarily stole shipments of food and beverages (22 percent), electronics (12 percent), and consumer goods (12 percent)

• Pharmaceuticals, metal, and alcohol and tobacco were targeted frequently

4/18/2014

19%

18%

10%

10%

8%

35%

Cargo Theft in theUnited States

2013

Texas California Florida Illinois Georgia Other


Predictable Intelligence - Cargo Theft in Italy

4/18/2014

BSI Cargo Theft Threat Rating by RegionAreas of greatest concentration of cargo theft

2013 – 2,000+ FTL Loads Stolen 2011/12 – 5,400+ FTL Loads Stolen

Copyright BSI 2014


Southern “Problem Regions”

• Widespread presence of Mafia-type groups in the following regions make them vulnerable to a host of supply chain disruptions • Apulia (Sacra Corona Unita): cargo theft, smuggling • Calabria (‘Ndrangheta): drug trafficking• Campania (Camorra): cargo theft, counterfeiting• Sicily (Cosa Nostra): cargo theft• All of these groups also engage in extortion and

corruption of state officials, which may pose a threat to the supply chain in a number of ways

• “Clan” organizational structure of these groups makes these groups more dangerous to the supply chain• Groups function more like loosely-linked individual

gangs• Individual clans specialize in a certain type of activity in

their geographic areas of influence• Creates organizational resiliency

• Problems tend be concentrated around transportation hubs, mostly ports• Apulia – Bari• Campania – Naples• Calabria – Gioia Tauro• Sicily – Catania, Palermo

4/18/2014

Index of Mafia Presence

Additional Credit: Catholic University of the Sacred Heart, Milan and Transcrime


Increasing Cargo Theft Numbers in Russia

• A significant portion of the incidents, around 25 percent, are hijackings

• Theft frequency and GDP correlation

• Anti-corruption efforts within police forces led to more than 100,000 police officers relieved – many now turned to full time cargo theft

• BSI noted a 2.5 percent increase in cargo theft incidents in Russia in 2013, and a 9 percent increase since 2011

• Russia suffers from a lack of security infrastructure and even basic road and rail infrastructure is sub-standard

• Hard-sided trailers are difficult to find

• Russia has even less secured parking than most areas of Western Europe

• GPS/GLONASS is not widely used

• Trips by road that should take less than 10 hours sometimes take multiple days• Increases the vulnerability of cargo since more stops are

required, potentially in unauthorized areas

4/18/2014


FTL Cargo Thefts in Russia

4/18/2014

3,583

3,8093,905

3400

3500

3600

3700

3800

3900

4000

2011 2012 2013 (Annualized)BSI Estimates 30% of incidents are reported


My Early Supply Chain Challenge

• Intel Pentium II• With attached heat sink attached, the

size of a P-II was approximately three iPhones

• Retail per unit: $250 - $400• Truck Value up to $6M USD

• Intel Pentium 4• ½ the size of a standard business card• 1/10” thick• Retail per unit: $800 - $1,500• Truck Shipment Value: $150M

18/04/2014


“Security is a necessary evil and just like taxes –I constantly pay into it and I get nothing in return”

Quote from Chief Operating OfficerFortune 100 CompanyHigh Tech Product Manufacturer


Pharmaceutical Cargo Theft Trends• High value = high risk

• A product’s appeal as a target for theft can be related to

• Whether or not most medical insurance covers the pharmaceutical

• If the product can be used for secondary illegal use

• Pharmaceuticals and medical insurance

• Value, and black market value, rises if a pharmaceutical product is not covered under most medical insurance

• Value, and black market value, decreases if a pharmaceutical product is covered under most medical insurance

• Illegal uses of pharmaceuticals

• Product’s black market value increases if the drug can be used for illegal uses

o Ex: precursor for production of methamphetamine, recreational use

• Product’s black market value decreases the fewer illegal uses it has

4/18/2014

National Insurance Coverage vs. Targeting

Recreational and Unauthorized Uses vs. Targeting

Nat

iona

l ins

uran

ce c

over

age

Recr

eatio

nal a

nd U

naut

horiz

ed U

ses

Appeal as a target for theft

Appeal as a target for theft

Yes

No

Yes

No

Lower

Lower

Higher

Higher


Predictive Modeling ExampleQuantifying Supply Chain ROI

• Pharmaceutical Manufacturer• Manufacture $1 Billion of goods for the European Market• Ship goods over the road using standard shipping methods, primarily trucking• Product is liquid, can be sold on black / grey market

36


Predictive Modeling Forecasting Variables

Company Specific:

• Historical Losses

• Geographical Risks

• Brand Recognition

• Product Recognition

• Shipment Frequency

• Revenue Exposure

• Product Density

• Transportation Routing

• Manufacturing Locations

Data SCREEN Sources:

• BSI Loss Repository ($13 trillion in global commerce):

Client Losses

Insurance Losses / Claims

Law Enforcement Records / Reports

Transportation Mode

Modus Operandi

• Crime Rates

• Economic Indicators

• Corruption Index

• Countermeasure Effectiveness


Unprotected Loss Forecast

Frequency Chart

Certainty is 68.00% from 1,436,567.44 to 1,749,743.08

.000

.001

.003

.004

.005

0

13.5

27

40.5

54

1,216,456.04 1,386,346.86 1,556,237.68 1,726,128.50 1,896,019.32

10,000 Trials 9,992 Displayed

Forecast: Annual Unprotected Loss Forecast


Countermeasure DeterminationEscorts

Physical SecurityLogistics Inco-Terms

Geographical Avoidance

Dual Drivers

Standards Cert 28000

Telematics


Determine Cost Benefit Analysis

Frequency Chart

Certainty is 65.00% from $4,263,037 to $5,038,671

.000

.004

.007

.011

.014

0

35.5

71

106.5

142

$3,852,691 $4,299,115 $4,745,538 $5,191,961 $5,638,385


Forecast: Unprotected Loss Forecast: Mexico City

Fina

ncia

l Im

pact

Cost Avoidance

Q2 $1,750,000 - Q1 $46,000 - Countermeasure Cost $79,000

= Cost Benefit $1,625,000

Q1

Q3

Q2

Unprotected Loss Forecast $1,750,000Protected Loss Forecast ($46,000)Countermeasure Cost ($79,000)

Cost Benefit $1,625,000

Frequency Chart

Certainty is 65.00% from $466,097 to $727,930

.000

.003

.007

.010

.013

0

33.5

67

100.5

134

$393,112 $528,931 $664,750 $800,568 $936,387



Copyright BSI 3/27/2013

Cost Benefit Ratio$20 to $1!


Determining the Right Level of Spends

Frequency Chart

Certainty is 65.00% from $4,263,037 to $5,038,671

.000

.004

.007

.011

.014

0

35.5

71

106.5

142

$3,852,691 $4,299,115 $4,745,538 $5,191,961 $5,638,385



Loss

es

Security Overspends

Common Causes of Security Overspending: 1. Cookie Cutter Approach with Security Thresholds 2. Securing Trade in Low Risk Regions 3. Excessive cost of Security Countermeasures

Q1

Q3

Q2

Frequency Chart

Certainty is 65.00% from $466,097 to $727,930

.000

.003

.007

.010

.013

0

33.5

67

100.5

134

$393,112 $528,931 $664,750 $800,568 $936,387



Unprotected Loss Forecast: $1,000,000Protected Loss Forecast: $50,000Countermeasure Cost: $1,500,000Cost Benefit: -$550,000


Sample Country ROI Analysis

• Unprotected Loss Forecast on the € 3.6 billion of goods sold in Italy is €7.6 million

• The Protected Loss Forecast is very high considering firm’s typical rate of Protected Losses (€2.5M):• Countermeasures much less effective in

Italy• Corruption • Organized Crime’s participation in

Supply Chain crimes• Insider information & targeting

• Despite substantial risk and high protected loss forecast, the rate of return is very attractive 12 to 1

Unprotected Loss Forecast € 7,637,718Protected Loss Forecast € 2,475,855Countermeasure Cost € 400,000ROI of firm’sCountermeasures € 4,761,863Rate of Return € 11.90 to € 1

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