Quantifying the Return of Supply Chain - PowerPoint Presentation

Quantifying the Return of Supply Chain Security Countermeasures Dan Purtell SVP Supply Chain Solutions April 22, 2013

Agenda Predictive Modeling – Why? Quantifying Return of Security Countermeasures:A Supply Chain Loss Prevention Example Conclusions Question and Answer

SCREEN Intelligence: Supply Chain Risk AnalysisGlobal Risk Maps Spotlight NewsCountry Risk Reports Supplier Compliance Manager: C-TPAT, AEO, PIP supplier vetting solutionCorporate Social Responsibility assessmentsBusiness Continuity analysisBSI Supplier Verification Audits:Supply Chain SecurityGovernment Compliance (C-TPAT, PIP, AEO)Corporate Social Responsibility Quality Business ContinuitySupplier Customer Specific Audit Quality Initiatives BSI Supply Chain Solutions Advisory Services: C-TPAT Program Prep & Validation Assistance Gap Analysis Security & Threat Awareness Quantitative Risk Solutions / Predictive Modeling

Predictive Modeling - Why

Common Flaws with Risk Assessment Approach Qualitative approach with quantitative end result: Subjective type of analysis (high, medium, low) Qualitative 5 x 5 x 5 Model (Threat x Vulnerability x Impact = Risk) Quantitative Blending Qualitative with Quantitative without Actuary Data Lack of management buy in with current risk analysis process Program fragmentation, little to no centralized loss reporting / repository infrastructureNo financial countermeasure backing, management desires return on investment for security spendsToday’s business managers operate in validated quantitative space….subjective analysis are ignored and freight goes unprotected or insured “Comparing this need with the data collected, corporate methods and tools fall short of a desirable and robust system for risk assessment. The majority utilized qualitative measures that did not clearly connect to business impact. “ Jim Rice, MIT Center for Transportation and Logistics Supply Chain Response to Terrorism, Creating Resilient and Secure Supply Chains

Quantifying Risk and Uncertainty and Risk-Based Spending Some countries are attractive manufacturing or sourcing countries, yet the risk (verified through predictive modeling) actually shows a lose by market entry Supply Chain Security & Countermeasure Spending frequently provides positive returns:Cargo Theft / Loss Prevention (applies to high value, high demand products and high risk countries) Lower marine insurance rates Compliance with C-TPAT and lower inspection rates 2013 BSI Cargo Theft Loss Forecast - $23 billion globally Applies to multiple sectors, not just high valueRisk is not stagnant and yesterday’s countermeasures may or may not still provide a positive ROI95% of security budgets are spent within the factories of the company90% of theft of company product occurs within the supply chain

My Early Supply Chain Challenge Intel Pentium II With attached heat sink attached, the size of a P-II was approximately three iPhonesRetail per unit: $250 - $400 Truck Value up to $6M USD Intel Pentium 4 ½ the size of a standard business card 1/10” thickRetail per unit: $800 - $1,500Truck Shipment Value: $150M01/05/2013

“Security is a necessary evil and just like taxes – I constantly pay into it and I get nothing in return” Quote from Chief Operating Officer Fortune 100 Company High Tech Product Manufacturer

Predictive Modeling Steps A Loss Prevention Example

Step One for Predictive Modeling – Mapping Cargo Flow and Volumes Origin Factory Shipment Destination Number of Annual Shipments Average Value per Shipment Annual Value Barcelona Factory Crewe, UK 3,200 $ 1,404,900.00 $ 4,495,680,000.00 Barcelona Factory Trier, Germany 600 $ 945,000.00 $ 567,000,000.00 Barcelona Factory Tiel , Holland 45 $ 1,404,900.00 $ 63,220,500.00 Barcelona Factory Linz, Austria 23 $ 900,000.00 $ 20,700,000.00 Barcelona Factory Athens, Greece 120 $ 1,795,000.00 $ 215,400,000.00 Barcelona Factory Londerzeel , Belgium350 $ 1,404,900.00 $ 491,715,000.00 Barcelona FactoryIreland320 $ 1,404,900.00 $ 449,568,000.00 Barcelona FactorySwitzerland12 $ 945,000.00 $ 11,340,000.00 Barcelona FactoryBrno, Czech Republic12 $ 945,000.00 $ 11,340,000.00 Barcelona FactoryHaiger, Germany90 $ 945,000.00 $ 85,050,000.00 Barcelona FactoryBudapest, Hungary30 $ 945,000.00 $ 28,350,000.00 Barcelona FactoryBoras, Sweden20 $ 945,000.00 $ 18,900,000.00 Barcelona FactoryAntwerp, Belgium70 $ 945,000.00 $ 66,150,000.00 Barcelona FactoryUK Port - Belfast110 $ 945,000.00 $ 103,950,000.00 Barcelona FactoryUK Port - Felixstowe90 $ 1,404,900.00 $ 126,441,000.00 Barcelona FactoryUK Port - Liverpool320 $ 1,404,900.00 $ 449,568,000.00 Barcelona FactoryUK Port - Tilbury5 $ 1,404,900.00 $ 7,024,500.00 TOTALS 5,417 $ $ 7,211,397,000.00

Factory Step Two - Map Cargo Flow & Infuse with Geographical Risk Assessment

Step Three – On the Ground Assessments or Desktop Analysis Physical Security & Process Reviews: Factories3PL’s & Warehouses Transportation Providers Is key in determining if loss ratio or incident frequency should be lowered or raised Confirm Step – One: VolumeValuesProduct(s)Routing

Step Four – Create Loss Forecast Variables Company Specific: Historical Losses Geographical Risks Brand Recognition Product RecognitionShipment FrequencyRevenue ExposureProduct DensityTransportation Routing Manufacturing Locations Data Sources: BSI Loss Repository ($ 13 trillion in global commerce): Client Losses Insurance Losses / ClaimsLaw Enforcement Records / ReportsTransportation ModeModus Operandi Crime RatesEconomic Indicators Regional Economic ActivityCorruption Index Countermeasure Effectiveness

Step Five – Unprotected Loss Forecast

Step Six – Countermeasure Determination Escorts Physical Security Logistics Inco-Terms Geographical Avoidance Dual Drivers Standards Cert 28000 Telematics

Step Six Continued Defeated Countermeasures 5,500 FTL Hijackings past 24 months The 5 Band Super Heavy Duty Adjustable Cell Phone Jammer Range over 50 meters. Jamming GPS,GSM, DCS,PHS,3G $3 This GPS tracking jammer 10 meter coverage. Popular item with sales personnel and delivery drivers, who wish to take lunch or make a personal stop outside of their territory or route "off the radar". $119

Step Seven - Cost Benefit Analysis Financial Impact Cost Avoidance Q2 $1,750,000 - Q1 $46,000 - Countermeasure Cost $79,000 = Cost Benefit $1,625,000 Losses Q 1 Q 3 Q 2 Unprotected Loss Forecast $1,750,000 Protected Loss Forecast ($46,000) Countermeasure Cost ($79,000) Cost Benefit $1,625,000 Copyright BSI 3/27/2013

Step Seven - Cost Benefit Analysis Financial Impact Cost Avoidance Q2 $1,750,000 - Q1 $46,000 - Countermeasure Cost $79,000 = Cost Benefit $1,625,000 Losses Q 1 Q 3 Q 2 Unprotected Loss Forecast $1,750,000 Protected Loss Forecast ($46,000) Countermeasure Cost ($79,000) Cost Benefit $1,625,000 Copyright BSI 3/27/2013 ROI Ratio: $22 to $1!

Determining the Right Level of Spends Losses 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 Losses Q 1 Q 3 Q 2 Unprotected Loss Forecast: $ 1,000,000 Protected Loss Forecast: $ 50,000 Countermeasure Cost: $ 1,500,000 Cost Benefit: -$ 550,000

Determining the Right Level of Spends Losses 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 Losses Q 1 Q 3 Q 2 Unprotected Loss Forecast: $ 1,000,000 Protected Loss Forecast: $ 50,000 Countermeasure Cost: $ 1,500,000 Cost Benefit: -$ 550,000 Solution: Find a cheaper and effective countermeasure Incur the expected losses

01/05/2013 EMEA Transportation Analysis Worksheet Origin Destination Number of Annual Shipments Average Value per Shipment Annual Value Industry Average Loss Forecast Company YYY Protected Loss Forecast Barcelona Factory Crewe, UK 3,200 $ 1,404,900 $ 4,495,680,000 $ 8,991,360 $ 674,352 Barcelona Factory Trier, Germany 600 $ 945,000 $ 567,000,000 $ 1,134,000 $ 85,050 Barcelona Factory Tiel, Holland 45 $ 1,404,900 $ 63,220,500 $ 126,441 $ 9,483 Barcelona Factory Linz, Austria 23 $ 900,000 $ 20,700,000 $ 41,400 $ 3,105 Barcelona FactoryAthens, Greece120 $ 1,795,000 $ 215,400,000 $ 430,800 $ 32,310 Barcelona FactoryLonderzeel, Belgium350 $ 1,404,900 $ 491,715,000 $ 983,430 $ 73,757 Barcelona FactoryIreland320 $ 1,404,900 $ 449,568,000 $ 899,136 $ 67,435 Barcelona FactorySwitzerland12 $ 945,000 $ 11,340,000 $ 22,680 $ 1,701 Barcelona FactoryBrno, Czech Republic12 $ 945,000 $ 11,340,000 $ 22,680 $ 1,701 Barcelona FactoryHaiger, Germany90 $ 945,000 $ 85,050,000 $ 170,100 $ 12,758 Barcelona FactoryBudapest, Hungary30 $ 945,000 $ 28,350,000 $ 56,700 $ 4,253 Barcelona FactoryBoras, Sweden20 $ 945,000 $ 18,900,000 $ 37,800 $ 2,835 Barcelona FactoryAntwerp, Belgium70 $ 945,000 $ 66,150,000 $ 132,300 $ 16,538 Barcelona Factory UK Port - Belfast 110 $ 945,000 $ 103,950,000 $ 207,900 $ 25,988 Barcelona Factory UK Port - Felixstowe 90 $ 1,404,900 $ 126,441,000 $ 252,882 $ 34,139 Barcelona Factory UK Port - Liverpool 320 $ 1,404,900 $ 449,568,000 $ 899,136 $ 121,383 Barcelona Factory UK Port - Tilbury 5 $ 1,404,900 $ 7,024,500 $ 14,049 $ 1,897 TOTALS   5,417 $ 7,211,397,000.00 $ 14,422,794.00 $ 1,168,683         Program Cost Benefit / ROI $13,254,110 Step Seven - Completed ROI Analysis with Countermeasure

Conclusions

Conclusions When seeking security countermeasure funding, speak in business terms: Avoid qualitative remarks / conclusionsQuantify exposures – anticipate impact (It’s hard for a decision maker to not fund a program that results in avoidance of significant corporate losses) Consider including ‘indirect cost impact’ Use terms such as ROI, Cost Benefit or Impact of unfunded programs Many companies have great Supply Chain Security programs, but can’t quantify the benefit as they are currently operating in a “Protected State” Strip security from the program and quantify what financial exposures exist without the firm’s current security programs Avoid Supply Chain Security Deadly Cycle: High Losses > Secure Cargo > Reduce Losses > Assume Threat has Diminished > Drop Security Program > High LossesThe law of large numbers will eventually bite you:Protect supply chains based on realistic loss or incident probabilityDon’t bend your numbers to get funding; supply chain security countermeasures 90% of the time justify some form of security spendingYou don’t need a million dollar exposure to implement a predictive modeling & risk-based security program01/05/2013

Questions & Answers Thank you for Attending Contact Details: Dan Purtell BSI Supply Chain Solutions 480-355-5262 Dan.purtell@bsigroup.comwww.supplychainsecurity.com01/05/2013