Securing Your Cargo in an Increasingly Insecure World

Securing Your Cargo in an Increasingly Insecure World Dan Purtell Senior Vice President Governance, Risk & Compliance BSI October 26, 2015 Long Beach, CA 1

BSI - Over 100 Years of Innovation BSI Group World s first National Standards Body BSI issues over 2,000 standards each year Performed more than 180,000 assessments in over 150 countries last year 64 offices and regional hubs in UK, Hong Kong and USA BSI Supply Chain Solutions Professional Services Over 20 years of experience in assessing global supply chain risks, threats and trends Leading provider of supply chain security, corporate social responsibility and business continuity intelligence, data and analysis Global auditor base to deliver second party audits in areas of quality, security, GMP/GDP, corporate social responsibility, and business continuity Sole provider of supply chain security intelligence to the US C-TPAT program and other Government AEO Programs Copyright 2015 BSI. All rights reserved 3

BSI Supply Chain Solutions Supply Chain Intelligence Geographic Supply Chain Risk Data and Analysis Global Risk Maps for 20+ Risk Indicators Incident Reporting Country Risk Reports Assessment/ Audit Analysis Customizable and Standard Assessments Corrective Action Plans Robust Supplier Risk Ratings and Reports Global Supplier and Risk Mapping Custom Risk Weighting Methodology Audit Professional Global Auditing Network Supply Chain Security, Corporate Social Responsibility, Quality, Environmental, Design/Process, and Business Continuity Audits Intelligence Enriched Audit Reports 4

BSI Supply Chain Risk Study 100.0% What Are Your Top Supply Chain Concerns? 68.3% 50.0% 41.4% 56.1% 48.8% 53.7% 36.6% 46.3% 0.0% Social Responsibilities Brand protection including counterfeiting, intellectual property rights & unmanifested cargo Government compliance including C-TPAT, AEO, PIP Supplier risk assessment Business continuity (including natural disasters, labor strikes/port outages) Political Instability Financial risks including cargo thefts, counterfeits, insurance increases as well as transport security costs 2.4% Other (specify) Survey of 310 Government Certified Supply Chain Companies Copyright 2013 BSI. All rights reserved. 6

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! Copyright 2013 BSI. All rights reserved. 7

Trends in Security Risk-based approach is becoming widely adopted by multi-national organizations Security organizations more frequently attempting to quantify the value they bring to the organization More compliance programs falling within the security remit Business Continuity and Cyber Security are two of the highest new / emerging concerns Security Pendulum is swinging back to the far left 18/11/2015 9

Supplier Compliance Audit Network 20 Member Companies Heavy Retail Focus Participating firms registered 45,358 suppliers 60% of the firms are C-TPAT Tier III 95% of the participants conduct supply chain security assessments on 59% of their supplier / LSP / factory base 26,761 assessments by SCAN participating firms 40% use a risk based approach BSI Partnership: Risk Engineered Security Requirements: Weighted Questions, Company Variables, Country Risk & Supplier Risk Indexing SCAN will use BSI s SCM as the Risk and Audit Management Repository 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% What format of supply chain security assessments do you currently perform on your suppliers/factories? Supplier Self- Assessments In House Audit of Suppliers Third Party Assessment performed by an outsourced audit firm SCAN projects 6,500 audits in 2015 and by 2018 25,000 audits None 10

Rx-360 Shared Audit Overview Rx-360 Consortium Membership: 70 of the largest global Pharma and Active Pharma Ingredients (API) manufacturers Mission: "Protect patient safety by sharing information and developing processes related to the integrity of the healthcare supply chain and the quality of materials within the supply chain." 5 Year Association with a member based Board of Directors Objective: Develop a shared supplier audit program where results of audit are shared by Pharma companies that use the supplier: Audits focus: BSI Partnership o o Supply Chain Security (C-TPAT and Loss Prevention) Good Manufacturing Practice (GMP) Sole Source Audit Firm Combined Security and GMP BSI s Risk-Based approach and intelligence infused BSIV audits BSI works directly with the C-TPAT regulatory body and is a service provider and Medical Device works directly with FDA 11

BSI Risk-Based Enterprise Corporate Security Approach Fundamental belief that risk is broadly predictive Firms have the ability to assess and assign risk to our current operation Firms can quantify the risk of emerging markets Risk will change, so this is not a stagnant / one time exercise Tiered countermeasure based on risk and avoid a cookie cutter approach Invest on security when positive cost benefit is provided $1 to $3 or better Supply Chain (Typically 80-90% of a firm s losses) Breakeven or better Site Security (Typically ~ 15% of a firm s Supply Chain Losses) Prioritized personal, regional and functional objectives based on risk and payback Regional tasks will look different based upon top exposures: Site Security, Natural Disaster, Political Stability, Corruption, Cargo Theft, Trade Compliance Performance should be measured and under continual evaluation 12

Evolving Supply Chain Risk 13

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 3 rd 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 Emergence of of non-traditional ethnic groups Migrant issues are impacting the supply chain and threatening national security 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 11/18/2015 14

Top 7 Global Supply Chain Threats 1. Supply Chain Terrorism 2. Unmanifested Cargo Introduction and Precursor Chemical Shipments 3. Counterfeit / Illicit Trade production, export & sales 4. Business Continuity Interruption Political Stability / Manmade Disruption Natural Disaster 5. Social Responsibility Violations Human Rights Environmental Conflict Free 6. Cargo Theft 7. Lack of required supplier vetting and risk assessment & unauthorized sub-contracting 11/18/2015 15

Level of disruption Disruption Vulnerability by Mode of Transportation High Full truck load Less-than-full truck load Rail Elevated Low Factories; DCs High Air Sea Elevated Control and level of security 85% of incidents occur once cargo leaves a factory, yet Supply Chain Security funding is on average less than 5% of a security budget. Low 16

Migrant Smuggling in Northern Africa Northern Africa has witnessed a dramatic rise in illegal migration to Europe since 2014 Most migrants travel across the Mediterranean aboard fishing vessels or crude barges, which frequently sink Very weak rule of law in the region precludes the need to use sophisticated smuggling tactics such as cargo introductions Some countries in the area remain a risk Also concern of introductions once within Europe Detections of Illegal Migrants in Europe in 2014 Route Number of Detections Central 170,664 Mediterranean Libya Tunisia Eastern 50,834 Mediterranean Egypt Lebanon Israel Syria Western 7,842 Mediterranean Algeria Morocco West Africa 276 Nigeria Benin Ivory Coast Ghana BSI Stowaway Introduction Rating 18

Threats to Air Cargo Security in Africa and the Middle East 11/18/2015 19

The Tianjin Explosion: Broader Impact in China 20

Fallout from the Tianjin Explosion Total cost of the Tianjin explosion is estimated at $3.3 billion Proximity of the facility to port areas greatly increased the amount of damage Cost of Major Industrial Accidents and Natural Disasters, in Billions USD Similar risks exist for other Chinese cities due to disregard for zoning rules Other ports restricted dangerous goods Qingdao, Lianyungang, Dalian, Fuzhou, Xiamen, and 13 ports in Guangdong all banned handling of dangerous goods Led to the closure of chemicals handling sites in a number of Chinese provinces 21

Industrial Accidents in China Tianjin is not an isolated incident The threat to working conditions, including industrial accidents, in China is Severe At least 38 industrial explosions have occurred in China so far this year Corruption often allows companies to store more chemicals than they are allowed and ignore zoning rules 22

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 18/11/2015 24

Quantifying Supply Chain Risk We all have our biases and perception of what is normal Essential to take emotion out of analysis Every country has challenges and areas of higher risk When assessing risk, it s critical to normalize data and maintain objectivity 11/18/2015 27

Forecasting Formula Variables Company Specific: Historical Losses Damage Rates Brand Recognition Product Recognition Shipment Frequency Revenue Exposure Product Density Transportation Routing Manufacturing Locations Data 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 Regional Economic Activity Corruption Index Countermeasure Effectiveness 28

Financial Impact.013.010.007.003.000.014.011.007.004.000 $3,8 52,69 1 $4,2 99,11 5 $4,7 45,53 8 $5,1 91,96 1 $5,6 38,38 5 C erta in ty i s 65.00 % from $4,26 3,037 to $5,0 38,67 1 $3 93,11 2 $5 28,93 1 $6 64,75 0 $8 00,56 8 $9 36,38 7 C erta in ty i s 65.00 % from $46 6,097 to $7 27,93 0 13 4 10 0.5 67 33.5 0 14 2 10 6.5 71 35.5 0 Financial Exposure and Cost Benefit Analysis Forecast: Unprotected Loss Forecast: Mexico City 10,000 Trials Frequency Chart 9,993 Displayed Cost Avoidance Unprotected Loss Forecast $1,750,000 Protected Loss Forecast ($46,000) Countermeasure Cost ($79,000) Cost Benefit $1,625,000 Forecast: Unprotected Loss Forecast: Mexico City 10,000 Trials Frequency Chart 9,962 Displayed Q2 Q3 Q1 Q2 $1,750,000 - Q1 $46,000 - Countermeasure Cost $79,000 JTI Corporate Security Director's Meeting = Cost Benefit $1,625,000 29

BSI s SCREEN Intelligence Modular Platform (select 1, 2 or all 3) with 21 Proprietary risk variables and expanded platforms including: Supply Chain Security Cargo Theft Anti-Western Terrorism Smuggling Social Responsibility Human Rights Environmental Business Continuity Natural and Man-Made Disasters Political Stability SCREEN is a secure, web-based intelligence platform including: Country risk reports Spotlight news BSI risk maps 30

$80M Severe Impact High Impact Child Labor Natural Disasters $40M Some Impact Man-Made Disruption Working Conditions Cargo Theft Low Impact Environment People Travel $500K Insignificant JTI Corporate Security Director's Meeting Unlikely Possible Probable Highly Probable Almost Certain 34

Contact info Dan Purtell SVP Governance Risk and Compliance BSI Professional Services Dan.purtell@bsigroup.com 480.448.7276 35