WEBINAR: COVID-19 Situation, Supply Chain Risk, and Operations Under Constraint

March 16, 2020

2© Oliver Wyman

OUR SPEAKERS

HELEN LEISPartner, Health & Life SciencesNew York

Johannes BerkingPartner, Automotive & Manufacturing IndustriesHamburg

Jörn A. BussPartner, Automotive & Manufacturing IndustriesChairman, Marsh & McLennan AMIDetroit (Office Leader)

Situation

Supply Chain Risk

Operations Under

Constraint

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4© Oliver Wyman

WEBINAR AGENDA

01 SITUATION: Epidemiologic perspectives 20 min

02 SUPPLY CHAIN RISK 20-30 min

03 OPERATIONS UNDER CONSTRAINT 20-30 min

04 Q&A Remaining time

SITUATION: EPIDEMIOLOGIC PERSPECTIVESPanelists: Helen Leis

01

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SUMMARY

• COVID-19 has infected more than 170K people globally and is taking its toll on individuals, families, and economies as productivity drops and stock markets reflect increased global uncertainty

• This document provides some baseline facts for business leaders and guidance as to critical questions to address in the immediate and near-term to ensure the continuity of their business and the safety, health, and wellbeing of their workforce and customers

Source: 1. China CDC 2.. London School of Tropical Medicine 3. CDC.

Information as of 3/10/20

Context and Purpose

Are we overreacting?

• COVID-19 is the name for the illness caused by the novel coronavirus that originated in Wuhan, China in November/December 2019

• It is from the same family of viruses that cause some common colds, as well as Severe Acute Respiratory Syndrome (SARS) and Middle East Respiratory Syndrome (MERS)

• It is considered similar to other respiratory infections such as influenzas; symptoms range from fever, cough, shortness of breath to more severe cases of pneumonia and organ failure

• There are a few characteristics that are important to understand:- Early data suggests that COVID-19 may be 2-3 times as

contagious as the flu with a much higher case fatality rate

- Approximately 19% of confirmed cases are considered “severe” or “critical”1

- The incubation period for COVID-19 appears to be longer than that of the flu, at ~5 days versus 2-4 days2; in addition, evidence suggests it can be transmitted asymptomatically, making COVID-19 more complicated to contain

- We don’t yet know if COVID-19 is seasonal like the flu; half of coronaviruses appear to be seasonable, and half do not; there is no direct evidence yet to suggest this is seasonal

- As more data is collected, we may come to understand that COVID’s spread and severity are more like the seasonal flu; and there is reason to believe that vaccine and treatment pathways will lead to more effective responses for severe cases

What is it?

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• First reported in Wuhan, China, on December 31, 2019

• Patient Zero est. around Nov 2019

• Declared a public health emergency of international concern by the World Heath Organization on January 30, 2020

As of March 15th, 2020:

• >170k cases reported in 110 countries and territories

• >6,500 reported deaths

COVID-19 WORLD-WIDE COVERAGEThe virus continues to spread

Source: Map from CDC (link), Numbers from WHO National Health Commission of the People’s and Situation Report – 50 (link)1. Countries included: All Countries in “European Region” Sub-region in WHO Situation Report-50

~250

82k

Number of confirmed cases as of March 15th,

for select countries

35+k1

(incl. Italy: 25-50k)

~3,700

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0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

Confirmed Cases of COVID-19Cumulative Number of Cases as of March 15

New Cases Per Day of COVID-19New Cases Per Day as of March 10, 2020

Source: WHO Situation Reports (link), the first report release date was Jan 21, 2020Notes: Until February 17, the WHO situation reports included only laboratory confirmed cases causing a spike in total cases. Some sources include this update as of February 13. The jump due to inclusion of non lab confirmed cases is not included in the new cases data in WHO situation reports. From January 21 through January 31, the WHO did not directly report new cases and values shown are extrapolated from totals.

COVID-19 TRENDS AND SPREAD OF THE DISEASEWe do not know where we are from a curve perspective globally; on the low end reaching China levels would mean 250,000-500,000 cases and 15,000 – 30,000 death worldwide before leveling off

China

Rest ofWorld

Updates toMeasurementDefinitions*

0

2,000

4,000

6,000

8,000

10,000

12,000

Information as of 3/15/20

China

Rest ofWorld

Where are weglobally?

Where are weglobally?

= 0.006%of China Population

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MERS2,494 infected858 deaths

100%

10%

1%

0.1%

1 5 10 15

Seasonal Flu

Mor

e De

adly

More contagious

Bird Flu

1918 Spanish Flu~500M infected~50M Deaths

SARS8,096 infected774 Deaths

Common Cold

Fatality Rate1

(log scale)

Average number of people infected by each sick person (R0)

Ebola

Smallpox

Measles

Denotes Coronaviruses

Key:

H1N1 Swine Flu700M – 1.4B infected284k deaths2

Chickenpox

COVID-19 Fatality andTransmission Range:

>170k infected, >6.5k deaths

• R-naught (R0) represents the number of cases an infected person will cause. R0 for COVID-19 is currently estimated at between 2 and 3 (with edge of range estimates closer to 1.4 and 3.5), which means each person infects 2-3 others3; R0 for the seasonal flu is around 1.34

• The case fatality rate for confirmed COVID-19 cases is currently 3.53%5

according to the WHO versus 0.1% for the seasonal flu

• We expect case fatality rate to fluctuate as testing expands and more cases are identified

Additional Details

`

HOW DOES COVID-19 COMPARE TO DISEASE OUTBREAKS?COVID-19 is currently more deadly that the Flu, but the science on transmission and mortality continues to evolve

Information as of 3/15/20

Source: 1. New York Times (link) for fatality and R-naught comparisons, CDC timelines for case numbers (selected link: CDC SARS timeline), 2. Updated CDC estimates (link), 3. The R0 for the coronavirus was estimated by the WHO to be between 1.5 -2.5 (end of January estimate) (link), other organizations have estimated an R0 ranging between 2-3 or higher (link), 4. CDC Paper (link), 5. WHO 3/10/20 statement

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Case Fatality Rate by Specific Patient CharacteristicsAll confirmed cases in China as of February 11, 2020

0%

2%

4%

6%

8%

10%

12%

14%

16%

CASE FATALITY RATE (CFR) BY PATIENT CHARACTERISTICSignificantly higher death rates occur among the elderly and those with underlying conditions

≥80 70–79 60–69 50–59 40–49 30–39 20–29 10–19 0–9 Cardio-vascular disease

Diabetes Chronic respir-atory

disease

Hyper-tension

Cancer None

by Age by Comorbid Condition

Source: China CDC Weekly. Vital Surveillances: The Epidemiological Characteristics of an Outbreak of 2019 Novel Coronavirus Diseases (COVID-19) — China, 2020.Notes: Data includes 44,672 confirmed cases reported through February 11, 2020.

Information as of 3/10/20

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HOW CAN MITIGATION MEASURES LOWER THE BURDEN OF THE PANDEMIC?Proactive and swift mitigation measures (e.g., social distancing) are critical to control the spread and reduce the overall burden on the healthcare system, as ~15-20% of confirmed cases require hospitalization

Illustrative COVID-19 transmission with and without mitigation measuresTiming and width of peaks may vary between countries

1. Assuming case-based isolation onlySource: Adapted from “How will country-based mitigation measures influence the course of the COVID-19 epidemic”. Lancet. Mar 6 2020. https://doi.org/10.1016/S0140-6736(20)30567-5

Preliminary and evolving

Months since first transmission

# of

cas

es

0 1 2 3 4 5 6 7 8 9 10

Uncontrolled transmission1

Proactive mitigation efforts reduce the intensity of the spread, easing burden on health systems

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Nov 2002First emerges in China

Feb 2003Patient A brings SARS to HK

Mar 2003Toronto, Singapore, Thailand outbreaks

Apr 2003>5,000 cases, super spreader, SARS clinically identified

May 2003New cases drop dramatically, WHO lifts travel bans

July 2003 WHO declares end of epidemic (though there are spot cases for next year)

4 months Global Spread

5 months Viral sequence

6 months Source country under control

2 months Global Spread

1 month Viral sequencing

3 months Source country possibly under control

SARS1 | 6 months critical |8,096 infected | 774 Deaths

COVID-192 | 3+ months & counting | >170,000 infected | >6,500 Deaths

WHERE ARE WE IN THIS PANDEMIC?SARS, while smaller and more contained than COVID-19, is one analog to understand how the pandemic could unfold and how important public and public health response is to containment and mitigation

Dec 2019First emerges in China

Jan 2020WHO declares state of emergency

Feb 2020>80,000 cases and community spread outside of China

March, 2020China’s factories back at 60-70% capacity as quarantines lifted

COVID-19 Public health response in China seems to contain, but threat spreads to new geographies

Information as of 3/15/20

Source: 1.SARS timeline (link), 2.COVID-19: CDC and WHO, 3. Asia Times (link)

March 11, 2020Italy moves to national lockdown as death toll reaches; US announces restrictions on flights from Europe for next 30 days

March 12, 2020Norway announces national shuts down (schools) and quarantines for asymptomatic travelers

March 13-16, 2020Most EU countries close bordersUS blocks EU flights incl. UK

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HOW LONG COULD THIS LAST? HOW MIGHT THIS PLAY OUT?Two key questions, and a number of items to monitor, help define three potential scenarios

Q1: Will public health measures contain individual outbreaks?China has demonstrated containment is feasible, but will containment be maintained, will other countries be willing and able to implement the necessary containment tactics, and will the public comply?KEY ITEMS TO WATCH:• New case rates as China lifts restrictions: some new cases (a ‘bump’) are to expected, but a spike could be concerning• Case growth in Italy: Italy has shown some worrying signs of veering off the China containment curve, bending the

trend in the next 1-2 weeks is critical months; ongoing pandemic

YES

SCENARIO 1: Serial outbreaks lasting 3-4 months

NO

Q2: Will a mitigating factor emerge to help dampen the effects of the virus?If public health measures are insufficient in some or all countries, will we catch a break from a mutation that renders the virus less virulent, seasonality, or improvements in CFR?KEY ITEMS TO WATCH:• Signs of seasonality: We will not know definitively if the virus is seasonal for 9-12

months, but diminishing outbreaks in the Northern Hemisphere as temperatures rise, and limited outbreaks in the Southern Hemisphere could be indicative

• Data on mutations and their impact: Very limited data is available on the impact of identified mutations of the virus on prevalence, transmission, or severity of disease

YES

SCENARIO 2: 6-12 months to rein in pandemic

NO

SCENARIO 3: 12+ months; ongoing pandemic

14© Oliver Wyman

Preliminary and evolving

HOW LONG COULD THIS LAST? HOW MIGHT THIS PLAY OUT?Scenario 1: Serial outbreaks lasting 3-4 months

What you’d have to believe

• New case rates spike with initial outbreak in a region and increased testing, but level off within ~8 weeks

• Public health officials enact aggressive containment measures to contain localized outbreaks (e.g., Italy, Seattle (USA), New Rochelle (USA)), learning from the “playbook” set by China, Singapore and refined by the next regions to experience outbreak

• Population largely complies with public health directives, slowing human-to-human transmission; health systems are not overwhelmed, CFR does not rise

• New case rates in China do not increase after quarantines and travel restrictions are relaxed and schools reopen

What we know so far

• Aggressive containment measures in China (100M under quarantine in February 2020, 59M remain so as of early March) contained spread within 8 weeks of identification

• New case rates in China have declined; similar compliance would be necessary in rest of world to contain

• China has not yet returned to “normal” (e.g., schools are still closed with staggered re-opening planned for Mar –May)

Anticipated business impacts

• Supply chain shocks reverberate into Q2 in some sectors; Chinese manufacturing shutdown in part tempered by inventories stockpiled in advance of Lunar New Year

• Corporate and government-mandated (e.g., US restriction on European travel announced 3/11) travel restrictions in affected regions lead to drop-off in demand in airlines, hotels and impact retail supply and demand

• Earnings dented post outbreak in a particular region, but swift recovery and rebounding consumer confidence allows companies to return to normal one to two quarters later

• Complete global recovery takes until Q4 or longer, given serial pattern of outbreaks and containment; recovery more rapid if virus proves to be seasonal

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HOW LONG COULD THIS LAST? HOW MIGHT THIS PLAY OUT?Scenario 2: 6-12 months to rein in pandemic

• While some countries move rapidly to replicate aggressive containment measures, others either do not or are unable to drive compliance

• Countries with slower, less aggressive response and/or poor compliance are not able to contain the virus with case rates continuing to increase beyond expected 6-8 week window

• Some countries with initial containment see spike of cases after lifting containment measures

• Despite continued rise of cases, case fatality rate decreases because mitigating factor emerges (e.g., viral mutation affecting virulence, seasonality, early identification and improved treatment)

• As case fatality rate decreases, public begins to calm down despite ongoing outbreaks of disease

• Other countries may be unable (e.g., lack of resources to rapidly erect hospitals, lack of infrastructure and surveillance capabilities to track and isolate cases) or unwilling to mount the same public health response as China

• Compliance with public health recommendations is more difficult to enforce in many countries (e.g., broken quarantine of patient in New Hampshire)

• Virulence-lowering viral mutations have been observed previously (e.g., SARS) and there is emerging evidence of at least two strains of COVID-19, one less virulent than the other

• While ~50% of coronavirus family have proved to be seasonal, no direct evidence yet indicates COVID-19 is seasonal

• Aggressive testing and documentation of effective treatment protocols has contributed to a dramatically reduced CFR in South Korea (0.8% as of 3/12) compared to that of other regions

• Employers reluctant to relax travel and WFH mandates without guidance from public health officials

• Vulnerable industries experience a continued drop in demand as consumer confidence wavers into Q2 and Q3 and take measures to stabilize balance sheets and ensure liquidity

• Supply chain shocks play out over a six month period, after which momentum could begin to stabilize and recover

• Pace of growth slows in impacted countries; larger, more diversified economies with less dependence on international trade and/or foreign income than other economies prove better able to weather slowing growth

What you’d have to believe What we know so far Anticipated business impacts

Preliminary and evolving

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HOW LONG COULD THIS LAST? HOW MIGHT THIS PLAY OUT?Scenario 3: 12+ months; ongoing pandemic

What you’d have to believe What we know so far Anticipated business impacts

• Virus proves to either not be seasonal, or seasonal and endemic (rising, falling and returning seasonally by Hemisphere)

• Regions are unable to contain outbreaks; virus spreads widely, affecting ~20-60%1 of adult population in next 2 years

• Mortality rates do not decline, placing significant strain on or overwhelming health systems and further increasing fatalities

• Vaccine is required to halt progress of disease

• Insufficient data to support scenario as of yet

• Multiple vaccines under development but at least 1 year out

• Unless “spike” of cases in a region can be smoothed over a longer period of time, health systems become overtaxed and cannot adequately meet all patients’ needs (e.g., Wuhan, Italy)

• As health systems become overwhelmed, transmission and case fatality increases

• Drops in demand (consumer confidence, access to supply, part-time/ gig economy workers with less discretionary income) cause growth to slow into Q4

• Companies in particularly vulnerable industries (travel, energy, hospitality) require additional liquidity, and may trigger complications for related industries

• Government stimulus injected to protect vulnerable workers and, for instance, directly support SMEs (e.g. credit provision), perhaps on a scale of TARP or larger

Source: 1.Harvard School of Public Health

Preliminary and evolving

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CHECKLIST 1WHAT SHOULD COMPANIES BE THINKING ABOUT RIGHT NOW?

Information as of 3/10/20

Confirm Business Resiliency

All companies should be revisiting business continuity plans to reassure employees and ensure readiness for supply chain constraints, demand shocks, and impacts to business partners, prioritizing critical business activities and creating contingency plans for disruption

Model Financial scenarios

Companies should be evaluating their financial outlook, modelling supply and demand across a number of scenarios, identifying potential interventions and contingency plans for subsequent impacts and/or sustained challenges (e.g. strategies for managing variable costs, cash flow, liquidity)

Reassure Customers

Consumer concerns need to be understood, mapped, and incorporated into the business continuity plan such that consumer needs are addressed and trust is maintained

Move to Digitization Rapidly

Some industries are likely to see a massive acceleration in the use of digital channels. Retail, Financial Services, and Healthcare companies have experienced 100-900% growth in key digital channels in China during the outbreak. Customers with positive digital experiences are unlikely to return to analog channels

Prepare for Long Haul

Pandemic business continuity plans will get companies through the next 2 – 4 weeks, but strategies may be required to get through 6 – 12 months (or more) of disruption if subsequent demand shocks exist. Companies should consider the nature and required timing associated with more structural changes to their operations

Convene Industry

Companies should consider which industry and government collaborations are necessary to address safety concerns, share best practices, stimulate demand, and rebuild consumer trust

SUPPLY CHAIN RISKPanelists: Johannes Berking

02

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Disruption in production in China / examples Contraction of freight transport

Automotive

Pharmaceuticals

Electronics

Container cargo volume at Chinese ports has reduced strongly during Jan and Feb. 2020 as ports were forced to operate with reduced staffing

133,2Janv.-19

Janv.-18

Janv.-20

143,8

115,0

Hong Kong airport freight traffic (In tonnes)

Chinese ports volume of container cargos (In ‘000 TEU2)

Air Cargo is impacted as well, several operators having suspended deliveries in Hubei Province

1. Toyota, VW, Hyundai, GM 2.TEU: total equivalent units Source: Shanghai International Shipping Institute; Airport Authority of Hong Kong, NBC News, Automotive logistics, Reuters, HIS Markit, Financial Times, Forbes, Wall Street Journal

0

50

100

150

200

Jan28-Feb3Jan14-Jan20 Jan21-Jan27 Feb4-Feb10 Feb11-Feb17

Shangaï port Tianjin portGuangzhou port

• 47 out of 47 top 4 global industry players’1

factories in China shut down beginning of Feb. and are slowly reopening one by one

• ~30% unit production drop in China between January and March – representing 1,7M vehicles

• 1st manufacturing shortage of drug for US market originating in China in mid Feb., 20identified at risk

• 450 Chinese drug ingredients at risk for Indian pharmaceutical market, which relies at 70% on China for raw materials

• ~12% smartphone unit production drop between January and March in China

• 20% to 40% LCD screen unit production drop for the month of February

IMPACT OF CHINESE LOCK-DOWN ON GLOBAL SUPPLY CHAINSContainment efforts in China in Q1 2020 have led to stalling of economic activity, leading to disruption of production and contraction of freight transport, and impacting significantly global supply chains

Container shipments from China to the US

forecast to be down by 12.9% in February and 9.5% in March vs. last

year

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MANUFACTURING INDUSTRY: OBSERVED IMPACTAuto and Industrial companies have been buffeted in two waves: global supply chain disruption (in-process) and internal operational regional disruptions (potential)

System integrator (“OEM”) Distribution/ retail

Module or Component supplier

n-Tier Suppliers

Raw material supplier

n-tier supplier of critical component is affected and cannot ramp-up production fast enough

Critical raw materials with limited global availability are affected, leading to long period of capacity shortage

Plants outside of affected areas are impacted by shortages of few crucial parts and have to completely shut down

Supplier of components or modules suffers from undetected broken supply chain on n-tier level

As virus spreads to different regions, in-region production losses due to partial plant closures from worker shortages

Demand reduction due to short term supply constraints, containment measures, macro-economic factors, etc.

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On-going local disruptions I global supply chain

Large-scale disruptions and lock-downs on all levels

Broad range of local and global supply chain disturbancespossible, triggered by capacity constraints on people and logistics side

Local isolation efforts continue

Pandemic spread addressed with isolation efforts

Pandemic spread after isolation efforts have failed

THREE IMPACT SCENARIOS TO CONSIDERDepending on the spread and isolation strategies, the impact on global supply chain will vary and may change substantially – your supply chain crisis response needs to think through all of them

22© Oliver Wyman

CHECKLIST 2 - COVID-19 SUPPLY CHAIN RESPONSE: SUCCESS FACTORSTackling a COVID-19 supply chain crisis requires immediately establishing the ability to respond and securing the supply

Rapidly set-up robust response team structures, governance and processes

Quickly create comprehensive transparency on impact on complete supply chain (operational and financial)

Enable and support operations teams (procurement, manufacturing, logistics, quality, engineering) to safeguard immediate supply and to develop sustainable solutions

Establish decision authority for response team leadership and link to board of management

Speed-up the development and implementation of mitigation actions for components with highly critical supply situation

Continuously challenge plausibility of actions to secure supply (supplier financial support, lead time management, alternative suppliers, insourcing, etc.)

ESTABLISHABILITY TORESPOND

SECURESUPPLY

23© Oliver Wyman

BIRNGING IT TO LIFE: OVERVIEW OF KEY CRISIS MANAGEMENT STEPS

Permanent interaction between suppliers and logistics/ purchasing teams to define appropriate measures

2

Measures

Daily review and challenging of status and measures as well as definition of further actions3

Steering

Decisions on critical issues and definition of overall way forward for the project4

Reporting

1

Transparency

Permanent interaction between suppliers and logistics/ purchasing teams to identify affected components/ items

Permanent feedback

loop

Daily feedback

loop

Weekly feedback

loop

24© Oliver Wyman

CHECKLIST 3 - IS YOUR COVID-19 SUPPLY CHAIN RESPONSE ADEQUATE?

• Is your response team sufficiently staffed, equipped, and focused solely on the task?

• Does the team have immediate and permanent access to the full organization and board-level decision makers?

• Do they run efficient real-time processes for issue identification, solution development, decisions, and reporting?

Structures, Governance, Processes

• Do you know which parts of your full supply chain are potentially affected?

• Do you track the status of every potentially impacted part of the supply chain?

• Do you know the (financial) impact of every critically affected part of your supply chain on your own business?

• Do you know the impact on your customers’ supply chains?

Comprehensive Transparency

• Is every operations team potentially affected by a supply chain disruption trained to support transparency creation, solution development or implementation?

• Are capabilities and resources available to support the supply chain also beyond the organizational boundaries (transport, quality, engineering, …)?

Organization Enabled

• Has your response team leadershipthe authority to take the required decisions to solve disruptions?

• Does the response team have the right information at hand to take decisions immediately at scale that will impact significant parts of the business?

• Is the top management frequently updated on status and challenges?

Crisis Management

• Do you have a clear framework on how to prioritize scarce resources and management attention?

• Does your solution development focus on the most critical parts: short time to impact and/or no solutions available?

Speedy Mitigation

• Do you guide solution development with a standardized set of levers?

• Do you systematically require back-up plans for solutions that are not yet implemented?

• Are you prepared for new parts of the supply chain being affected?

• Do you have a back-up plan for your response team?

Robust Plans

25© Oliver Wyman

CHECKLIST 4 - OUTLOOK: MID TO LONG TERM SUPPLY CHAIN MEASURESBesides short term measures, companies need to increase their mitigation and preparation … after the crisis is before the crisis

S&OP considerations

Outbound Supply Chain

• How comprehensive is your supply chain risk management and how do you adjust your risk appetite?• How resilient is your supply chain, or your supplier landscape?• How and when to lock-in transportation capacities and prices?• How much control do you need of core elements to better mitigate certain risks?• How do you optimize for cost vs flexibility or even agility?• Do you have a watch-tower on guard that spots weak signals and increases stock?• …

• How much/where should you store products now before a likely reduction/shut-down of production?• How to best ramp-up distribution flows again after the crisis (direct delivery vs regular vs …)?• How to flex your own distribution cost early on?• How can you leverage the supply chain flexibility to your advantage in customer negotiations?• How can you utilize supply chain agility as a competitive advantage e.g. to gain (and retain) share in times

of supply disruptions?• …

• What’s your hierarchy of products/production? In case of scare supplies, what gets produced/not?

• How does demand likely change shortly before, shortly after the crisis, how to best adapt production and the resulting supply chain?

• Should you change your share of made-to-stock/made-to-order in light of a crisis?

• Is a temporary slow-down in demand and supply the time to run more trails/how to use idle supply chain and production capacity best?

• …

Inbound Supply Chain

OPERATIONS UNDER CONSTRAINTPanelist: Jörn A. Buss

03

27© Oliver Wyman

20%

40%

60%

80%

100%

120%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16Month Number During Event

9/11/01 SARS Global Economic Crisis / H1N1

Industry capacity change from base periodMonthly ASM index vs same month in baseline pre-event period; M0=month prior to event

Overview of the current situation1

• Global capacity growth of 4% has swung to an +10% decline, initially driven by reductions to/in China, but now spreading to US and EU domestic traffic as well

What to expect as the situation evolves

• The industry has historically reacted quickly to immediate and pronounced drops in demand but has taken a more cautious approach to slower evolving events, often reducing capacity at a slower rate than demand

• Large-scale events not contained to specific geography typically evolve asymmetrically at the market-level

• In the past, recovery periods have ranged from 12-18 months

AIRLINE INDUSTRY: COMPARISON OF EVENT IMPACT9/11 and the global economic crisis / H1N1 had similar recovery periods whereas the more regionally focused SARS outbreak had a more compact cycle

1. As of March 5, 2020

28© Oliver Wyman

• Latest forecasts suggest that global passenger airlines will lose $63t o $113 BN in 2020; ~$100 BN swing from earlier forecasts of $29.3 BN in profits1

• Recent reduction in fuel costs may be a mitigating factor, but prices may quickly rebound if OPEC+ reaches an agreement on supply

Airline Capacity Reduction2 Other Financial Response Actions2

7.5% None announced

15+% Company-wide hiring freeze, offering voluntary leave options, parking aircraft, and evaluating early retirements of older aircraft

5% Reducing hiring of frontline and support center staff and limiting non-essential spending

None yet Freeze hiring on non-frontline positions, and looking at freezing all hiring and voluntary leaves, an early out program, etc

10%Voluntary unpaid leave, suspending hiring through June 30, postponing pending salary increases for management and administrative personnel and offering pilots a month off at reduced pay

30% Asked all its staff to take three weeks of unpaid leave.

50% Offering staff voluntary, unpaid leave

AIRLINE INDUSTRY: CASH CONSERVATION HAS BECOME PARAMOUNTWith significant fixed costs / high CAPEX, airlines are already considering temporary reductions in pay, staff furloughs, and suspension of discretionary projects and initiatives

1. Forecast from the International Air Transport Association (IATA)2. As of March 5, 2020

Information as of 3/10/20

29© Oliver Wyman

Operational

• Organized COVID-19 Response Management: formalize RISK MANAGAMENT TASK FORCE activities, secure inventory, monitor internal facility status, proactive response planning, etc.

• Supply chain/vendor diversification (at the regional concentration level)

• Social distancing for virtualizable activities

• Non-virtualizable asset intensive activities– Call centers: non-essential visitors bans, worker monitoring– Warehouse/Manufacturing sites: non-essential visitors bans, worker

monitoring, increased work-in-process and finished goods buffer inventory

– . . .

Financial

• Furloughs and shutdowns

• OEMs providing supplier liquidity assistance via expedited payments, advances, etc.

• Customer incentives (rebates, financing, etc.) to bolster demand

MANUFACTURING INDUSTRY: OBSERVED RESPONSEFirms are developing a Response framework and associated measures in real-time

Response framework Response measures

Outside/Inside the 4-Walls

Virtual/non-virtualizable activities

Near term vs mid-term demand impact

30© Oliver Wyman

Source: Marsh Risk Consulting

CHECKLIST 5 - KEY ELEMENTS OF PANDEMIC BUSINESS CONTINUITY PLANSEvery company should have a business resiliency team fully activated and focused on these key elements:

Protect your people first

Ensure that your staff understandwhat to do (personal actions) to protect themselves, and to stop the spread.

Ensure your staff know to stay away from work if unwell and seek medical help; promote use of telehealth.

Stay up to date on the latest travel advice as it could change quickly.

Be conscious that your staff may have caregiving responsibilities for ill family incl. school closings

Listen to and respond to staff concerns – anxiety can be more disruptive than the virus itself.

Institute work from home policies if warranted/possible

Look after your business interests

Know which business processes and activities are critical and require protection.

Pay special attention to customers, their plans & expectations; determine how best to protect and assure them.

Plan for how to continue operations if you experience significant staff absences.

Prepare for reductions (especially consumer confidence) or increases in demand (i.e., cleaning services, e-commerce).

Review your relevant insurance policies, coverage, and claims processes.

Assess government and financial institution support

Secure your supply chain

Clients need to develop an end-to-end supply chain x-ray.

Identify your critical suppliers and their locations, especially if in heavily impacted areas or with less support resources available.

Confirm the status and location of expected deliveries/shipments.

Understand what your suppliers' plans are and work together to protect both of your interests, particularly if a smaller business.

31© Oliver Wyman

BUSINESS RESILIENCYA dedicated Business Resiliency Team can effectively support all levels of the organization as transparency and showcasing possible countermeasures has positive psychological effects, besides being prepared

Risk evaluation Risk mitigation Risk monitoringRisk identification

• Identification of risks

• Showcase risk relations

• Develop countermeasures and Implementation plan for mitigation of risks

• Showcase Action Planner

3.2.1.

• Evaluation of risks via Impact Analysis

• Showcase Risk Matrix

• Implementation ongoing risk monitoring

4.

Business Resiliency Team

Source: Oliver Wyman Risk Management & Emergency Response Team

32© Oliver Wyman

BUSINESS RESILIENCY : RISK IDENTIFICATIONTransparency and flexibility are key within and with your business partners, but conserving cash might be the most important factor

After Sales, Services(where applicable)

Sales & MarketingProductionResearch &

Development Purchasing

Cross-functional topics• Establish a Business Resiliency Team – C-SUITE/CEO• Monitor competitors and assess temporary partnerships (if legal) or long term advantage taking – C-SUITE/CEO• Monitor your cash situation and access to low/no interest loans – CFO• Develop a communications plan (internal & external) – MARKETING & COMMS• Consider capabilities / cross training esp. white collar – HR / OPS• Assess contractual staff obligations and leeway (paid leave, flex-hrs, OT etc) – HR• Assess IT risks due to Off-site access – CIO

• Review launch timeline

• Review capex plans• Develop 2-3 staged

team plans for manufacturing

• Build part banks

• Assure inventory levels

• Assess customer needs and field team impact

• Assess 6-12 month new product roadmap on timing

• Review “force major” terms, but work with partners/customerso inventory/bankso forecasting

• Expect the worst on demand decline

• Consider marketing aspects related to your products

Supply Chain

CTO CPO COO CS/MO

Source: Oliver Wyman Risk Management & Emergency Response Team

33© Oliver Wyman

Insure/hedge against risk

BUSINESS RESILIENCY : RISK EVALUATION – RISK MATRIXUnderstanding the possible effects of each risk is key for prioritizing counteractions

Risk types

High

Probability

Low

Low Impact High

Risk = Probability x Impact

High

Probability

Low

Low Impact High

Avoid

Transfer

Reduce

Retain

Reduce risks and/or minimize the monetary extent of the losses

Avoid the risk all together or at least reduce risk as much as

possible

Monitor and prepare for risk occurrence

Source: Enterprise-Wide Risk Management Strategies for Linking Risk & Opportunity (Deloach, J.)

Low

High

Focus

1st priority

34© Oliver Wyman

BUSINESS RESILIENCY : DETERMINATION OF MOST CRITICAL ITEMSHandling internal risk areas in the same fashion as external partner risks proved beneficial as the right weights are applied

Illustrative supply chainExample: Equipped aircraft door

Paintsupply Paint

Metallic structure

Equipped door Equipped door Equipped door

Metallic panels

Bolts

Window

Forming

Insulation cut

Paint

Handle supply

Insulationsupply

Paint supply

Slide

Cabin panel

Handle

LightningCritical items for risk assessment

Door assembly Quality gate and shipping Warehouse

FAL station (fitting)

Ready for fitting

ComponentSub-assembly

Planning and steering

Cust

omer

def

initi

on

Example

Source: Oliver Wyman Risk Management & Emergency Response Team

35© Oliver Wyman

BUSINESS RESILIENCY : RISK MONITORINGIn order to effectively monitor risks, performance metrics, responsibilities and targets need to be defined as well as suitable tools need to be set up

Risk monitoring process building blocks

Order cycle time

Sales plan accuracy

Working capital

Revenue

Inventory

C.-to-c. cycle time

Risk mitigation

costSC

adaptability

Value at risk

Cost of goods sold

Databases

Server

Forecasting algorithms

RISK MONITORING

HorizonReporting receiver FrequencyResponsibility

(reporting)Responsibility (performance) Targets DimensionsGranularity Actions

Risk Dashboard

Source: Oliver Wyman Risk Management & Emergency Response Team

36© Oliver Wyman

BENEFITSEffective management of risks leads to a multitude of positive effects

• Prevention of disruptions and delays• Reduced number of production errors• Improved product quality

Reliability

Cost

Reputation

Competitiveness

• Prevention of reputation damages as a result of disruptions and mismanagement in a time of crisis (the best and the worst in people)

• Reduction of adverse social and environmental impacts

• Prevention of unforeseen cost due to disruptions, accidents, lawsuits etc.

• Reduced impact of revenue losses• Avoidance of fines

• Strong reputation through customer and employee satisfaction• Prevention of intellectual capital loss• Opportunities to capture less fortunate competitors

• Prevention of incidents due to distractions• Prevention of incidents due to human and machine errors

Safety

Source: Oliver Wyman Risk Management & Emergency Response Team

37© Oliver Wyman

H.R.6201 - FAMILIES FIRST CORONAVIRUS RESPONSE ACT MAR 14. 2020This bill is providing paid sick leave and free coronavirus testing, expanding food assistance and unemployment benefits, and requiring employers to provide additional protections for health care workers

WHAT IS IT / WHY IS IT IMPORTANT

• FY2020 supplemental appropriations1. to the Department of Agriculture (USDA) for nutrition and food assistance2. to the Department of Health and Human Services for nutrition programs that assist the elderly

• Requires the Occupational Safety and Health Administration to issue an emergency temporary standard that requires certain employers to develop and implement a comprehensive infectious disease exposure control plan to protect health care workers.

• expand unemployment benefits and provide grants to states for processing and paying claims• establish requirements for providing coronavirus diagnostic testing at no cost to consumers• treat personal respiratory protective devices as covered countermeasures that are eligible for certain liability

protections• temporarily increase the Medicaid federal medical assistance percentage (FMAP).• establish a federal emergency paid leave benefits program to provide payments to employees taking unpaid leave

due to the coronavirus outbreak

FocusH.R. 6201, require companies with less than 500 employees to offer up to 14 days of paid leave. It also allows companies employing < 50 workers to petition for an exemption from the Labor Department “when the imposition of such requirements would jeopardize the viability of the business as a going concern.”

Source: https://www.congress.gov/bill/116th-congress/house-bill/6201

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UAW & BIG 3 - COVID-19 Task Force MAR 15. 2020GM, Ford, FCA, and the UAW jointly announced that they would establish a COVID-19/Coronavirus Task Force to implement enhanced protections for manufacturing and warehouse employees at all three companies

WHAT IS IT / WHY IS IT IMPORTANT

Focus will include o vehicle production planso additional social distancingo break and cleaning scheduleso health and safety educationo health screeningo food service and o any other areas that have the potential to improve

protections for employees

Plant Specificso increased visitor screeningo increased cleaning and sanitizing of common areas and

touch points.o implement safety protocols for people with potential

exposure and who exhibit flu-like symptoms.

39© Oliver Wyman

CHECKLIST 6 - OPERATIONS UNDER CONSTRAINTPractical aspects on the inside as EVERYONE SHARES RESPONSIBILITIES

Transparency Prevention & Preparation (Near) Worst Case

Sala

ried

Hour

ly

• Understand indv. situations

• Help prioritize work

• Provide flexibility

• Assure IT support

• Ask for sharing in case

• Protective wear

• Critical function list

• COVID HR help line

• IT / Call systems test

• Cross training (incl. plant)

• 3rd party emergency support

• Selective Quarantine

• Spread tracker

• CDC/Health Serv. Interaction

• Selective shut downs

• Cleaning

• A, B (& C) Teams Operations

• Prepare for 2+ week full shut down!

• Understand indv. situations

• Comms of paid leave

• Encourage open comms

• Run plants slower, avoid other issues/accidents/spills

• Protective wear

• A, B (& C) Teams Operation plans

• Cleaning between shifts

• Bank builds

40© Oliver Wyman

Q&A

PREVENTION: What are good measures around prevention in a plant set-up?

• Temperature measurement can help, but has its flaws. Simple thermometers require close testing with the testing person being exposed. Infrared/FLIR style cameras/checking can help keep a distance. Also keep in mind that there is evidence of asymptomatic transmission, suggesting some folks who clear the temperature check may still carry the virus

• Practice social distancing, cleaning and regular disinfection of frequented areas

• Early detection and open communication to encourage staff to share infection cases is critical to enable adequate measures

• In-plant/location efforts have to incorporate everyone incl. e.g. cafeteria/food preparation staff and their interactions with everyone

DEMAND: Won’t the current demand slow down and then recovery help manage the situation?

Demand slow down is a double edged sword:

POSITIVE

• Relieves pressure on supply chain and operations as demand can be fulfilled via inventory run down and slower production set up

NEGATIVE

• Most firms are challenged/unprepared by rapid ramp-down and rapid ramp up situations both internally and with their supply chain

• Prolonged lower demand can lead to a true recession and impact capex heavy industries

• Unpredictability in demand curves make planning and effective operations management in these situations difficult

41© Oliver Wyman

COVID-19 RESOURCES

Oliver WymanPerspectives

https://www.oliverwyman.com/coronavirus

WHO COVID-19 Situation Reports

https://www.who.int/emergencies/diseases/novel-

coronavirus-2019

CDC Resources

https://www.cdc.gov/coronavirus/2019ncov/index.html