Supply Chain Risk Mitigation Webcast

Welcome to Today’s Webcast

Supply Chain Risk Mitigation:
Minimizing Exposure to Supplier Failure, Volatile Commodity Prices, and
Manufacturing Disruptions

March 15, 2012

Copyright © 2012 IHS Inc. All Rights Reserved.

Today’s Speakers
Katie Lewis
 Director, Procurement & Sourcing Solutions, IHS Inc.

Eric Pratt
 Senior Director, Pricing & Competitive Analysis, IHS Inc.

John Mothersole
 Principal, Industry Practices Group, IHS Inc.

Barry Hochfelder
 Editor, Supply & Demand Chain Executive

Copyright © 2012 IHS Inc. All Rights Reserved. 2

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Supply Chain Risk Mitigation:
Parts, Materials, & Suppliers
 Katie Lewis - Director, Procurement & Sourcing Solutions, IHS Inc.
 Eric Pratt - Senior Director, Pricing & Competitive Analysis, IHS Inc.
 John Mothersole - Principal, Industry Practices Group, IHS Inc.

Early Survey Findings Reveal Priorities

Greatest Supply Chain Focus Areas

Negotiating Contracts/Individual Supplier Relationships

Managing Inventory Levels

Gaining Greater Visibility into the Supplier Network

Material Risk Management/Hedging

Low Cost Country Sourcing

Benchmarking

Geographic Mapping of Supplier Mfg

Parts Management

0% 10% 20% 30% 40% 50% 60% 70%

IHS Inc and Supply & Demand Chain Executive magazine 2012 preliminary Supplier Risk Survey results (data collection is ongoing)


Segmenting Supply Chain Risk

• Resting Risk
• Supplier Segmentation – Partner, Critical, Bottleneck, Transactional
• Fragmentation of Supply
• Conflict Metals or soon-to-be Non-Compliant substances in Supply Chain
• EOL and PCN alerts
• Counterfeit Parts

• Reactive Risk
• Natural Disaster Disruptions
• Political Disruptions
• Supply Disruption Alerts/Notices specific to supplier
• Cost – rising & volatile prices for key material inputs


Parts & Components: Resting Risk
Managing Scheduled Variations
Eric Pratt
Senior Director, Pricing & Competitive Analysis, IHS Inc.

Product Life Cycles & Technical Documents

Maturity
Decline

Growth
Phase-Out

Introduction Obsolete

New Product Introduction End of Life (EOL) or
Product Change Notification (PCN)
(NPI) Discontinuance (PDN)

New Product Introduction End of Life (EOL) or
Product Change Notification (PCN)
(NPI) Discontinuance


Insight: IHS Analyzes NPI, PCN, EOL Data
Business Driver Stated by Manufacturers
LOW DEMAND, LOW SALES

Demand LOW INVENTORY

Demand-Side Economics LOW FORECAST
…
PB-Free Conversion

Environment REACH CONVERSION

Compliance and Sustainability ROHS CONVERSION
…
DIE CHANGE, MANUFACTURING PROCESS CHANGE

Technology NEW VERSION, TECHNOLOGY INNOVATION

Innovation, Technology, QUALITY ISSUES
and Manufacturing OBSOLETE MFG PROCESS, OBSOLETE TECHNOLOGY
…
COMPANY ACQUISITION
Organization FAB/FACILITY CLOSURE
Consolidation / Rationalization of
PRODUCT RATIONALIZATION/CONSOLIDATION
Company and its Products
…
SHORTAGE OF MATERIAL
Supply SUPPLIER OBSOLESCENSE
Supply-Side Economics
…


Insight: PCN/EOL Correlate with Market Trends,
Business Drivers, and Volatility

Component PCN 40% CAGR from 1997-2010 Lead-free creates 20% new EOL 2006-2007
End of Life (EOL)
Specific to RoHS/Pb-free Environmental Compliance

2003 2004 2005 2006 2007 2008 2009

Component EOL 40% CAGR from ‘97 to ‘10 Demand weakness 90% of EOL in 2009
2,600
2,500
2,400
2,300

Semiconductor MSI (Right Scale) 2,200
End of Life Parts % of Total Parts 2,100
2,000
1,900
.80 1,800

.75 1,700
1,600
.70
1,500
.65
1,400
.60
1,300
.55
1,200
.50 1,100
.45 1,000
.40 900

.35 800

.30

.25 IHS EOL insight found “demand side” primary reason for 90% of EOL
.20 actions in 2009, vs. more typical 15-20% citations during 2004-2008
.15

.10
Millions Square Inches Silicon Processed - Semi
Parts: IHS Electronics Database
.05

.00
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Charts Courtesy of IHS Inc., 2011

Today, Counterfeits Are A Big Deal
Risks to Company, Brand, and Performance

What is the Impact of Counterfeit Electronics?
(% Respondents)
Undermine compliance claims 44%
COMPANY

Compromise device/product security 37%
BRAND

Expose contractual liability 42%
&

Expose product safety / legal liability 55%
Damage brand / reputation 71%
PERFORMANCE OPERATIONS

Product launch delays 36%
PRODUCT

Production line stoppages 57%
&

Customer returns/recalls 67%
Product quality/reliability failures 84%
Increase product dev’pt time/costs 38%
FINANCIAL

Add to unit costs 51%
Inhibit sales / customer sat 62%
&

Reduce expected product life 64%
Increase warranty/maint. costs 65%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Source: Benchmarking Counterfeit & Inferior Grade Components,
Supply & Demand Chain Executive & IHS Inc., April 2009

Insight:
Counterfeit Incidents vs. Revenues 2001 – 2011

ERAI Accounted for Over 90% of High Risk and Suspect Counterfeit Parts Verified
and Reported from 2001-2011


Reactive Risk
Managing Supply Chain Disruption: Thailand & Japan

Thailand Flood -Update

• Over 800 fatalities
• More than one-third of
Thailand flooded
• 7 million people affected
• 14,000 factories flooded

An aerial view of the Chaophraya River on Oct. 12, 2011 in Ayutthaya province, central Thailand.
(AP Photo)

The disaster in Thailand disrupted the supply chains of many industries.
• Direct Impact: Automotive production, Analog IC & Discrete Semiconductor
manufacturing, HDD manufacturing and assembly, Electronics Assembly –
PCs, digital cameras
• Indirect Impact: PC, DRAM, Set Top Boxes, Servers


Supply and Demand Analysis
Supply/Demand Analysis
SHIPMENTS CHANGE % ASP'S CHANGE % DAYS OF INVENTORY CHANGE %
40.00%
30.00%
20.00%
10.00%
Percentage

0.00% Toshiba plant before flood
Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12E
-10.00%
-20.00%
-30.00%
-40.00%
Source: IHS

Toshiba plant during flood

 Supply and Demand Analysis:
 Q4-11: Total Q4 HDD shipment dropped 29% QoQ. Price has increased ~28% QoQ in Q4-11.
 Q1-12: IHS expects Q1-12 shipment and inventory to improve due to increased production from
non-flooded HDD makers and component manufacturers. Price may start to decline for certain
drives.
 2012: Situation will continue to improve. Inventory will increase and prices will gradually decline 3-
10% QoQ. Overall supply/demand equilibrium in Q312. Almost 12 months!


Disaster Effect: Japan Crisis

To what extent has your company’s increased How have prices changed for impacted
normal purchasing for commodities, materials, commodities, materials, or components?
or components believed to be impacted?

Not at all 9.2% Significant decrease in prices 0.0%
Somewhat 21.7% Slight decrease in prices 1.7%
Moderately 34.2% No change to prices 24.2%
Significantly 6.7% 60%+ Slight increase in prices 40.8%
Very significantly 2.5% Significant increase in prices 4.2% 45%
Not applicable 25.8% Not applicable 29.2%

How have you or your suppliers increased the Which of the following do you believe are true?
use of open market or other independent
supply chains to source critical parts?
Prices are/or will increase for commodities, 69.2%
materials, components or services we need
Material shortages or obsolescence will 49.2%
Not at all 18.3%
increase
Somewhat 24.2%
Counterfeiting of electronics will increase 55.0%
Moderately 10.8%
Significantly 8.3% 40%+ We will use new suppliers or open market 27.5%
sources to satisfy demands
Very significantly 1.7%
Not applicable 36.7% Other 7.5%

Source: IHS Online Poll

PCNalert: Actual PCN Show Disaster Impact


PCNalert: Illustrate Material/Price Volatility


Material Risk
What Was Reactive Becomes Routine:
Rising Commodity Volatility
John Mothersole
Principal, Industry Practices Group, IHS Inc.

What Has Changed?

• Commodity prices exploded from 2002 to 2011
• Average annual growth rate of 15%
• Why should we care about commodity prices?
• This surge in prices has impacted profitability and complicated budget
planning - elevating purchasing’s role
• Higher prices joined by higher volatility in recent years
• Upside risk and downside risk combine to create wild gyrations in prices on a
month to month basis
• Emerging markets have exploded onto the global economy
• Influence will continue to grow over the next decade
• Resource nationalism is becoming a factor
• Investors are now firmly entrenched


Copper Versus Gold Prices

Which to Choose?
10000 2000

8000 1600

6000 1200

4000 800

2000 400

0 0
2000 2002 2004 2006 2008 2010 2012

Copper, $/metric ton, left Gold, $/troy ounce, right


Price Volatility Has Increased
Standard Deviation in Monthly Price Changes*
10.0

9.0

8.0

7.0

6.0

5.0

4.0

3.0
1982-85 1986-89 1990-93 1994-97 1998- 2002-05 2006-09 2010-
2001 2011
*Gold, silver, oil, aluminum, copper, coffee, sugar, rubber, cotton, corn, w heat, lumber, steel
scrap, steel plate, HR carbon steel sheet


The ‘West’s’ Influence is Waning
Share of world GDP, measured in US dollars

2010 2020
Other Asia, Other Asia,
Mideast, Mideast,
Pacific Pacific
Africa Africa
20.5% 33.8%
5.8% 6.1%
Japan
8.7% North
Emerging North America
Europe America 20.1%
Japan
6.4% 27.1% 5.7%
Other
Western Other Emerging Americas
Western 7.1%
Europe Americas Europe Europe
25.2% 6.3% 7.5% 19.6%

US 22.9% US 16.9%
China 9.4% China 19.6%
India 2.7% India 5.5%


Is the Investment Climate Worsening?

Fraser Institute Global [Mining] Policy Potential Index
52
Lower score signals less attractive

48
mining environment

44

40

36


Country Risk Analysis


Quantified Risk Correlates With Volatility


The Role of Investors

4.5 65

4.0
75
3.5

3.0 85
2.5

2.0 95

1.5
105
1.0

0.5 115
1996 1998 2000 2002 2004 2006 2008 2010 2012
IHS Global Insight Industrial Materials Price Index, 2002=1.0, left scale
Trade Weighted Value of U.S. Dollar, 1973:3=100,inverted, right scale


Takeaways

• Commodity prices exploded since 2005
• Global economy continues to struggle from the Great Recession; however
prices have almost regained previous peaks
• A new higher cost profile has been placed under many commodities
• Volatility has increased significantly – and is likely a permanent
feature of supply chains
• This raises the need to not just track commodity prices but also
the corresponding factors that drive prices
• Build a cost profile of your key materials
• Identify key production centers and raw material exporters
• Be aware of changes and potential changes in policy – these do influence
investor flows
• Be prepared for volatility
• Formal hedging strategies should be considered if not already in place


Supplier Risk
Managing Risk in the Supplier Network
Katie Lewis
Director Procurement & Sourcing Solutions, IHS Inc.

Risk Survey (Preliminary) Results
Significance of Managing Supplier Risk to
Most Pressing Supplier Risks
Operational Plan
Supply Delay/Disruption
Extremely Significant
Quality

Very Significant
Cost

Moderately Significant Reliability

Environmental Compliance
Not Very Significant
Counterfeit Risk

Not At All Significant
Supplier Bankruptcy

0% 10% 20% 30% 40% 0% 10% 20% 30% 40% 50% 60% 70% 80%
IHS Inc and Supply & Demand Chain Executive magazine, 2012 Preliminary Survey Results (survey is on-going)

• Survey results confirm supplier risk management is integral to 2012
operational plans

• Delays and disruption are the biggest concern, with quality and cost
following closely behind

Understanding the Supplier Network

Supplier Relationship Management

• Building Partnerships

• Gaining Visibility

• Understanding Risk

• Avoiding Disruption

• Achieving Cost Savings


Assessing Supplier Risk
• The impact of a disruption to the supplier relationship should
influence your relationships with suppliers
• Balancing risk and cost is integral to effective supplier
management

For the most integral and high-value inputs to your supply
chain, grow strategic partnerships with your suppliers Partner

Value of Spend
For lower value, but still integral inputs coming
from a short list of suppliers, close inventory Bottleneck
monitoring is required

For highly competitive commodities and
parts, strategic timing of buys, effective Substitutes Available
contract negotiation, and benchmarking
mean cost savings

Thailand Floods

I read in the news that flooding during
the monsoon season in Thailand has
impacted manufacturing facilities in the
region.

•Will it impact my supply chain?

•What producers could be impacted?

•What facilities are in the path of the
floodwaters?

•Could these disruptions impact my
production schedule?


Thailand Floods
What if I knew instantly which of my suppliers had manufacturing
facilities in the region?

My suppliers
are clearly
marked, so I
can measure
the impact to
my supply
chain

If I know which suppliers were affected, and which ones supply my
production lines, I can react quickly when disaster strikes.


Managing the Supplier Network

Know Your Suppliers

• Tier 1
• Make informed decisions, balancing cost
and risk based on detailed supplier
information
• Tier 2
• The majority of manufacturers do not
have tier 2 or 3 visibility, increasing the
risk of unforeseen disruptions
• Tier 3


Supply Chain Risk Ratings
• Supplier Database
• Financial viability
• Revenues
• Cost of Goods Sold
• Debt
• Security of Supply
• Capacity
• Inventories
• Diversity of production facilities
• Counterfeit notices, responsiveness,
correctness
• Quality
• Reliability
• Innovation and Investment
• Capital Expenditure
• Growth Prospects
• Geographic risk based on production
• Diversification
• Cost/Productivity balance
• Infrastructure obstacles


IHS Connect: Supply Chain Workbench


Questions?
Katie Lewis
 Director, Procurement & Sourcing Solutions, IHS Global Insight

Eric Pratt
 Senior Director, Pricing & Competitive Analysis, IHS Inc.

John Mothersole
 Principal, Industry Practices Group, IHS Inc.

Barry Hochfelder
 Editor, Supply & Demand Chain Executive


For More Information
Send questions and requests for information to:
SupplierRisk@ihs.com

@IHS_SupplyChain

IHS - Design & Supply Chain

IHS_SupplyChain


Supply Chain Risk Mitigation Webcast

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