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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.

Supply Chain Risk Mitigation

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How much do you really know about your suppliers? How could your supply chain be impacted by a natural disaster, another recession, or limited inventories? Global supply chains have been brought to their knees in recent years as the result of host of massively disruptive events including devastating natural disasters, economic crisis, turbulent commodity prices, product recalls, and other unforeseen disruptions. These catastrophic events including Hurricane Irene, the eruption of the Eyjafjallajokull volcano in Iceland, the Japan earthquake and tsunami, and the most recent Thailand flooding have put many suppliers out of business, leaving manufacturers stranded and production lines halted. Executives are becoming increasingly aware of the risks of doing business on a global scale and are experiencing first-hand the havoc these supply chain disruptions pose to their bottom lines, brand reputation, and stock value. Join Supply & Demand Chain Executive and IHS as they share expertise, tools, and best practices in supply chain risk mitigation, and supplier risk scoring. Speakers will discuss why managing risk in the supply chain needs to be a multidimensional approach taking into account: Materials risk, knowing where volatile raw material prices are headed Electronic Parts risk, ensuring the sustainability and authenticity of the components within your supply chain Supplier risk, understanding what potential obstacles your suppliers might face Global supply chains need this critical information now more than ever. Don't miss this chance to hear industry experts share actionable advice on leading tools and best practices for supplier risk management.

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Page 1: Supply Chain Risk Mitigation

Welcome to Today’s Webcast

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

March 15, 2012

Copyright © 2012 IHS Inc. All Rights Reserved.

Page 2: Supply Chain Risk Mitigation

Today’s Speakers

Katie Lewis

Director, Procurement & Sourcing Solutions, IHS Inc.

Eric Pratt

Senior Director, Pricing & Competitive Analysis, IHS Inc.

Copyright © 2012 IHS Inc. All Rights Reserved. 2

John Mothersole

Principal, Industry Practices Group, IHS Inc.

Barry HochfelderEditor, Supply & Demand Chain Executive

Page 3: Supply Chain Risk Mitigation

Join the Conversation

Follow IHS on Twitter…Get the latest supply chain news,updates and trending topics from

@IHS_SupplyChain

Copyright © 2012 IHS Inc. All Rights Reserved.

Live Tweet today’swebcast:

#IHSWebcast

3

Page 4: Supply Chain Risk Mitigation

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.

Page 5: Supply Chain Risk Mitigation

Early Survey Findings Reveal Priorities

Material Risk Management/Hedging

Gaining Greater Visibility into the Supplier Network

Managing Inventory Levels

Negotiating Contracts/Individual Supplier Relationships

Greatest Supply Chain Focus Areas

Copyright © 2012 IHS Inc. All Rights Reserved. 5

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

Parts Management

Geographic Mapping of Supplier Mfg

Benchmarking

Low Cost Country Sourcing

Material Risk Management/Hedging

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

Page 6: Supply Chain Risk Mitigation

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

Copyright © 2012 IHS Inc. All Rights Reserved. 6

• Counterfeit Parts

• Reactive Risk• Natural Disaster Disruptions

• Political Disruptions

• Supply Disruption Alerts/Notices specific to supplier

• Cost – rising & volatile prices for key material inputs

Page 7: Supply Chain Risk Mitigation

Parts & Components: Resting RiskManaging Scheduled Variations

Eric PrattEric PrattSenior Director, Pricing & Competitive Analysis, IHS Inc.

Page 8: Supply Chain Risk Mitigation

Product Life Cycles & Technical Documents

Growth

MaturityDecline

Copyright © 2012 IHS Inc. All Rights Reserved. 8

Introduction

GrowthPhase-Out

Obsolete

Product Change Notification (PCN)

Product Change Notification (PCN)

End of Life (EOL) orDiscontinuance (PDN)

New Product Introduction(NPI)

End of Life (EOL) orDiscontinuance

New Product Introduction(NPI)

Page 9: Supply Chain Risk Mitigation

Insight: IHS Analyzes NPI, PCN, EOL Data

Business Driver Stated by Manufacturers

DemandDemand-Side Economics

LOW DEMAND, LOW SALES

LOW INVENTORY

LOW FORECAST

EnvironmentCompliance and Sustainability

PB-Free Conversion

REACH CONVERSION

ROHS CONVERSION

Copyright © 2012 IHS Inc. All Rights Reserved. 9

TechnologyInnovation, Technology,

and Manufacturing

DIE CHANGE, MANUFACTURING PROCESS CHANGE

NEW VERSION, TECHNOLOGY INNOVATION

QUALITY ISSUES

OBSOLETE MFG PROCESS, OBSOLETE TECHNOLOGY

OrganizationConsolidation / Rationalization of

Company and its Products

COMPANY ACQUISITION

FAB/FACILITY CLOSURE

PRODUCT RATIONALIZATION/CONSOLIDATION

SupplySupply-Side Economics

SHORTAGE OF MATERIAL

SUPPLIER OBSOLESCENSE

Page 10: Supply Chain Risk Mitigation

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

End of Life (EOL)Specific to RoHS/Pb-free Environmental Compliance

Component PCN 40% CAGR from 1997-2010 Lead-free creates 20% new EOL 2006-2007

Copyright © 2012 IHS Inc. All Rights Reserved. 10

2003 2004 2005 2006 2007 2008 2009

.00

.05

.10

.15

.20

.25

.30

.35

.40

.45

.50

.55

.60

.65

.70

.75

.80

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

1,800

1,900

2,000

2,100

2,200

2,300

2,400

2,500

2,600

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

Semiconductor MSI (Right Scale)End of Life Parts % of Total Parts

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

Millions Square Inches Silicon Processed - SemiParts: IHS Electronics Database

Component EOL 40% CAGR from ‘97 to ‘10 Demand weakness 90% of EOL in 2009

Charts Courtesy of IHS Inc., 2011

Page 11: Supply Chain Risk Mitigation

Today, Counterfeits Are A Big DealRisks to Company, Brand, and Performance

55%

42%

37%

44%

Expose product safety / legal liability

Expose contractual liability

Compromise device/product security

Undermine compliance claims

CO

MP

AN

Y&

BR

AN

D

What is the Impact of Counterfeit Electronics?(% Respondents)

Copyright © 2012 IHS Inc. All Rights Reserved. 11

65%

64%

62%

51%

38%

84%

67%

57%

36%

71%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Increase warranty/maint. costs

Reduce expected product life

Inhibit sales / customer sat

Add to unit costs

Increase product dev’pt time/costs

Product quality/reliability failures

Customer returns/recalls

Production line stoppages

Product launch delays

Damage brand / reputation

FIN

AN

CIA

L&

PE

RF

OR

MA

NC

E

PR

OD

UC

T&

OP

ER

AT

ION

S

Source: Benchmarking Counterfeit & Inferior Grade Components,Supply & Demand Chain Executive & IHS Inc., April 2009

Page 12: Supply Chain Risk Mitigation

Insight:Counterfeit Incidents vs. Revenues 2001 – 2011

Copyright © 2012 IHS Inc. All Rights Reserved. 12

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

Page 13: Supply Chain Risk Mitigation

Reactive RiskManaging Supply Chain Disruption: Thailand & JapanManaging Supply Chain Disruption: Thailand & Japan

Page 14: Supply Chain Risk Mitigation

Thailand Flood -Update

• Over 800 fatalities

• More than one-third ofThailand flooded

• 7 million people affected

• 14,000 factories flooded

Copyright © 2012 IHS Inc. All Rights Reserved. 14

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

Page 15: Supply Chain Risk Mitigation

Supply and Demand Analysis

Toshiba plant before flood

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12E

Pe

rce

nta

ge

Supply/Demand AnalysisSHIPMENTS CHANGE % ASP'S CHANGE % DAYS OF INVENTORY CHANGE %

Copyright © 2012 IHS Inc. All Rights Reserved. 15

Source: IHS

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 fromnon-flooded HDD makers and component manufacturers. Price may start to decline for certaindrives.

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!

Toshiba plant during flood

-40.00%

-30.00%

Page 16: Supply Chain Risk Mitigation

To what extent has your company’s increasednormal purchasing for commodities, materials,or components believed to be impacted?

How have prices changed for impactedcommodities, materials, or components?

Disaster Effect: Japan Crisis

Not at all 9.2%Somewhat 21.7%Moderately 34.2%Significantly 6.7%Very significantly 2.5%

Significant decrease in prices 0.0%Slight decrease in prices 1.7%No change to prices 24.2%Slight increase in prices 40.8%Significant increase in prices 4.2%

60%+45%

Copyright © 2012 IHS Inc. All Rights Reserved. 16

How have you or your suppliers increased theuse of open market or other independentsupply chains to source critical parts?

Which of the following do you believe are true?

Very significantly 2.5%Not applicable 25.8%

Significant increase in prices 4.2%Not applicable 29.2%

Not at all 18.3%Somewhat 24.2%Moderately 10.8%Significantly 8.3%Very significantly 1.7%Not applicable 36.7%

Prices are/or will increase for commodities,materials, components or services we need

69.2%

Material shortages or obsolescence willincrease

49.2%

Counterfeiting of electronics will increase 55.0%

We will use new suppliers or open marketsources to satisfy demands

27.5%

Other 7.5%

Source: IHS Online Poll

40%+

45%

Page 17: Supply Chain Risk Mitigation

PCNalert: Actual PCN Show Disaster Impact

Copyright © 2012 IHS Inc. All Rights Reserved. 17

Page 18: Supply Chain Risk Mitigation

PCNalert: Illustrate Material/Price Volatility

Copyright © 2012 IHS Inc. All Rights Reserved. 18

Page 19: Supply Chain Risk Mitigation

Material RiskWhat Was Reactive Becomes Routine:Rising Commodity Volatility

John MothersolePrincipal, Industry Practices Group, IHS Inc.

Page 20: Supply Chain Risk Mitigation

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

Copyright © 2012 IHS Inc. All Rights Reserved. 20

• 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

Page 21: Supply Chain Risk Mitigation

Copper Versus Gold Prices

1200

1600

2000

6000

8000

10000

Which to Choose?

Copyright © 2012 IHS Inc. All Rights Reserved. 21

0

400

800

0

2000

4000

2000 2002 2004 2006 2008 2010 2012

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

Page 22: Supply Chain Risk Mitigation

6.0

7.0

8.0

9.0

10.0

Standard Deviation in Monthly Price Changes*

Price Volatility Has Increased

Copyright © 2012 IHS Inc. All Rights Reserved. 22

3.0

4.0

5.0

6.0

1982-85 1986-89 1990-93 1994-97 1998-

2001

2002-05 2006-09 2010-

2011*Gold, silver, oil, aluminum, copper, coffee, sugar, rubber, cotton, corn, w heat, lumber, steel

scrap, steel plate, HR carbon steel sheet

Page 23: Supply Chain Risk Mitigation

NorthEmerging

Japan8.7%

Other Asia,Pacific20.5%

Mideast,Africa5.8%

2010

The ‘West’s’ Influence is Waning

Share of world GDP, measured in US dollars

2020

NorthAmerica

Other Asia,Pacific33.8%

Mideast,Africa6.1%

Copyright © 2012 IHS Inc. All Rights Reserved. 23

NorthAmerica27.1%

OtherAmericas

6.3%

WesternEurope25.2%

EmergingEurope6.4%

US 22.9%China 9.4%India 2.7%

America20.1%

OtherAmericas

7.1%WesternEurope19.6%

EmergingEurope7.5%

Japan5.7%

US 16.9%China 19.6%India 5.5%

Page 24: Supply Chain Risk Mitigation

Is the Investment Climate Worsening?

48

52

Fraser Institute Global [Mining] Policy Potential Indexle

ss

att

ractive

en

viro

nm

en

t

Copyright © 2012 IHS Inc. All Rights Reserved. 24

36

40

44

Lo

we

rsco

resig

na

lsle

ss

att

ractive

min

ing

en

viro

nm

en

t

Page 25: Supply Chain Risk Mitigation

Country Risk Analysis

Copyright © 2012 IHS Inc. All Rights Reserved. 25

Page 26: Supply Chain Risk Mitigation

Quantified Risk Correlates With Volatility

Copyright © 2012 IHS Inc. All Rights Reserved. 26

Page 27: Supply Chain Risk Mitigation

The Role of Investors

65

75

85

2.5

3.0

3.5

4.0

4.5

Copyright © 2012 IHS Inc. All Rights Reserved. 27

95

105

1150.5

1.0

1.5

2.0

2.5

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

Page 28: Supply Chain Risk Mitigation

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 permanentfeature of supply chains

• This raises the need to not just track commodity prices but also

Copyright © 2012 IHS Inc. All Rights Reserved. 28

• This raises the need to not just track commodity prices but alsothe 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 influenceinvestor flows

• Be prepared for volatility• Formal hedging strategies should be considered if not already in place

Page 29: Supply Chain Risk Mitigation

Supplier RiskManaging Risk in the Supplier Network

Katie LewisDirector Procurement & Sourcing Solutions, IHS Inc.

Page 30: Supply Chain Risk Mitigation

Risk Survey (Preliminary) Results

Moderately Significant

Very Significant

Extremely Significant

Significance of Managing Supplier Risk toOperational Plan

Environmental Compliance

Reliability

Cost

Quality

Supply Delay/Disruption

Most Pressing Supplier Risks

Copyright © 2012 IHS Inc. All Rights Reserved. 30

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

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

0% 10% 20% 30% 40%

Not At All Significant

Not Very Significant

0% 10% 20% 30% 40% 50% 60% 70% 80%

Supplier Bankruptcy

Counterfeit Risk

Environmental Compliance

IHS Inc and Supply & Demand Chain Executive magazine, 2012 Preliminary Survey Results (survey is on-going)

Page 31: Supply Chain Risk Mitigation

Understanding the Supplier Network

Supplier Relationship Management

• Building Partnerships

• Gaining Visibility

Copyright © 2012 IHS Inc. All Rights Reserved. 31

• Understanding Risk

• Avoiding Disruption

• Achieving Cost Savings

Page 32: Supply Chain Risk Mitigation

Assessing Supplier Risk

PartnerFor the most integral and high-value inputs to your supplychain, grow strategic partnerships with your suppliers

• The impact of a disruption to the supplier relationship shouldinfluence your relationships with suppliers

• Balancing risk and cost is integral to effective suppliermanagement

Copyright © 2012 IHS Inc. All Rights Reserved. 32

Valu

eofS

pend

Partner

Bottleneck

Substitutes Available

chain, grow strategic partnerships with your suppliers

For lower value, but still integral inputs comingfrom a short list of suppliers, close inventorymonitoring is required

For highly competitive commodities andparts, strategic timing of buys, effectivecontract negotiation, and benchmarkingmean cost savings

Page 33: Supply Chain Risk Mitigation

Thailand Floods

I read in the news that flooding duringthe monsoon season in Thailand hasimpacted manufacturing facilities in theregion.

•Will it impact my supply chain?

Copyright © 2012 IHS Inc. All Rights Reserved. 33

•What producers could be impacted?

•What facilities are in the path of thefloodwaters?

•Could these disruptions impact myproduction schedule?

Page 34: Supply Chain Risk Mitigation

Thailand Floods

My suppliersare clearly

marked, so I

What if I knew instantly which of my suppliers had manufacturingfacilities in the region?

Copyright © 2012 IHS Inc. All Rights Reserved. 34

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

marked, so Ican measurethe impact to

my supplychain

Page 35: Supply Chain Risk Mitigation

Managing the Supplier Network

Know Your Suppliers

Copyright © 2012 IHS Inc. All Rights Reserved. 35

• Make informed decisions, balancing costand risk based on detailed supplierinformation

• The majority of manufacturers do nothave tier 2 or 3 visibility, increasing therisk of unforeseen disruptions

• Tier 1

• Tier 2

• Tier 3

Copyright © 2012 IHS Inc. All Rights Reserved.

Page 36: Supply Chain Risk Mitigation

Supply Chain Risk Ratings

• Supplier Database• Financial viability

• Revenues• Cost of Goods Sold• Debt

• Security of Supply• Capacity• Inventories

Diversity of production facilities

Copyright © 2012 IHS Inc. All Rights Reserved. 36

• 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

Page 37: Supply Chain Risk Mitigation

IHS Connect: Supply Chain Workbench

Copyright © 2012 IHS Inc. All Rights Reserved. 37

Page 38: Supply Chain Risk Mitigation

Katie Lewis

Director, Procurement & Sourcing Solutions, IHS Global Insight

Eric Pratt

Senior Director, Pricing & Competitive Analysis, IHS Inc.

Questions?

Copyright © 2012 IHS Inc. All Rights Reserved. 38

John Mothersole

Principal, Industry Practices Group, IHS Inc.

Barry HochfelderEditor, Supply & Demand Chain Executive

Page 39: Supply Chain Risk Mitigation

For More Information

Send questions and requests for information to:

[email protected]

Copyright © 2012 IHS Inc. All Rights Reserved.

IHS_SupplyChain

IHS - Design & Supply Chain

@IHS_SupplyChain

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